.0 Introduction

This assignment that I will be doing is about Foreign Direct Investment (FDI) and the financial benefits that Toyota has brought to Malaysia. So what do you understand about FDI and about Toyota Company as well as the lean manufacturing? I will be discussing them in details in the following sections in my assignment.

2.0 Foreign Direct Investment (FDI)

2.0 What is FDI?

Foreign investment can be divided into two components which are the foreign direct investment (FDI) and foreign portfolio investment (FPI).

Foreign direct investment is defined as a long term investment by a foreign direct investor in fixed assets located abroad for operating distribution or production facilities. FDI plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing.

In the years after the Second World War global, FDI was dominated by the United States, as much of the world recovered from the destruction wrought by the conflict. The U.S. accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries.

FDI has grown in importance in the global economy with FDI stocks now constituting over 20% of global GDP. In the last few years, the emerging market countries such as China and India have become the most favored destinations for FDI and investor confidence in these countries has soared.

Please refer to Appendix 1 (Page 26) for the FDI Confidence Index 2005.

Foreign portfolio investment is the purchase of stocks and bonds to obtain a return on the funds invested. Although portfolio investors are not directly concerned with the control of a firm, they invest immense amounts in stocks and bonds from other countries too. The relative ease with which portfolio investment can enter and exit countries has been a major contributing factor to the increasing volatility and instability of the global financing system.

There is an important distinction between FDI and FPI. FPI is investment by individuals, firms, or public bodies in foreign financial instruments. FPI does not involve taking a significant equity stake in a foreign business entity. FPI is determined by different factors than FDI and raises different issues.

2.1 Forms of FDI

FDI exists in many forms. The most common classification is based on the investment type in the foreign economy. The two most important entry modes are Greenfield investment and Mergers & Acquisition.

2.1.1 Greenfield investment

This is the direct investment in new facilities or the expansion of existing facilities. It is the primary target of a host nation's promotional efforts because they create new jobs and production capacity, transfer technology and know how. It can also lead to linkages to the global marketplace.

The Organization for International Investment cites the benefits of Greenfield investment including increased employment (often at higher wages than domestic firms), investment in research and development, and additional capital investment.

However, this does not always result in positive influences on the local economy. It can crowd out local industry as the investing multinational can produce more cheaply and uses local resources. Besides, the profits from production do not feed back into the local economy but instead to the multinational's home economy.

2.1.2

Mergers & Acquisition (M&A)

Mergers & Acquisition (M&A) is the primary type of FDI, it occurs when a transfer of existing assets from local firms to foreign firms takes place. Cross-border mergers occur when the assets and operations of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company being an affiliate of the foreign company.

Compared to a Greenfield investment, a cross-border acquisition is clearly much quicker entry and can also be a cost effective way to obtain technology and/or brand names. However, some firms often pay too high price or utilize expensive financing to compete a transaction.

2.2 Matters of FDI

2.2.1 Exporting

Exporting is a traditional and well established method of reaching foreign markets. No investment in foreign production facilities is required because exporting does not require the goods to be produced in the target country. This also reduces the risk if the project fails. Exporting is usually seen as a low key method of entering a foreign market as it avoids the substantial cost of establishing manufacturing operations in the host country such as factories, machineries and employees.

There are 2 types of exporting: indirect and direct exporting.

(i) Indirect exporting

Indirect exporting is the exporting of goods and services through various types of home-based exporters. The main advantage of indirect marketing for small businesses is that it provides a way to penetrate foreign markets without the complexities and risks of direct exporting. Many of the options involve the use of intermediaries. Export intermediaries may include commissioned agents, export management companies, export trading companies and foreign trading companies.

However, there are also disadvantages of indirect exporting: foreign business can be lost if exporters decided to change their source of supply, potentially lower sales and inadequate market feedback.

(ii) Direct exporting

Direct exporting is the exporting of goods and services by the firm that produces them. Direct exporting usually achieves greater sales than indirect exporting. It is good in a way that can have more control over the export process, potentially higher profits and a closer relationship with the overseas buyers and marketplace. However, it requires greater initial outlays of funds and personnel, and they are generally regarded as riskier than indirect exporting options.

There are several different approaches to direct exporting. The first approach is using domestic sales representatives or agents to introduce a product to potential buyers. Another approach is the use of foreign distributors who are merchants that purchase merchandise from exporter and resell it at a profit. The third approach is the direct sales to end users whereby a business sells its products or services directly to end users in foreign countries. The last approach is locating foreign representatives and buyers.

2.2.2 Franchising

Franchising is a form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules. It is a business relationship in which the franchisor (the owner of the business providing the product or service) assigns to independent people (the franchisees) the right to market and distribute the franchisor's goods or service, and to use the business name for a fixed period of time.

There are 2 types of franchising; industrial franchising and commercial franchising. Commercial franchising can be divided into goods franchising, service franchising and mixed franchising.

There are many benefits to becoming a franchisee. The franchisor provides detailed training, advices and help in identifying suitable trading locations for the franchisee. The support and benefits provided by a franchisee system greatly reduce a franchisee's business risks too.

However, there are also some disadvantages of franchising. The franchisee will have to pay the franchisor for the services provided for the use of the system and there are also several policies that may affect the franchisees' profitability. Other than that, the good name of the franchised business and its brand image may become less reputable for the reasons beyond their own control.
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Several examples of franchising are McDonalds, 7-11 and Starbucks Coffee. Please refer to Appendix 2 (Page 27) for some examples of some franchised company in different countries

2.2.3 Licensing agreement

Licensing agreement is a contractual arrangement in which one firm (the licensor) will grant to another firm (the licensee) the right to use any kind of expertise such as manufacturing processes, marketing procedures and trademarks for one or more of the licensor's products.

The licensee pays a fixed sum when signing the licensing agreement and pays a royalty of 2 to 5 percent of ...

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