Foreign Investment by Multinational Companies (Alternative Methods)!
In order to increase their profitability many giant firms find it necessary to go in for horizontal and vertical integration.
For this purpose they find it profitable to set up their production or distribution units outside their home country. The firms that sell abroad the products produced in the home country or the products produced abroad to sell in the home country must decide how to manage and control their assets in other countries. In this regard, there are three methods of foreign investment by multinational firms among which they have to choose which mode of control over their assets they adopt.
There are four main modes of foreign investment:
1. Agreement with Local Firms for Sale of MNCs Products:
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A multinational firm can enter into an agreement with local firms for exporting the product produced by it in the home country to them for sale in their countries. In this case, a multinational firm allows the foreign firms to sell its product in the foreign markets and control all aspects of sale operations.
2. Setting up of Subsidiaries:
The second mode for investment abroad by a multinational firm is to set up a wholly owned subsidiary to operate in the foreign country. In this case a multinational firm has complete control over its business operations ranging from the production of its product or service to its sale to the ultimate use or consumers.
A subsidiary of a multinational corporation in a particular country is set up under the company act of that country. Such subsidiary firm benefits from the managerial skills, financial resources, and international reputation of their parent company. However, it enjoys some independence from the parent company.
3. Branches of Multinational Corporation:
Instead of establishing its subsidiaries, multinational corporation can set up their branches in other countries. Being branches they are not legally independent business unit but are linked with their parent company.
4. Foreign Collaboration or Joint Ventures:
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Thirdly, the multinational corporations set up joint ventures with foreign firms to either produce its product jointly with local companies of foreign countries for sale of the product in the foreign markets. A multinational firm may set up its business operation in collaboration with foreign local firms to obtain raw materials not available in the home country.
More often, to reduce its overall production costs multinational companies set up joint ventures with local foreign firms to manufacture inputs or sub-components in foreign markets to produce the final product in the home country.