In this competitive marketplace it has become an absolute necessity to conduct a business internationally to stand out among your competitors. Geographically expanding your business is a risky and expensive proposition and globalization is yet not either stable or developed enough force. The factors governing a successful breakthrough of a business in the market place are carefully tailored since the downfall is as great as it’s victory.
Table of Contents
Foreign Direct Investment
Open economies are preferred when foreign direct investments are considered as oppose to more tightly regulated economies as it offers skilled workforce hence a above average growth prospects for investors. Foreign direct investment differs from capital investment as it may include provision of technology and management.
Method of Foreign Direct Investment.
Opening of a subsidiary and or associate company in a foreign country is one of the ways, which allows you to acquire control in an existing foreign company through means of a merger or joint venture.
According to the Organization of Economic Cooperation and Development(OCED) the threshold allowed for foreign direct investment is a minimum 10% ownership stake in a foreign-based company, which is usually regarded for the investors that would require 10% or more of the ordinary shares or shares through voting of a foreign company. This threshold is flexible in nature because it depends on the effective controlling interest in a firm that could be established through less than 10% of the company’s voting shares (Amadeo, 2017)
The aspects of foreign direct investment are commonly categorized as being horizontal, vertical or conglomerate in nature. Horizontal direct investment is when the investor establishes the same type of business operation in a foreign country as it operates in the home country. For example, Kit Kat which was originally started in United states and the factories were then built in the United Kingdom now known as one of the most consumed confectionary. (Amadeo, 2017)
A vertical investment is when different but related business activities, those focusing on a niche, are acquired in a foreign company meaning when the manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company, which is why China is preferred the most due to cheap and skillful workforce and abundance of raw materials which in later reduces cost in the production. (Myatt, 2016)
A conglomerate investment is a type of foreign investment when a company makes a investment in foreign company that’s unrelated to it’s existing company, this type of investment involves entering a business where the investor has no previous knowledge or experience in which is often taken as a joint venture with a foreign company already operating in the industry. One of the most popular merger was in 1970, where Phillip Morris purchased Miller Brewing Co. In 1985, Phillip Morris Cos. acquired General Foods Corp. and, three years later, Kraft Foods. Since the mergers, the Altria Group Inc., Phillip Morris' company name since 2003, has divested these previous acquisitions. Phillip Morris being a popular cigarette brand is one of the examples of a conglomerate investment. (Shen, 13)
Trade Rules and Technical Barriers
The Technical Barriers to Trade (TBT) Agreements is a standard that affirms technical regulation, standards and conformity assessment procedures are non-discriminatory and does not create an obstacle in trade. World Trade Organization also assures that the human health and safety or the environment is not compromised through it’s legitimate policy objectives.
Which is basically created by government policies and regulations and are often referred as non-tariff barriers. Non-tariff barriers are policies by the government which makes it difficult to export a market or bringing in imported products that are less competitive to goods that are locally produced. These barriers can arise from any type of export which could be either food to digital goods or services for example administrative procedures, licensing requirements, product labelling requirements, privacy requirements, data storage requirements, price control etc. Or when importing goods, the factors which are considered includes custom duties, custom procedures, technical regulations and standards (for example for health and safety). (Myatt, 2016)
Due to globalization the trade regulations are becoming increasingly significant and at the same time, because of international liberalization traditional or conventional trade obstacles such as tariffs and import restrictions are being reduced. For example, in the period following the Second World War, average tariffs for industrial products are reduced from 40 percent to 5 percent. (Myatt, 2016)
To accommodate globalization of business without creating misunderstanding and creating confidence in both ends are certain restrictions which is removed such as reduction in tariffs, quotas and other trade restrictions between signatories. World Trade Organization (WTO) ensures that beneficial terms are negotiated between the two parties.
Amadeo, K. (2017, july 26). Multilateral Trade Agreements: Pros, Cons and Examples. Retrieved from the balance: https://www.thebalance.com/multilateral-trade-agreements-pros-cons-and-examples-3305949
Myatt, M. (2016). The impact of globalization on business. Retrieved from hub.n2growth.com: http://hub.n2growth.com/the-impact-of-globalization-on-business/
Shen, L. (13, june 2016). These Are the 12 Biggest Mergers and Acquisitions of 2016. Retrieved from Fortune.com: http://fortune.com/2016/06/13/12-biggest-mergers-and-acquisitions-of-2016/