|Foreign Direct Investments: Preparing for Success
A foreign entity can invest in a foreign country by establishing or investing in a company in that country. This is referred to as a foreign direct investment (FDI).
FDI entails a significant ownership (and even a controlling) interest in the foreign-market company. It differs from a foreign indirect investment, which involves investing in financial instruments for capital gains.
Why Invest in a Foreign Country?
Foreign individuals and organizations invest in and operate businesses in foreign countries for many reasons. An expert in corporate consulting, particularly one specializing in foreign investment consulting, can tell you how and when FDI makes sense.
1. Competitive Advantage Enhancement
For some, an investment opens up a market for their products or strengthens their competitive advantage in that market. By circumventing protective trade policies such as customs duties and import quotas, multinational companies can compete with local producers and products.
2. Supply Chain Stability
For others, foreign investment is a means to protect their supply chain from international trade upsets. An automobile manufacturer that wants to secure its steel supply can set up a steel production plant where it used to source its steel, or it can invest in an existing steel manufacturing company.
3. Access to Resources
An investment can also be a strategic move to gain access to much-needed resources. Some raw materials in a host country may be accessible only to locally domiciled enterprises. Access to affordable but skilled labor can be another powerful inducement for foreign direct investment.
Why Do Countries Accept Foreign Direct Investments?
For developing countries and emerging economies, foreign direct investments drive economic growth. They can lead to the following benefits:
1. Job Creation
The influx of capital comes with job creation in the recipient or host country. These jobs mean more productive members of the economy who can spend, save, and contribute to the local economy’s growth.
2. Technology Transfer
Investors can bring with them advanced technologies. This leads to a technology transfer between the investors and the local workforce. A general technology transfer may also occur, especially if the host country’s government has an effective interface and program to support the domestic absorption or adoption of foreign technologies.
3. Infrastructure Development
Aside from technology transfers, there’s also an upgrade of the recipient economy’s physical infrastructure to accommodate the requirements of foreign direct investment ventures. The foreign investor may have workflows and processes that require a reimagining of or an update to existing infrastructure.
4. Human Capital Development
Foreign direct investments are correlated with the development and upgrading of the host country’s human capital. FDI-funded business ventures require specific skill sets, creating a demand that the labor market strives to fill.
5. Trade Integration and Competition
Foreign direct investments help in the international trade integration of host economies. The competition the resulting venture companies bring also helps stimulate the local economy’s competitive landscape. They induce enterprises in the local economy to become more dynamic and strive to be more competitive.
Preparing for Joint Venture FDI
You can make a foreign direct investment by creating a new company. If it’s a big project, it may require a significant investment and may proceed more smoothly through a joint venture.
Entering a joint venture means collaborating with one or more entities to achieve specific business objectives, sharing risks, responsibilities, and rewards. It’s a step one should never take lightly, especially when investing in a foreign country.
The Advantages of Joint Venture FDIs
FDIs can be accomplished solo, so why form a joint venture with one or more entities? Risk mitigation and resource optimization are two reasons.
1. Risk Mitigation
Foreign direct investment entails a lot of risks. You’re entering a foreign market. Even if you’re already familiar with it and investing in the same niche you operate in domestically (i.e., horizontal FDI), the market may still present challenges of which you may be unaware.
Working with a suitable partner or partners through a joint venture can help mitigate the risks inherent in new projects or markets.
2. Resource Optimization
Collaborative efforts mean shared financial burdens and the combination of unique skills and resources. This can lead to efficiency gains and a significant potential for innovation.
It’s crucial to engage the services of a corporate consultant before investing in a joint venture. They can help with the following aspects of your FDI project:
- Identifying suitable partners
- Defining the structure of the collaboration (corporate structuring)
- Drafting agreements that clearly outline roles, responsibilities, and profit-sharing mechanisms
- Aligning the operational, financial, and strategic objectives among the parties
- Developing and nurturing good investor relations
- Facilitating actual business setup, including incorporation and obtaining government permits and licenses
- Conducting a feasibility analysis of the project components
Why You Need a Corporate Consultant for Your Joint Venture
Even if you’re a seasoned investor, it’s good practice to work with a corporate consultant on joint venture FDI projects. It’s great for market guidance, risk management, and strategic alignment.
1. Market Guidance
Your consultant has knowledge of and expertise in the new market. They can easily determine which discovery services will work best for a local telco operation. They will know (or can readily find out) the suppliers you should work with on your automotive project. Their local market insight will be priceless in your business venture.
2. Risk Management
Working with a corporate consultant in your target market is a good risk management strategy. They know the common risks to businesses in that market, for businesses in general and companies like yours in particular. After identifying your risks, they can help you develop strategies to prevent and manage them.
3. Strategic Alignment
Your corporate consultant can ensure that the strategic goals of all the parties in the joint venture are aligned. This strategic alignment creates a solid foundation for a successful partnership.
Risks of Proceeding Without an FDI Joint Venture Consultant
Your joint venture consultant liaises with investors, manages good relations, and facilitates cooperation. Ventures may fall apart without a dedicated consultant behind the scenes to ensure the pieces fit perfectly together.
Without a corporate consultant’s professional guidance and market expertise, there could be a significant misalignment in the parties’ goals, expectations, and operational procedures. This can lead to conflict.
2. Legal Complications
Poorly drafted agreements leave room for disputes. They can potentially lead to legal challenges and undermine the joint venture’s success.
3. Suboptimal Resource Allocation
Without expert insights, the venture may misallocate resources. This can give rise to inefficiencies and result in financial losses.
Increasing the Likelihood of Business Success
A foreign direct investment can be a strategic move to expand your reach, market, and competitive advantage. Entering into a joint venture mitigates risks and optimizes resources.
Whenever you plan to invest in a new market through joint venture FDI, engage the services of a corporate consultant, particularly one with expertise in your target market. They will ensure your collaborations are thoughtfully constructed, legally robust, and strategically aligned.