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Foreign Direct Investment Term Paper

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Updated: Dec 1st, 2021

Introduction

In the process of a firm making decisions regarding internationalization, comparative advantage is one of the considerations that the management of the firm has to consider. There are various strategies that the management of the firm can adopt in venturing into the international business. One of them includes Foreign Direct Investment (FDI). The capability of a country or a film to produce either goods or services at a lower cost, compared to other countries or firms is called comparative advantage. In conducting its internationalization process, the management team of Dunavant Enterprises has considered the concept of comparative advantage. The enterprise is located in US and is privately owned. Over the years, the firm has managed to become the largest merchandiser of cotton globally. The firm has ventured into the international business by owning a number of real estates in various continents. One of the continents that the firm has intensively invested in is Africa.

Appropriateness of investing in Africa

The decision by the firm’s management team to invest in Africa is appropriate for the success of the firm. This is due to the fact that Africa has a relatively high comparative advantage in the production of cotton compared to countries such as US, China, and India. In addition, Africa has vast acreage of land that can support the production of cotton. This will enable the firm to increase its textile production in the future. According to Forrest, there was increased reduction in the acreages for cotton production during the period 2007-2008 in US. This was experienced in the major cotton producing areas such as Arizona and California. The decline in acreage declined with a margin of 30% to approximately 11 million acres. This trend has also been witnessed in 2008-2009 with acreage declining further with a margin of 13% (Para. 3-5). Most of the African countries are increasingly venturing into the production of Cotton. Examples of these countries include Zimbabwe, Sudan and Uganda. Zimbabwe is ranked as the 6th producer and exporter of cotton into the international market (Greenberg 19). This presents a bright future for Dunavant Enterprises which will enable it to survive into the future as a going concern entity. This is due to the fact that the firm will be able to obtain cotton from the small scale farmers for its ginneries firms (Zachary 2).

By investing in Africa, the operations of the firm will improve the living standards of the citizens. This is due to the fact that it will create employment opportunities both directly and indirectly. For instance, by establishing ginneries in the African countries, the firm will create direct employment by employing the local residents to run the firm. On the other hand, the firm will create indirect employment by supporting other small scale enterprises that are involved in the textile industry’s supply chain. For instance, the firm is the largest micro financer in Africa through its program aimed at enhancing production of cotton (Zachary 2).

The host country will also benefit through an increment in the volume of international business through exportation. For instance, by operating in Uganda, Dunavant Enterprises resulted into an increase the Country’s volume of textile exports (Oluput 29). Increase in the country’s volume of exports will stimulate economic growth due to an increase in the Gross Domestic Product (GDP). In addition, this will result into an improvement in the per capita income and hence the citizen’s living standards.US will also benefit from the company’s operation in Africa. This is due to the fact that the multinational firm will remit a certain percentage of it revenues to its parent company in US. This will stimulate the country’s economic growth.

Potential outcomes of the investment

Resource endowment and economies of scale

Comparative advantage can result from a country possessing certain resources (Gupta 3).By investing in Africa, the firm will be able to conduct its operations more cost efficiently. This is due to the fact that Africa is well endowed with resources for production of cotton. For instance, Uganda has ample land resource and ideal cotton growing conditions. This is also applicable to other African countries. In addition, the firm purchases cotton from 180,000 small scale farmers through its agents. This is relatively low compared to the 25,000 American cotton growers (Zachary 3). The reduction in the cost of operation will also arise from the fact that there is cheap labor in Africa considering the fact that the textile industry is labor intensive. Through reduction in the cost of production, the firm will be able to attain economies of scale.

Firm’s strategy and rivalry

The firm will also benefit from increased production of cotton among the small scale farmers. This is due to the fact that the firm has adopted a strategy entailing availing finances to the cotton producers every season. The farmers repay the loans during the harvest time. This ensures that the firm has adequate supply of cotton (Zachary 2). The firm is facing intense competition from other firms in the textile industry. This is due to emergence of synthetic fibers. In addition, rivalry is resulting from increased venturing of other foreign companies into Africa.

Recommendation for marketing automobile tires in France

Product

The management team should ensure that it produces automobile tires that meet the demand of France as a target market. In addition, there should be diversity of automobile tires supplied within the market. The production of the tires should consider the various automobiles in France. The team should also incorporate the concept of product innovation to enable its products to be competitive in the market.

Pricing strategy

To ensure effective penetration into France market for automobile tires, the management team should integrate penetration pricing strategy. This will involve setting the price of its tires at a relatively lower price point compared to the competing firms in the industry. Through penetration pricing strategy, the firm’s product will appeal to a wide range of potential customers. The team should conduct a competitor market research to establish their pricing strategy.

Promotion strategy

The management should formulate a comprehensive, market communication strategy. Various methods of promotion should be considered. These include sales promotion, advertising, personal selling and public relation. A variety of mediums such as online advertising, outdoor advertising, radio, television and print media should be considered in the effort of creating product awareness through advertising. The choice of advertising medium should ensure that the information is accessed by a wide range of potential customers. Personal selling should be integrated in marketing the product to institutional customers.

Place

To ensure that the automobile tires are accessed within the entire market, the management team should establish distributional outlets in all the geographical regions in France. Effective distribution of the tires can also be enhanced through use of the local agents within the automobile industry. Use of local agents will greatly enable the firm to penetrate into the international market. This is due to the fact that they have adequate knowledge of the industry’s distribution channels.

Recommendation to the automobile industry in conducting FDI

Workforce issues

The management should ensure that it develops an effective workforce. This can be attained by formulating effective human resource strategies. In its employee recruitment, the management should ensure that it considers the local residents. This will contribute towards the firm attaining a positive public image amongst the local residents. The selection strategy should be competitive to ensure that only the qualified individuals are inducted into the firm.

An employee development program such as training program should also be formulated. This will enable the employees to incorporate the changes that are occurring within the automobile industry.

Political and Legal environment

The current French government is committed at ensuring that there is political stability so as a strategy to attract foreign investors (Favre Para. 5). In addition, the new French government is supporting research and development through relaxation of tax legislation. This will benefit firms which are greatly dependent on value addition (Favre Para. 6).

In venturing into the French market, the management of the firm should consider formation of mergers and acquisition. The French government is increasingly supporting the growth of the country’s economy by creating a favorable environment for FDI. This will enable the firm to successfully penetrate into this market.

Works cited

Favre, Philippe. “2007 report on Foreign Direct Investment in France.”Asiang.com, 2009. Web.

Forrest, Laws. “Analysts see bright future for cotton in 2009 or 10.” Farm Press. 2008. Web.

Greenberg, Stephen. “Global agriculture and genetically modified cotton in Africa.”2004. Web.

Gupta, Satya. “Comparative advantage and competitive advantage: an economic perspective and a synthesis.” New Brunswick, Canada: St. Thomas University. N.D. Web.

Oluput, Peter. “Report on cotton-textile supply chain in Uganda.”2003. Web.

Zachary, Pascal. “Out of Africa: cotton and cash.” The New York Times. 2007. Web.

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IvyPanda. 2021. "Foreign Direct Investment." December 1, 2021. https://ivypanda.com/essays/international-studies-in-business/.

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