4

FOREIGN INVESTMENT

This part considers the third main element of international locally. (Special cases of service and other industries are
trade-selling abroad through local investment in subsidiaries considered in part 6.) The management and control of the
for marketing, manufacturing, or the provision of services foreign subsidiary is considered in this part.

4.1 The motives 4.4 Organisation and staffing

Three basic types of foreign investment Organising head office
Host market factors Organising the regional centre
Cost factors Organising the subsidiary
Offshore production Centralisation and decentralisation
Skilled labour
Lower input costs 4.5 Pay, pensions, and employee benefits
Government inducements Introduction
Tax havens Categories of staff
Vertical foreign investment Taxation-basic principles
The investment climate Social security
Responses to an external approach Company pensions
'Push' factors-home country related motives The Swiss service company
Conclusions Split service contracts
Self employed professionals and small miscellaneous
groups of expatriates
4.2 Guidelines for the establishment of the foreign
subsidiary 4.6 Finance
Establishing the need Background to financial planning
Financial background
Objectives
Distinct problems of foreign investment Financial planning
Strict financial control
A gradualist approach
The management process Adequate capitalisation
The planning stage Borrowing by overseas subsidiaries
Greenfield ventures v. take-overs Subsidiary or branch
Sources of finance
Wholly owned subsidiaries v. joint ventures
The selection of the chief executive
Target setting 4.7 Disinvestment
The planning stage- final comments Introduction
Definition of disinvestment
The investing stage
Choice of the site Magnitude and characteristics
Product and market Motives
Operation and control Barriers to disinvestment
The final stage: evaluation Disinvestment signals and proposals
Conclusion Disinvestment analysis
The disinvestment decision
Implementation of the disinvestment decision
National measures on collective dismissals
4.3 The management and control of the foreign subsidiary International organisations and disinvestment
Management plan structure Involuntary disinvestment
Controlling the plan Other external disinvestment pressures
Other considerations Conclusion

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© Palgrave Macmillan, a division of Macmillan Publishers Limited 1988
 4.1
The motives

There are more motives for foreign direct investment than The first three groups of motives correspond to our main
there are separate investment decisions. On very few occa- typology. The last three are more usually quoted as support-
sions is an investment undertaken for a single, unique, ing motives or additional factors, reinforcing the primary
compelling reason with no secondary influences or contingent drive.
elements. The decision, moreover, is very rarely taken at an
instant, as a snap judgment, but rather is the culmination of
pressures and opportunities impinging on the firm. Motives Table 4.1-1: A classification of motives for foreign direct investment
will therefore usually be a mixture of defensive, aggressive,
and contingent factors, combined with a perception of the (1) Host market oriented factors
prospective host country. Host market size
Market growth
Investment is a better way of servicing market than
alternatives
THREE BASIC TYPES OF FOREIGN DIRECT To meet local demand more effectively
Maintain/increase market share
INVESTMENT
Trade barriers (including import controls)
To use host country as an export base
Three basic types of foreign direct investment can be Defence of market
identified, each related to a predominant motive:
(2) Cost based factors
(1) market-oriented investment; Cheap labour
(2) cost-oriented investment; Availability of labour including skilled labour
(3) raw material-oriented, 'vertical' investment. More profitable operation
Lower input costs
Lower transport costs
These broad categories cover a wide range of motivation.
(Government) financial inducements
Each contains a large variety of sub-types. Market-oriented Lower inflation
investment includes a switch from exporting where this and Access to technology
other means of foreign market servicing have been found to Low taxation
be inadequate. It also includes investment in order to jump a
tariff wall, or an anticipated import quota or tariff, and (3) Vertical integration
investments in economies of perceived high growth potential. Availability of raw material inputs
Cost-oriented investment may be based on cheaper labour or Lower cost material inputs
other input costs, in order to service more effectively either Need to ensure supplies of inputs
the source country home market or the host country market,
(4) Investment climate
or to use the low cost country to service third-country markets Political stability
or world markets in general. A particular subset of cost- Cultural closeness to home country
oriented investment is the establishment of 'offshore produc- Infrastructure provision
tion plants' (also called 'foreign feeder plants' or 'sourcing Tax structure
plants') where part of the production process is hived off and 'Environment' generally
located in a cheaper labour high growth economy. Typical
offshore production processes occur in the electronics (5) Response to an external approach
industry and typical locations include Singapore, Mexico, From government (usually host government)
From local agent/distributor/licensee
Taiwan, and Hong Kong. Raw material-oriented investment
From customer
takes place to achieve greater control of vital inputs or to From supplier
reduce the costs of such inputs, thus by-passing the market in From competitor
these goods.
Often, however, foreign direct investment is not a pure (6) 'Push' factors (parent-country related)
form of any of the three basic types and the motives given by Underemployed resources
investors are a mixture of reasons. We must also consider the Difficulties at home
fact that different individuals within the firm's organisation Diversification of risk
may have different motives for supporting the same invest- Difficulties in supplying foreign market by other means
Need to exploit advantages abroad
ment decision. Table 4.1-1 is a summary of motives given for 'Exchange of threat'
foreign direct investment and we begin by analysing each Insurance against problems at home-multiple sourcing
section in tum.

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