Reasons for Undertaking Foreign Direct Investment by the Multinational Essay

Reasons for Undertaking Foreign Direct Investment by the Multinational Enterprise - Essay Example Unlike the small and medium sized enterprises that only seek to access foreign markets, the major concern of the multinational enterprises is to develop a global manufacturing capacity and improve their proximity to the major world markets (Graham & Spaulding, 2005). The foreign direct investments provide a measure of ownership of domestic productive assets in a given economy by foreign organizations (Economy Watch, 2010a). Classically, foreign direct investment is a situation where ‘a company from one country makes a foreign physical investment by building a factory in another country’ (Graham and Spaulding, 2005). It is an investment in the form of buildings, machinery, and equipment and it is opposed to portfolio investments that are considered indirect investments. Several factors drive firms to expand their operations to cut across different national and regional boundaries. MNEs establish foreign direct investments in response to the changing global and regional co mpetition (Bartels & Crombrugghe, 2009, p.1). Foreign direct investments can be a means of accessing new markets and marketing channels, reduction in costs of production, providing the organization with access to new skills, technologies and other resources, and sources of financing (Graham & Spaulding, 2005). To go global, the firms can decide to make foreign direct investment, and this decision is in turn guided by a number of factors that are considered the potential benefits of the approach. This paper provides a critical evaluation and discussion of some of the major factors that can drive a multinational enterprise to decide to undertake foreign direct investment in efforts to expand its operations and go global. The paper highlights on the benefits of foreign direct investments to the multinational enterprises. Reasons for establishing FDIs to MNEs Foreign Direct Investment has been associated greatly with the current trend that is observed towards globalization and internati onalization of business operations. High growths of the economy and better economic performances in different parts of the world in the recent past can be attributed to the foreign direct investments by the multinational enterprises (Vardar, 2012). Significant growth has been seen in the flows of foreign direct investment especially into the developing countries in the last few decades (Graham & Spaulding, 2005). It becomes one of the drivers of globalization. With the developments that have been seen in the global business operations and global investment patterns, the concept of foreign direct investment has been expanded to include alliances with local companies, foreign mergers and acquisition, or establishment of joint ventures in the foreign markets (a Watch, 2010). The foreign direct investor will seek to have a controlling stake in these investments (ILIKEINVESTING, 2011). Cross-border investments have been in existence as early as the 1950s and different theories have been advanced to explain why the firms decided, and continue to make decisions, to internationalize their operations. In the recent pasts, countries have entered a habit of competition to attract more foreign direct i