Page 148 - DMGT545_INTERNATIONAL_BUSINESS

Unit 7: Foreign Direct Investment

By now, “the Indian, economy had started witnessing unprecedented boom” and despite notes
divesting the cement business, the L&T turnover scaled the ` 10,000 crore mark. Alongside,
the lucrative Middle East market was booming and L&T forayed into six countries in the
Gulf with joint ventures. “The idea was to develop a mini L&T in the region,” observes
a senior company executive. The company also set up manufacturing facilities in China
to leverage the cost structure. Exports in 2007 constituted 18% of net sales. With soaring
revenues and operating margins, L&T started benchmarking itself with the best in the
world.

Suddenly, the notion of an Indian MNC became a reality. L&T has big plans to foray into
new businesses. The new businesses are:
Ship-building: L&T is getting into ship-building by building a world-class facility; and
already has a ‘small shipyard in Hazira. It will build complex ocean going ships for the first
time in India.
Power equipment: It is getting into power equipment in a big way. A JV with Mitsubishi for
super critical boilers formed another with Toshiba for turbines on the way.
Financial services: L&T is rapidly increasing its presence in infrastructure finance. It is also
planning to come up with a $1 billion infrastructure fund.
Railways: A new area, L&T aims to be an end- to-end solutions provider for the railways,
from track-laying to signaling to transmission, and others.
Thus, for an institution that has grown to legendary proportions, there cannot and must
not be an ‘end’. Unlike other stories, the L&T saga continues.
Questions
1. Having a strong presence in India, what drives L&T to think of emerging a strong
MNC?
2. What challenges lie ahead of L&T? How is it prepared to cope with them?
3. Will the L&T saga continue?

Source: The Economic Times, September 2, 2007 and company website: www.lntecc.com
7.7 summary

This unit attempts to give an overview of the functions in as simple manner as possible.
l z Foreign direct investment occurs when a firm invests directly in facilities to produce a
product in a foreign country. It also occurs when a firm buys an existing enterprise in a
foreign country.
l z Horizontal FDI is FDI in the same industry abroad as a firm operates at home. Vertical
FDI is FDI in an industry abroad that provides inputs into or sells output from a firm’s
domestic operations.

l z Several factors characterized FDI trends over the past 20 years; (a) there has been a rapid
increase in the total volume of FDI undertaken, (b) there has been some decline in the
relative importance of the United States as a source for FDI, while several other countries
have increased their share of total FDI outflows, (c) an increasing share of FDI seems to be
directed at the developing nations of Asia and Eastern Europe, while the United States has
become a major recipient of FDI, and (d) there has been an increase in the amount of FDI
undertaken by firms based in developing nations.

l z High transportation costs and/or tariffs imposed on imports help explain why many firms
prefer horizontal FDI or licensing over exporting.

lovely Professional university 143