Foreign direct investment is whereby facilities in a foreign country are openly owned. It can be described as the transfer of capital, technology, and labor (Foley, 2007). It can be made through the acquisition of a new business entity or enterprise. Investment entry mode has very many advantages as well as disadvantages. This paper focuses on the effect of investment entry mode of firms entering the international market.
Conditions favoring this mode include import barriers where the government sets up barriers such as quotas and tariffs to ensure its local enterprises do not get affected by others big foreign industries. Small cultural distance is also seen to be one of the major aids to investment entry mode (Misala, 2006). A situation where there are minimal political risks of instability and high sales potential are all major factors aiding this type of mode
Its advantages are diverse including greater knowledge of local markets, therefore, ensuring businesses flourish. Secondly, the investors can use specialized skills and therefore minimize information spillover. Lastly, this entry mode can be viewed as insiders (Mary, 2009). The disadvantages are minimal such as difficulty is managing local resources, and it brings about more risks as compared to other types of entry modes (Chang & Rosenzweig, 2011). It also requires more time, therefore, time to consume (Sporek, 2006). This is noted due to the commitment the investors using the mode have had to put up. Lastly, it requires additional resources.
As seen, investment entry mode has its set of pros and cons. However, the cons outweigh the pros, therefore, this type of entry mode brings detrimental effects t new international investors as compared to others types.
Chang, S.-J., & Rosenzweig, P. M. (2011). The choice of entry mode in sequential foreign direct investment. Strategic Management Journal, 22(8), 747776. https://doi.org/10.1002/smj.168
Foley, J. (2007). The Global Entrepreneur: Taking Your Business International.
Mary, M. (2009). Foreign Market Entry Mode. 239-456783
Misala J. (2005). International Trade and the World Economy. Theory and Mechanism of Functioning. Main School of Commerce Spark T. (2006).Globalization of the World Economy and a New Regionalism In Processes of Regional Economic Integration in Europe and the World, Edited by T. Spark Academy of Economics in Katowice, Katowice.
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