Entry Strategy Market

ESSAY: Theories can explain the trends in global foreign direct investment flows in recent years.

According to the manual of the balance of payments of the (IMF) that defines foreign

direct investment (FDI) as being: "an investment made to acquire a lasting interest in an enterprise operating in one economy other than that of the investor's territory. The purpose of the latter being to have actual power in the management of the other company.

To simplify the definitions quoted previously, OECD gave (FDI) the following definition: "investments that an entity resident in one economy (direct investor), performs in order to acquire a lasting interest in an enterprise resident in another economy (direct investment firm) by long-term interests, we hear that there is a long-run relationship between the direct investor and the investor exerts a significant influence on the management of the company.

In the first section of this essay I define different forms of foreign investments FDI and FPI, then in the second section of this essay I will analyse trend of FDI in recent years and then finish with theories that will explain trend of FDI.

First, there is two forms of foreign investment long term:

Foreign direct investment (FDI) is beneficial to the countries of origin and host and is part of an open and efficient international economic system, and is one of the key drivers of development. The benefits it provides however not automatically manifest and is not equitably distributed between countries, sectors and local communities. National policies and the international investment environment are critical for attracting FDI to a greater number of developing countries and to ensure that these investments have the maximum positive effect for the development. It's essentially the host country responsibility to implement, transparent terms & conditions favourable to investment and strengthen the human capacity and institutional necessary to exploit.

Foreign direct investment can be grouped according to their shape or their logic. According to the logic, Markusen retains the IDE horizontal and vertical FDI typology that underlies the decision to create subsidiaries abroad. These strategies are not exclusive one on the other but are rather in dynamic logic. As to the form, the IDE can differ depending on whether it is an investment of creation, acquisition, merger, joint venture, expansion or financial restructuring. 

FPI (Foreign Portfolio Investment) represents passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities' issuer by the investor.

After defined FDI and FPI, I found necessary to explain 2 types of MNCS.

Horizontal FDI is intended to produce on the one hand, to the territory of implantation, a range of goods that reproduced entirely or partially by the parent based on local demand characteristics; and secondly, they concern countries of similar levels of development. Considered investments are North, where the qualifier of horizontal strategy. The parallel approach illustrates the characteristics of the specialisation international intra-branch founded in imperfect markets. This type of IDE aims to facilitate Investor access to a foreign market solvent to the favourable prospects for development. Thus, in this perspective of conquest or preservation of market, foreign investment is to meet local demand through the creation of “subsidiaries relay”.

Dupuch and Milan show that multinational firms of horizontal type appear when to settle near the consumer benefits are higher than the benefits associated with the concentration of activities.

The vertical strategy responds to a rationalisation of the production target. It refers to a quest for efficiency and generates meaning investment flows North-South determined by the differences in the level of development of partner Nations. As a result, vertical FDI through the location of the activities in "subsidiaries workshops", aims to organise an international division of the production process. These investments differ from horizontal FDI by their single and simultaneously cross-sectoral character. Thus, FDI is so-called location when firms fit into a perspective of international division of the production process.

• Figure 1. FDI inflows: global and by group of economies 1995-2014  (Billions of US dollars)  

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Source: UNCTAD

To understand the trend of FDI flows worldwide, I found necessary to use the chart (figure 1) which allows to clearly explain where the flows are intended during 1995-2014.  According to the UNCTAD Global, foreign direct investment declined in 2014 to about 16%. If we pay attention, we see that in 2014 the IDE was 1230 billion dollars against 1470 billion in 2013. This evolution is due to the fragility of the world economy, the uncertainty of investors about public policy and geopolitical tensions. Also, new investments we were offset by a few very important assignment operations. The decline in FDI flows contrast with the progress of other macroeconomic variables, such as GDP, trade, gross fixed capital formation and the employment. (Figure 1). Developing countries account for 55% of global FDI inflows.

We note a substantial evolution of entry of FDI in Asia, FDI flows to the region rose by 9% in 2012 to 2014. FDI flows to Africa remained unchanged (54milliards), the contraction of the flows to North Africa was offset by the increase inflows to sub-Saharan Africa. FDI in the countries of Latin America and the Caribbean declined by 14% to $ 159 billion. Despite a resumption of cross-border flows of FDI from developed countries decreased by 28% to 499 billion. FDI in the United States fell to 92 billion due to a mega sale without which the investment level would have remained stable. (Figure 2)

• Figure 2. FDI inflows and FDI outflows 2012-2014  (Billions of US dollars)  

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With all this reasoning, according to Dunning, the foundation's theorist growing multinational firms to run investments out of national territory into three types of motivations.

• Investments in the reconquest of a market "market-seeking. This type of investment is seduced by the extent of country markets targets with strong potential for consumption, characterised by a high per capita income and a strong opportunity for growth in the future.
• Investments in the quest for optimisation of production equipment (efficiency-seeking}: are drawn in specific places {free trade area, Park technopoly, etc.) recognised by the load borne by the company. Which requires the enterprise to segment the process of production, to take advantage of differences in costs of factors of production or other comparative advantages, such as the presence of suppliers this type is not intended to set up production units in the host countries
• Strategic {strategic-asset-seeking} or workaround investments: which is realized by the operations of {mergers & acquisitions}. The company appealed to this kind of operations to increase its competitiveness in the host market, or take advantage of the synergies with other partners.

What outputs of FDI of developing represent more than a third of the total global, with leading Asian multinational companies. In 2014, multinational companies from developing countries had invested abroad $ 468 billion or nearly 23% more than the previous years (figure 2). It is important to know that developing countries are now more than a third of the output global FDI. Developing countries earmarked much of their output of FDI to the neighbouring countries of their region. Be on the familiar ground makes the internationalisation of the company, the presence of markets and regional value chains playing a leading role. There are differences in the process output of FDI from developed countries and those of developing countries.

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