What are the capital investment decisions for going global?
Discussions About Investing To Go Global
Before making the decision to commit critical capital resources overseas, the venture needs to have a clear understanding of why it is doing so. Before discussing the reasons for investing overseas, we first want to discuss Foreign Direct Investment (FDI). For statistical purposes FDI is usually defined as ownership of at least 10 to 25 percent of the equity of one venture in one country, by another venture based in another country.
The actual levels of ownership for measuring control can range from 10 to 100 percent. A foreign subsidiary is an affiliate organization that is incorporated overseas and one in which the parent owns typically at least 10 percent and less than 50 percent of the voting equity stock. This is known as an uncontrolled foreign corporation.
A controlled foreign corporation is one in which the parent owns more than 50 percent. According to the United Nations, FDI has soared from $158 billion in 1991 to nearly $1.3 trillion by 2000. The International Capital Markets report published by the International Monetary Fund (IMF) found that portfolio investment flows from parent to subsidiaries increased from $219 billion in 1990 to nearly $1.5 trillion in 1999.
There are at least ten reasons why FDI activity is on the rise:
1. To attract new sources of demand
2. To enter markets in which superior profits are possible
3. To benefit from economies of scale
4. To use foreign factors of production
5. To use foreign raw materials
6. To use foreign technology and know-how
7. To exploit monopolistic advantages
8. To react to exchange rate movements
9. To react to trade restrictions and trade barriers
10. To extend product lifecycles
Alternative to FDI: Global Strategic Alliances
An approach used by ventures to minimize the additional risk of global expansion is to simply employ lower-risk strategies. In light of the issues we raised with FDI, Global Strategic Alliances (GSAs) limit financial risks when entering new markets. This approach quickly yields market knowledge and leverages the experience or particular skills of the local alliance partner.
It can be most effective in managing complex regulatory and/or management issues. The overseas level of involvement may increase as the expanding venture builds upon its initial success in a new marketplace.
Entrepreneurs are using the following examples as models for initiating a GSA:
– codevelopment of technologies
– sharing of databases like customers contacts or e-mails
– sharing intellectual property, such as business models, practices, and engineering specifics
– sharing the knowledge base of domain experts
Functional alliances are then created for local market research, translation services, account management, collection, purchase ordering, Web design, and Web hosting.
GSAs do have their challenges. First, one is structuring the talking points and getting to a working deal. When drafting the documents, make sure the objectives are clear for both sides, which includes tax planning issues, performance metrics, management issues, and exit strategies. For example, make sure it is clear how to end the agreement and what are the scenarios for upside and downside, with opportunities to restructure for either party to bring in outside partners to help out. Other legal speed bumps include the handling of intellectual property rights and how to protect them, and which jurisdiction should be followed.