Foreign direct investment as a tool for competition in world markets
Foreign direct investment (FDI) is a form of foreign capital participation in the implementation of investment projects on the territory of the recipient country, which is characterized by the active participation of the investor (or his representatives) in the company's activities.
FDI refers to owning real assets - factories, equipment and real estate. In this case, the difference between investing in real and financial assets (stocks, bonds) becomes difficult to discern if an existing subsidiary is purchased.
Long-term investments of capital and intellectual property by foreign owners in various sectors of the economy can be carried out in various ways. The most common of them from the point of view of the factor of competition is reduced to the purchase of financial assets (shares and bonds) in a foreign company. The next is either the conduct of export operations with a foreign firm, or licensing a foreign company. These options avoid the risks and costs associated with the movement of personnel to a foreign country; difficulties caused by: the need to conduct business in a foreign language and in the framework of another culture; organization of supply; development of new markets; actions in another political climate, etc. As experience of export work accumulates, and capital markets are sufficiently large, capital is invested in the creation of own assembly or manufacturing enterprises abroad.
Different forms of FDI are realized through the basic strategies of entering the company on the world market.
According to the classical approach worked out by F. Kotler, the strategies for entering the world markets can be divided into the following main groups:
- export (indirect, direct);
- joint ventures (licensing, contract manufacturing, contract management, joint venture);
- direct investment (assembly enterprises, manufacturing enterprises).
In a global competition, the most effective and "advanced" we can consider the strategy of joint business activity and the strategy of direct investment.
The strategy of joint entrepreneurial activity is based on combining the efforts of the firm with the commercial enterprises of the partner country in order to create production and marketing capacities.
For example, a joint-venture is a combination of efforts of foreign and local investors to create a local commercial enterprise, which they own and operate jointly. There are different ways of creating such an enterprise, for example, a foreign investor can buy a share in a local enterprise, or a local firm can buy a stake in an already existing local enterprise of a foreign company, or both parties can jointly create an entirely new enterprise.
The appearance of a joint venture may be necessary or desirable for economic or political reasons. In particular, a company entering the external market may lack financial, physical or managerial resources to carry out the project alone. Another possible reason for the preferable appearance of a joint-ownership enterprise is that the foreign government thus only allows the goods of foreign production to enter its market.
The strategy of entering the foreign market, which ensures the fullest involvement of the firm in its activities, is the investment of capital into the creation abroad of its own assembly or production enterprises. At the same time, firms compete in the world market, which leads to the improvement of production, the appearance of new goods and services, etc.
It should be noted that competition is a struggle between producers of goods and services characteristic of a market economy for the most profitable conditions for the production and marketing of goods and services, and at the same time a mechanism for regulating the proportions of production. The firms compete both on the national and the world market.
The following six types of markets are known (by the degree of increasing competition): a monopoly market; a market with a leading firm; the market of close oligopoly; weak oligopoly market; market of monopolistic competition; competitive market.
In the early 1980's. Studies of the phenomenon of competition were aimed at a new subject called "competition of national economies".
Initial research results showed the following:
1) the success of firms in the struggle (competition) with competitors in the world market mainly depends on the state of affairs in the country;
2) competitiveness is manifested or lost in specific areas: the production of computers, the release of machine tools, the provision of medical services;
3) a theory is developed that explains the object of research - the competition of national economies and called the theory of competitive advantages of the national economy.
To understand this theory, it is necessary to study: technological innovations; the economy of industry; technological development of the country (countries); economic geography; international trade; political science; industrial sociology (sociology of industry);
4) the competitiveness of national economies depends on the effectiveness of the use of their resources. Efficiency (productivity) of the use of national labor and capital resources contributes to the achievement of the state's goal - to provide its citizens with a high and rising standard of living.
The efficiency of the use of labor and capital is a return on the unit of labor or capital, expressed in terms of money (value),
5) If the most efficient sectors of the country lose competitiveness with foreign competitors, then the country will not be able to maintain efficiency gains;6) Expanding exports through low wages and weak currencies and simultaneous imports of complex goods (which a country can not produce efficiently) can lead to a positive trade balance but a decrease in the standard of living in the country;
7) international advantages are mostly concentrated in certain industries, and sometimes in certain market segments. In most cases, firms - leaders in any industry are represented not by individual firms, but by their groups. The success of a single firm is often explained by specialization in the production of a certain product, state subsidies or protectionism, and in this case the success of the firm is not considered such;
8) success in international specialization is determined not by the presence of factors (labor, capital, technology, information), but by where and how effectively they are used. Capital passes from country to country. New technologies are sold on the world market with a delay. The development of technology has greatly weakened the importance of many once important factors. Access to technology has become more important than low labor costs for workers;
9) often the country's success in any sector of the economy means that the leading TNCs and MNCs are based in the country. The TNC and MNC strategy is a combination of trade and the dispersion of production.
The main task of the theory of competitive advantages of the national economy is to explain why companies of this country successfully compete with foreign firms in certain sectors and sectors of the economy.
The main categories of the theory of competitive advantages of the national economy are divided into two groups:
1) related to firms;
2) related to the country.
The first group of categories are:
- the industry;
- the forces that determine the competition in the industry;
- competitive advantages of the company;
- forms of international firm competition;
- the global strategy of the company.
The industry is a group of competitors producing goods (services) and directly compete with each other.
The forces that determine competition - rivalry between existing competitors, the threat of new competitors, the threat of the emergence of goods (services), the ability of suppliers to bargain, the ability of buyers to bargain.
Sources of competitive advantage vary significantly within each industry. The competitive advantage is divided into the following types: lower costs, differentiation of goods, fast promotion of goods, service.
The forms of international competition in different industries vary significantly. The extreme cases of forms are: 1) plural-national and 2) global. The first form is competition in the aggregate of national markets, when competition takes place in each market in its own way. The international industry is the mechanical sum of industries. The second form is competition on a global basis, when the competitive position of a firm in one country significantly affects its position in other countries (see the concepts of international marketing).
The company's global strategy is a decision about the configuration of a firm (in which countries and how many to produce) and ways of coordinating its activities (how to coordinate dispersed activities - sales tactics, etc.).
The second group of categories includes: factors, demand conditions, related and supporting industries.
M. Porter unites both groups of categories in the properties of the country, which he calls determinants of competitive advantage. These are:
1) factor conditions, i.e. access to the factors necessary for successful competition;
2) the conditions of demand;
3) related and supporting industries;
4) conditions related to the firm.
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