FDI can mean buying or taking a significant interest in a competitor, a distributor or a supplier and is a major step toward internationalization. It is also a major commitment of time and resources.
FDI is a huge part of international transactions. If you take the value of all the cross border merchandise transactions in 2002, they don't equal the size of all the FDI last year. If you do it right, FDI opens up many opportunities. Otherwise, you can quickly lose your investment.
Here are five issues to consider before taking the plunge.
1. Decide on the objective of the investment. Create a plan to see if your goals are realistic. Each country has different rates of growth potential, and your partner's objectives may not be compatible with yours. Leave room for unexpected problems or opportunities.
2. Know your partner. Foreign cultures have different financial, accounting, legal and business standards. Some distribution or licensing agreements may not be transferable or revocable, and many accounting systems are less opaque than our own.
3. Find the form that provides optimal benefits and flexibility. Consider a step-up agreement that allows for an increase or decrease in ownership over time. In some cases, it makes sense to buy the assets of a company and leave a shell; other times, building a greenfield facility from scratch is the best way. There are different forms of ownership, and each has its benefits and drawbacks in terms of control, liability, profitability and reporting.
4. Understand the government's role. At the national, regional/territorial and local levels, government can provide incentives for investment and cut through red tape or it can make your life a living hell. Your position is strongest before you commit.
Sometimes the most exciting incentives are offered by regions and cities. These include tax abatements, creating infrastructure, repatriation of profits and direct grants and loans. Strike your best deal early and maintain good relationships with government.
5. Have an exit strategy. If you have a great run and develop a market but can't get out, then much of the benefit of FDI is lost. What is your divorce strategy for breaking the joint venture, selling the business and repatriating the profits?
Until your company has invested in a foreign market, it can't really be considered international. Nothing focuses a company more than realizing that a critical portion of its assets is at risk and operating in a foreign environment. David Levey (email@example.com) is an adjunct professor of Global Management in the MBA program at John Carroll University. He is the former manager of the Cleveland World Trade Association, the international business education arm of the Greater Cleveland Growth Association.