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International Financial Management

Notes lot of difficulty in selling the plant. If a firm is confident that it will survive the foreign market
and competition then DFI is the right way of investing abroad. However, there are several
alternative methods of entering foreign markets that are less risky and also involve a smaller
initial outlay than DFI.
The various alternatives are:

1. A Joint Venture: A viable form of increasing cross border investment is to engage in a
joint venture. A joint venture between a multinational firm and a host country partner is
a viable strategy if one finds the right local partner. For example, consider a firm in USA
that has expertise in the technology to build automobiles and plans to establish business
in West Germany. As this firm is not familiar with German rules and codes, it may
consider a joint venture with a German firm. The two firms could then combine to establish
a business in West Germany that would not have been possible by either individual firm.
Joint ventures have become popular and some of the obvious advantages are as follows:
(a) The local partner understands the customs, cultural restrictions and various
institutions of the local environment. For the multinational firm to acquire a
knowledge on its own, it might take a considerable period of time with a lot of
problems attached to it.
(b) The local partner can provide competent management both at the top and also at the
middle level.

(c) In some cases a 100% foreign ownership is not possible. Therefore, in such cases,
host countries prefer that foreign firms share ownership with local firms or investors.
(d) The contacts and reputation of the local partner may help the foreign firm in gaining
access to the capital market.
(e) If the purpose of the investment is to target local sales, the foreign firm may benefit
substantially from a venture that is partially locally owned.
2. Mergers and Acquisitions/Cross-border Acquisitions: Firms are motivated to engage in
cross border mergers and acquisitions to increase their competitive positions in the world
market by acquiring special assets from other firms or using their own assets on a larger
scale. FDI usually takes place through green field investments which involve building
new production facilities in a foreign country or through cross border acquisitions which
involve buying existing foreign business. Synergistic gains may or may not arise from
cross border acquisitions depending on the motive of the acquiring firms. Gains will
result when the acquired merger is motivated to take advantage of market imperfections.

A cross border merger has the following advantages as against green field investment:
(a) It is a cost effective way to capture advanced and valuable technology rather than
developing it internally.

(b) It is also an easy and quicker way to establish an operating presence in a host
country.
(c) Economies of scale and synergistic benefits can be achieved with a merger.

(d) Foreign exchange exposure is reduced.
As against the above mentioned advantages, a cross border merger may have the following
problems:

(a) Cultural differences may prevent the joining of two organisations of different
customs, values and nationality.

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