Depending on your business or your industry, an organization might
be able to just enter a new foreign market simply by exporting.
Alternatively, again, depending on one's business or industry, a firm might decide
to enter a new foreign market through some sort of licensing or a strategic
alliance with a local partner who already operates in that foreign market.
Finally, an organization might decide to go all in and establish some operations
in that new foreign location, and this is known as foreign direct investment or FDI.
That's what I'm going to focus on for a few moments right now.
So what is foreign direct investment?
Again, it's when a firm establishes a controlling stake
in a host country entity to manufacture or sell its products.
Why would firms want to pursue this particular
way of entering a new foreign market?
Well, there are a handful of potential advantages.
First of all, a firm might gain some local cost or production advantage.
In other words, it might just be more cost-effective to get some operations
going right in that new location because you can manufacture or
produce those goods more cheaply right there on location.
And it makes sense that that might also be a way to avoid high transportation costs
or importing tariffs to that foreign location.
So those are a couple of potential advantages.
What are some others?
Well, one thing to think about is foreign direct investment establishing
operations in that new location might allow you to easier,
to more easily transfer your capabilities.
These are the things that your organization really knows how to do.
And so we can transfer those capabilities easier
if we enter through foreign direct investment.
Now, why is that?
It's essentially because we're transferring those capabilities to
ourselves.
Instead of trying to transfer them to some other sort of strategic partner in that
new foreign location, we're just establishing operations there, and
it's very easy for us to kind of transfer the way we do things, right?
And related to that, it might be also be easier to protect those capabilities.
Remember, one of the risks with something like a strategic alliance or
having a foreign partner in that new location is that they might learn
a lot about your business and they might learn enough to actually decide
to distance themselves from you and directly compete with you.
But if we have established our own operations there,
we've transferred our capabilities to that new operation,
it's also easier to protect the way we do things because it's all in-house.
And that also gives us a tighter control over our operations.
I mean, if we're worried about things like quality control or
the way we're marketing our goods or services, again,
foreign direct investment is a way to keep control over all of those things.
So these are a number of potential advantages
to pursuing a foreign direct investment strategy to entering a new market.
Now, are there some downsides?
Of course there are.
There's some potential disadvantages here.
First of all, it can be very costly to set up operations in a new foreign location.
So there's some risks in doing that.
There's higher managerial or bureaucratic costs.
I mean, we might not know everything there is to know about effectively
managing those operations with local employees.
Customs and norms might be different in that new foreign location and
there's a learning curve there.
And so, again, there's potentially higher financial costs and risks.
There's potentially some higher managerial or
bureaucratic costs that we may incur as we try to get that operation off the ground
in this new foreign location that we might not know that much about.
There's also potentially a perception
in that new foreign location of us being foreigners, right?
There's this kind of liability of foreigness when we establish
operations in a foreign location where we're the outsider coming in.
That might have implications for how much customers want or value our product or
service, right?
And finally, you know, the domestic competitors in that new location
presumably may know something about competing in that foreign location.
They might be more politically connected.
They might have certain advantages because they've
Michael LenoxSenior Associate Dean and Chief Strategy Officer
Jared HarrisSamuel L. Slover Research Chair in Business Administration
