FOREIGN DIRECT INVESTMENT (FDI)

If your firm wants to invest abroad, itmust have a competitive advantage in its home market, such as management expertise, economies of scale, financial strength, differentiated products, or better technology. The advantage must be specific to your firm and it should be transferable to the foreign market.

Before embarking on an FDI, defined as creating a wholly or partlyowned foreign subsidiary, consider the other options, which may be less risky.

» Exporting: Selling to foreign agents and distributors. The least risky, but least profitable, method.

» A strategic alliance: Many EU firms are swapping shares and entering into joint ventures with other European companies as a way of pooling resources and protecting themselves against competitors.

» Licensing and management contracts: Licensing technology or "lending" managers to a foreign firm.

FDI is a much more risky and expensive option. It should only be undertaken where the potential rewards outweigh the risks - for example, if your company will dominate the foreign market.

VALUING FOREIGN ACQUISITIONS

Buying a foreign company is often a better way of entering a foreign market than starting from scratch. It is quicker, eliminates some local competition (they’re working for you now), and companies are sometimes available at bargain prices.

As with all acquisitions, the great danger is in paying too much. Buying a foreign firm in a developing country is likely to be costly in terms of due diligence, and the likely actions of the host government need to be fully understood.

The acquiring company also needs to be sensitive to how it is perceived by local people. Don’t assume that US-style market capitalism works the same way in developing nations.