What Are the Main Advantages and Disadvantages of Foreign Direct Investment as a Means of Entering New Markets?

Company has evolved to handle joint ventures, but not all of them turn into successes.

It also requires more of an investment and commitment by the international company which creates a higher risk. There is also the down side of having difficulty managing local resources.

Joint ventures (JV) are a popular method of foreign market entry because they theoretically provide a way to join complementary skills and know-how, as well as a way for the foreign firm to gain an insider’s perspective on the foreign market. Since China began its market opening in 1978, joint ventures have been the most commonly used form of foreign direct investment (FDI), with about 70% of FDI in China in the 1980s and 1990s taking the form of joint ventures (Qui, 2005, p. 47). The Chinese company, as well as the foreign investor, has since 1978 been drawn to the joint venture form. Walsh, Wang & Xin (1999) note that from the Chinese

The foreign partner can also become a competitor by selling its production in places where the parental company is already in.

A foreign investor may enter into a joint venture by combining with a national of a host country to create a new entity or by acquiring a portion of an existing local entity.

Supporters of Transnational Corporations (TNC) say that their operation in “third world” country, also known as a “developing country”, benefits both the home country (where the TNC is based) and the host country (where they operate). TNCs construct facilities, make infrastructure improvements, and employ local people, all activities that should improve the economy of a host nation. Many host nations hope that there will be a multiplier effect from the direct investment by a transnational corporation, known as foreign direct investment, or FDI. That multiplier is expected to ripple across all other sectors of their economy – benefitting everyone.

Many governments, especially in industrialized and developed nations, pay very close attention to foreign direct investment because the investment flows into and out of their economies can and does have a significant impact.

International joint ventures is an overseas business owned and controlled by two or more partners; starting such a venture is often as an entry strategy (Deresky, H. 2014.p.377), while joint ventures refers to an independent entity jointly created and owned by two or more parent company.

The lesson learned from this is that sometimes it is easier and faster reach a new market via joint venture, even though the profit will be less, but the company can save a lot of money in studying the new market trying to understand the new culture and how they purchase and also it can minimize the risk because there is a national brand supporting the new international brand, which gives confidence and security to the customers.

This academic paper will be exploring the key term, joint ventures. This concept is of interest because in today’s business environment due to the economy downfall, many organizations recourse to this strategy in order to easily infiltrate in a foreign market. Companies are seeking more opportunities to expand their market share and a joint venture is an attractive option to do so. Getting involved with a foreign market come with several obstacles and challenges. It is for the same reason that organizations engage in a joint venture whit a partner that knows and understand the culture and preferences of that specific nation.

Dunning’s OLI paradigm (1976) is used to support firms to locate its production in countries that are financially beneficial for them. According to Dunning, “the paradigm offers a holistic framework to take in consideration all of the important factors that influence the decision of a MNE.” (Stefanović, 2008, p.241) FDI is determined through the composition of the three powerful advantages; ownership, location and internationalisation as shown in figure 1. The thesis is to assess, ‘why go multinational?’, ‘how to choose the best location?’ and ‘what actions have to be taken to enter a foreign market?’

The research this material accounts for mainly focuses on the pros and cons of FDI regarding corporations more than host countries, like what are the factors that attract multinational’s investment, what are the risk of expropriation, the extent of the development of stock markets, and what is the linkage between democracy and foreign investment (Bekaert, Harvey, & Lundblad, 2011; Busse & Hefeker, 2007; Eichengreen et al., 2011; Li, 2009). Indeed, this specific research tells little about the host countries in this international flux of investment rather than distinguishing between developed and less-developed countries (LDCs).

Authors state that the objectives of an international joint venture are: to gain access to foreign markets, to allow R&D cooperation to develop new products or to solve supply chain problems. The joint ventures have as advantage: greater gaining potential as opposed to royalties, greater control over production and marketing, better feedback from consumers, and more experience in international marketing.

It is because through the joint venture, the company is more familiar with the situation of the company there. The negative outcome is that the management system different between the company. So it is hard to make a decision making. It is because there is different opinion of each person.

• It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if: