Motivations for Foreign Direct Investment & Sales Expansion Objectives
Original post by Eric Feigenbaum of Demand Media
Particularly in countries where capital is scarce or insufficient for major business and industrial development, entrepreneurs, companies and governments seek foreign direct investment. Foreign investors often create development and expansion opportunities that transform not only individual enterprises, but entire nations. Infusions of capital allow companies to improve their infrastructure and capabilities -- which if done correctly, increase sales revenue and profits.
Promising businesses often hit financial limitations. Despite their growth, success and profitability, they don't generate enough money to fund their growth and expansion projects. This usually occurs when significant outlays are required to purchase expensive equipment or add infrastructure such as new facilities, plants and vehicle fleets. In countries whose financial institutions lack the funds to provide large-scale enterprise loans, growing businesses turn to foreign investors and banks.
Both investors and business owners take risks when engaging in foreign direct investment. Foreign parties not only extend their money in a foreign land whose laws may not fully or adequately protect their rights and interests, but they face the uncertainty of a business's future. Companies accepting foreign capital usually give up a significant interest in their business and have to answer to their investors' concerns and direction. For their trade-offs and risks, all parties must feel relatively certain they will gain. Accordingly, business and expansion plans must be detailed and well considered. Investors typically want to see a roadmap to success with underlying market research, financial reports and plans for the use of investment capital.
The primary goal of foreign direct investment is the massive expansion of profits, which begins with significant increases in revenues. Thus, a business seeking capital must show investors exactly how their money will pay off. For example, a small commercial airline in a developing nation may need $1 billion to acquire four new international aircrafts, allowing it to expand to new markets which would not only bring profit to the airline, but tourism and business dollars to its country. Executives must show foreign investors how their investment will boost revenues. So, if the four aircraft each seat 300 and the airline can command an average of $600 per ticket, per flight -- and run two flights per plane each day -- the airline will generate $525.6 million in five years using the new planes. An investor must then determine if these figures will boost stock prices enough to make the risk worthwhile. A simple return on investment calculation shows that it will take 10 or more years for revenues to exceed the $1 billion investment. If the airline is privately held, this proposal is unlikely to garner investor interest.
Governments must weight the pros and cons of foreign direct investment carefully. An influx of foreign capital can help quickly build a country's industry, create jobs and increase gross domestic product. At the same time, some countries worry about excessive foreign ownership of industry and not enough profit returning to the local economy. Most economists and development experts assert that foreign direct investment is one of the fastest and most successful ways for poor nations to develop and increase their standard of living.
- World Bank: Foreign Direct Investment, Net Inflows
- Economy Watch: Foreign Direct Investment
- University of California at Santa Cruz: Foreign Direct Investment
- Boeing: Commercial Airplane Prices
About the Author
Eric Feigenbaum started his career in print journalism, becoming editor-in-chief of "The Daily" of the University of Washington during college and afterward working at two major newspapers. He later did many print and Web projects including re-brandings for major companies and catalog production.