Week 6 Foreign Direct Investment

Foreign direct investment is a company controlled through ownshop by a foreign company or foreign individuals. FDI is important because production facilities abroad comprise a large and increasingly important part of international companies's activities and strategies. FDI plays an growing role in global business, which can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies , capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development (Hill,2005).

When a firm decides to enter a new market in another country through foreign direct investment, the next step is to choose between the different types of FDI, wholly owned subsidiary or joint venture. In joint venture, firms can gain the benefits from a local partner's knowledge of the host countries, competitive conditions, political systems, business systems, culture and language; the costs and risk can be shared by the local partners, especially when the development costs and risks of opening a foreign market are high. Finally, joint venture reduces political risk as it involves a local firm. In many countries, political consideration makes joint ventures the only feasible entry mode (Hill, 2005). While wholly owned subsidiary reduces the risk of losing technical competence to a competitor, particularly when a firm's competitive advantage is based on technological competence. This is why many high-tech companies prefer this entry mode for overseas expansion. And it gives tight control over operations in different countries; this is necessary for engaging in global strategic coordination, as the firm could use the profit from one country to support competitive attacks in another. In order to realize learning curve and location economies, a global production system needs to be establishes and centrally determined decisions are needed, this requires high control over the subsidiaries, wholly owned subsidiary gives such tight control ( Hill, 2005).

I am a fan of VW automotive, which is a world-wide Car maker. The Group now consists of seven major brands, which include Volkswagen Passenger Car, Audi, Bentley, Seat, Skoda, Bugatti and Lamborghini. Most of them were all bought in the form of acquisition. Audi was bought from Daimler-Benze in 1964; Bentley, was bought in 1998 from Vickers along with Rolls-Royce, but the company cannot produce cars using the brand of 'Rolls-Royce's ' because this trademark is belonged to BMW; majority of Seat was acquired in 1987, Bugatti and Lamborghini were both acquired in 1998. The Audi division also bought NUS in 1969, but the brand was never used since 1977. Hence, it is clear that acquisition is the most favorable expansion strategy for VW ( Wikipedia contributors, 2012)

However, joint ventures companies formed by VW in China ( Shanghai-VW and FAW-VW) instead of a dopting acquisition, which is due to the special investment environment (VW, 2012). When VW entered in China, Chinese automotive in dustry was in its primary stage, most local car makers could not meet the quota of production. In order to absorb fund from investment and get world-advanced technology, the Chinese government supported foreign investment. On the other hand, in order to protect the local brand, foreign companies are not allowed to have majority share holdings. In other words, foreign car makers act the role of assistance provider and are strictly limited to helping the China's car industry to develop independently. According to the Chinese policies of  attracting FDI in car market, VW finally chose joint venture entry when it entered the market.