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    Foreign Direct Investment (FDI) and FDI Regulation

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    * What is the purpose for foreign investment regulations?
    * List and discuss the foreign investment regulations.
    * What are 2 issues that concern management when screening potential markets and sites?
    * List and discuss the steps in the screening process.

    Please include a reference list. Thanks in advance for the help!

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    Solution Preview

    The first part of this question concerns the international phenomenon of FOREIGN DIRECT INVESTMENT, and the regulations that countries have instituted around FOREIGN DIRECT INVESTMENT. The second part of this question concerns the process that company management uses to decide which markets, in which locations they will enter.

    First consider FOREIGN DIRECT INVESTMENT. This is simply any allocation of resources (assets, cash, debt, buildings, expertise, people, IP, etc) that a company in one country (referred to as the 'home' country) allocates to an investment in another country (referred to as the 'target' country. This investment may involve a joint venture with an existing firm in the target country, or the establishment of foreign subsidiary of the home country, but in all cases, money and resources are moved between countries seeking growth and profit. Given this simple definition, what are the pros and cons of FOREIGN DIRECT INVESTMENT, and more specifically, what is it about FOREIGN DIRECT INVESTMENT that prompts countries to establish regulations addressing it? Sometimes, it helps to think of these types of problems utilizing a scenario.

    COMPANY X is located in the UNITED STATES. It is a well established public company with strong financials, a proven track record, good quality products and an established and stable market. It has cash and cash equivalents in the hundreds of millions of dollars, and VERY low debt. COMPANY X currently produces only in the US but sells and ships its products all over the world. Looking at its cost of sales, production costs and profit margin, COMPANY X has determined that it would be beneficial to its bottom line to invest in off shore production facilities as a means of cost reduction. The Board of Directors has approved the use of $25 million for the investment in off shore production facilities, but that money comes with a catch - the Board has stipulated that this investment must produce double digit growth in profits, year over year, with measurement to commence 2 years after the off shore production facility comes online.

    After much research and due diligence, COMPANY X has settled on a small firm, COMPANY A, in the South American country of Chile, which they have concluded would make an ideal partner for a joint-venture. COMPANY A currently does contract manufacturing for a number of local vendors, making everything from toys to shoes. The lure of $25 million is VERY strong for COMPANY A management, and they see this opportunity as a way to leverage growth with money from its HUGE northern neighbor (the US). COMPANY X has proposed using this investment to expand and retool COMPANY A's production facilities, and to expatriate its highest performing employees and managers to Chile to coach people at COMPANY A in the latest business, production and technology practices. This would allow COMPANY A to do what it has always wanted to do for the last 20 years, and to do so without incurring any debt! It seems almost like a dream! Most of the management at COMPANY A want COMPANY X to begin yesterday! But there is one holdout - the Sr. Vice President of Operations. He doesn't like this idea AT ALL!!!

    First of all, he tells COMPANY A's Board of Directors and Executive Management that FOREIGN DIRECT INVESTMENT is just another form of First World imperialism. His face gets red as he talks and everyone knows he is very passionate on this subject. If he doesn't support the venture, it will be very difficult to push it through ...

    Solution Summary

    FOREIGN DIRECT INVESTMENT is simply any allocation of resources (assets, cash, debt, buildings, expertise, people, IP, etc) that a company in one country (referred to as the 'home' country) allocates to an investment in another country (referred to as the 'target' country.

    FDI is regulated differently by different countries to protect themselves from external, disruptive stimuli or to protect against perceived financial exploitation.

    Opponents of FDI point out that its impacts are often limited and in some cases detrimental- the consequences of crowding out local competition, enclave production with limited forward and backward linkages, and "race to the bottom" effects often related to labor and environmental issues.