International Business

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 Explain the disadvantages and limitations of foreign direct investment to a host country economic?

Advantages of foreign direct investment:

• Economic growth

The creation of jobs is the most obvious advantage of FDI, one of the most important reasons why a nation (especially a developing one) will look to attract foreign direct investment. FDI boosts the manufacturing and services sector which results in the creation of jobs and helps to reduce unemployment rates in the country. Increased employment translates to higher incomes and equips the population with more buying powers, boosting the overall economy of a country.

• Human capital development

Human capital involved the knowledge and competence of a workforce. Skills that employees gain through training and experience can boost the education and human capital of a specific country. Through a ripple effect, it can train human resources in other sectors and companies.

• Technology

Targeted countries and businesses receive access to the latest financing tools, technologies, and operational practices from all across the world. The introduction of newer and enhanced technologies results in company’s distribution into the local economy, resulting in enhanced efficiency and effectiveness of the industry.

• Increase in exports

Many goods produced by FDI have global markets, not solely domestic consumption. The creation of 100% export oriented units help to assist FDI investors in boosting exports from other countries.

• Exchange rate stability

The flow of FDI into a country translates into a continuous flow of foreign exchange, helping a country’s Central Bank maintain a prosperous reserve of foreign exchange which results in stable exchange rates.

• Improved Capital Flow

Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.

• Creation of a Competitive Market

By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies. A healthy competitive environment pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of competitively priced products.

• Climate

The United Nations has also promoted the use of FDI around the globe to help combat climate change

Disadvantages of foreign direct investment:

• Hindrance of domestic investment

Sometimes FDI can hinder domestic investment. Because of FDI, countries’ local companies start losing interest to invest in their domestic products.

• The risk from political changes

Other countries’ political movements can be changed constantly which could hamper the investors.

• Negative exchange rates

Foreign direct investments can sometimes affect exchange rates to the advantage of one country and the detriment of another.

• Higher costs

When investors invest in foreign counties, they might notice that it is more expensive than when goods are exported. Often times, more money is invested into machinery and intellectual property than in wages for local employees.

• Economic non-viability

Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.

• Expropriation

Constant political changes can lead to expropriation. In this case, those countries’ governments will have control over investors’ property and assets.

• Modern-day economic colonialism

Many third-world countries, or at least those with history of colonialism, worry that foreign direct investment would result in some kind of modern-day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies’ exploitation.

• Poor performance

Multinationals have been criticized for poor working conditions in foreign factories.

Explain the Diamond of National Competitive advantage theory and in what ways can Nigeria benefits from the adoption of the theory?

Porter Diamond is a model that emphasizes the competitive advantage of an industry or business that makes it work better than other competitors in a region or country. Also known as the Porter Diamond Theory of National Advantage, the model explains why certain industries thrive in particular nations. Companies use this model to analyze the competitive environment in foreign markets before entering them. The model outlines factors that determine the relative strength of entities, which drives them to become better than the rest. Besides some of the attributes that are available and identifiable in the environment itself, businesses have the liberty to create their own strengths to empower their presence and become an entity of national importance.

Porter Diamond Model discusses factors and traits of a business that make it more successful than others in a particular region. It enables companies to identify the resources that need to be developed to enhance their performance compared to the rest of the entities dealing in the same category of products and services.

Michael Eugene Porter, an American academician and influential thinker on management and competitiveness, developed the Porter Diamond model. It is an economic model for businesses, especially multinational organizations planning to expand their operations in different markets. The model lets companies identify the key areas to focus on to capture global markets effectively.

With the help of this theory, the business players can understand the reason for certain industries being widespread in particular nations. On this basis, they can analyze their position in the market and thereby implement strategies to compete and excel.

Explain four ways in which business organization make use of foreign exchange

International businesses have four main uses of the foreign exchange markets.

• Currency Conversion. Companies, investors, and governments want to be able to convert one currency into another. ...

• Currency Hedging. ...

• Currency Arbitrage. ...

• Currency Speculation.

Currency Conversion

Companies, investors, and governments want to be able to convert one currency into another. A company’s primary purposes for wanting or needing to convert currencies is to pay or receive money for goods or services. Imagine you have a business in the United States that imports wines from around the world. You’ll need to pay the French winemakers in euros, your Australian wine suppliers in Australian dollars, and your Chilean vineyards in pesos. Obviously, you are not going to access these currencies physically. Rather, you’ll instruct your bank to pay each of these suppliers in their local currencies. Your bank will convert the currencies for you and debit your account for the US dollar equivalent based on the exact exchange rate at the time of the exchange.

Currency Hedging

One of the biggest challenges in foreign exchange is the risk of rates increasing or decreasing in greater amounts or directions than anticipated. Currency hedging refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates. Companies use hedging as a way to protect themselves if there is a time lag between when they bill and receive payment from a customer. Conversely, a company may owe payment to an overseas vendor and want to protect against changes in the exchange rate that would increase the amount of the payment. For example, a retail store in Japan imports or buys shoes from Italy. The Japanese firm has ninety days to pay the Italian firm. To protect itself, the Japanese firm enters into a contract with its bank to exchange the payment in ninety days at the agreed-on exchange rate. This way, the Japanese firm is clear about the amount to pay and protects itself from a sudden depreciation of the yen. If the yen depreciates, more yen will be required to purchase the same euros, making the deal more expensive. By hedging, the company locks in the rate.

Currency Arbitrage

Arbitrage is the simultaneous and instantaneous purchase and sale of a currency for a profit. Advances in technology have enabled trading systems to capture slight differences in price and execute a transaction, all within seconds. Previously, arbitrage was conducted by a trader sitting in one city, such as New York, monitoring currency prices on the Bloomberg terminal. Noticing that the value of a euro is cheaper in Hong Kong than in New York, the trader could then buy euros in Hong Kong and sell them in New York for a profit. Today, such transactions are almost all handled by sophisticated computer programs. The programs constantly search different exchanges, identify potential differences, and execute transactions, all within seconds.

Currency Speculation

Speculation refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit. Such changes could happen instantly or over a period of time.

High-risk, speculative investments by nonfinance companies are less common these days than the current news would indicate. While companies can engage in all four uses discussed in this section, many companies have determined over the years that arbitrage and speculation are too risky and not in alignment with their core strategies. In essence, these companies have determined that a loss due to high-risk or speculative investments would be embarrassing and inappropriate for their companies.

Critically evaluate the Geert Hofstede’s dimension of culture and its implication on international business decision 

Hofstede’s Cultural Dimensions Theory, developed by Geert Hofstede, is a framework used to understand the differences in culture across countries and to discern the ways that business is done across different cultures. In other words, the framework is used to distinguish between different national cultures, the dimensions of culture, and assess their impact on a business setting.

Hofstede’s Cultural Dimensions Theory was created in 1980 by Dutch management researcher Geert Hofstede. The aim of the study was to determine the dimensions in which cultures vary.

Hofstede’s Cultural Dimensions Theory

Hofstede identified six categories that define culture:

1. Power Distance Index

2. Collectivism vs. Individualism

3. Uncertainty Avoidance Index

4. Femininity vs. Masculinity

5. Short-Term vs. Long-Term Orientation

6. Restraint vs. Indulgence

7. Power Distance Index

Power Distance Index

The power distance index considers the extent to which inequality and power are tolerated. In this dimension, inequality and power are viewed from the viewpoint of the followers – the lower level.

• A high power distance index indicates that a culture accepts inequity and power differences, encourages bureaucracy, and shows high respect for rank and authority.

• A low power distance index indicates that a culture encourages flat organizational structures that feature decentralized decision-making responsibility, participative management style, and emphasis on power distribution.

Individualism vs. Collectivism

The individualism vs. collectivism dimension considers the degree to which societies are integrated into groups and their perceived obligations and dependence on groups.

• Individualism indicates that there is a greater importance placed on attaining personal goals. A person’s self-image in this category is defined as “I.”

• Collectivism indicates that there is a greater importance placed on the goals and well-being of the group. A person’s self-image in this category is defined as “We.”

Uncertainty Avoidance Index

The uncertainty avoidance index considers the extent to which uncertainty and ambiguity are tolerated. This dimension considers how unknown situations and unexpected events are dealt with.

• A high uncertainty avoidance index indicates a low tolerance for uncertainty, ambiguity, and risk-taking. The unknown is minimized through strict rules, regulations, etc.

• A low uncertainty avoidance index indicates a high tolerance for uncertainty, ambiguity, and risk-taking. The unknown is more openly accepted, and there are lax rules, regulations, etc.

Masculinity vs. Femininity

The masculinity vs. femininity dimension is also referred to as “tough vs. tender” and considers the preference of society for achievement, attitude toward sexuality equality, behavior, etc.

• Masculinity comes with the following characteristics: distinct gender roles, assertive, and concentrated on material achievements and wealth-building.

• Femininity comes with the following characteristics: fluid gender roles, modest, nurturing, and concerned with the quality of life.

Long-Term Orientation vs. Short-Term Orientation

The long-term orientation vs. short-term orientation dimension considers the extent to which society views its time horizon.

• Long-term orientation shows focus on the future and involves delaying short-term success or gratification in order to achieve long-term success. Long-term orientation emphasizes persistence, perseverance, and long-term growth.

• Short-term orientation shows focus on the near future, involves delivering short-term success or gratification, and places a stronger emphasis on the present than the future. Short-term orientation emphasizes quick results and respect for tradition.

Indulgence vs. Restraint

The indulgence vs. restraint dimension considers the extent and tendency for a society to fulfill its desires. In other words, this dimension revolves around how societies can control their impulses and desires.

• Indulgence indicates that society allows relatively free gratification related to enjoying life and having fun.

• Restraint indicates that society suppresses gratification of needs and regulates it through social norms.

Country Comparisons: Hofstede Insights

Hofstede Insights is an excellent resource for understanding the impact of culture on work and life. It can be accessed here to understand how the different dimensions differ among countries under the Hofstede’s Cultural Dimensions Theory.

Discuss five advantages and disadvantages of four mode of entry into international business

Foreign Direct Investments

The U.S. is the world’s biggest recipient of foreign domestic investments and changes in the global economy makes the country strive to retain the position and attract more investments. FDI is a form of investment which involve controlling ownership of a business located in a given country by another company located in another country. FDIs take the form of building new facilities, reinvesting revenues earned from foreign operations, mergers and acquisitions, and intra company loans (Chan 2016, p.3). The United States has low barriers and open economy for FDIs. According to statistics, foreign companies hold a large number of shares in the U.S than in their domestic markets (Chetty, Ojala, & Leppäaho 2015, p.1436). Data from the White House also indicated that more than 5 million workers were employed in foreign entities. In 2018, the Bureau of Economic Analysis reported $253.6 billion in investments by the FDI in the United States. The top industry was the chemicals which represented $109 billion in FDI.

FDIs can still be developed through the establishment of an associate company or a subsidiary in the foreign nation. In addition, financial institution intending to invest its financial services can acquire a controlling interest in a preexisting company in the overseas nation. FDIs are categorized in three forms which include vertical, horizontal or conglomerate (Erdogan and Unver 2015, p.82). Vertical FDIs entail different but linked business operations from the main business of the investor being set up or acquired in a foreign nation. Horizontal FDI involves investors setting up similar business operations in the overseas nation as it operates in the domestic country (Corcoran and Gillanders 2015, pp.103-106). For instance, a bank offering loan products based in China setting up operations in the U.S. Conglomerate FDIs is where the company sets up foreign investment in business activities unrelated to the present operation in the home country. FDIs have played a crucial role in ensuring prosperity and economic growth in the United States, spurring innovation, creating highly compensated jobs, and driving exports (Chetty et al. 2015, p.1438). Foreign-owned organizations have created over 7.4 million jobs while over $62.6 billion has been spent by FDIs in research and developments by such organizations. Moreover, a total of $4.3 trillion in stock is associated with foreign direct investment.

 Advantages of FDIs

Economic development stimulation: FDIs stimulate the economy of the target country by establishing a conducive environment for investors and benefiting the local industries. Easy international trade: typically, countries have their established trade tariffs which make international trade difficult. Additionally, there are other industries which must be present in the global market to make sure their goals and sales targets are met (Chetty et al. 2015, p.1439). For instance, a financial institution would require to ensure their products reach the target customers. All this is made easier with foreign domestic investments. Employment and economic enhancement: as investors build new companies in foreign countries, they create new jobs and opportunities. This results in increased income and more purchasing power, which in turn leads to an enhanced economy. Human capital resources development: FDSs leads to human capital development. Attributes attained from sharing experience and training enhances the level of education and overall human capital for the nation.

Tax incentives: The United States offers tax incentives as a way of promoting foreign investments in selected business fields (Chetty et al. 2015, p.1440). Financial institutions can take advantage of such incentives to promote their businesses. For example, they can offer differentiated insurance packages which would target a specific market. Successful companies benefit the host company as well as the global economy. Resources transfer: FDIs allows for the transfer of resources such as technology, skills and know-how. The host company is, therefore given access to such resources. Increased income: FDIs result in increased income in the target country. This is attributed to higher wages and more jobs which increases the national income and gross domestic product. A larger financial institution offering financial services would offer higher salaries to their personnel as compared to whet the domestic financial institutions offer their personnel, and in turn, leads to increased income (Picciotto 2017, pp.177-180). Increased productivity: the equipment and facilities used by foreign investors can enhance the productivity of their workforce in the host country.

 Disadvantages of FDIs

Currency risks: changes in foreign exchanges can affect FDIs. It can be an advantage for one country and a disadvantage to another. Intercultural risks: countries have different cultures which affect business operations such as consumer preferences and language. In addition, some countries believe in certain customs, values and beliefs. For instance, if a particular community does not believe in insurance products, the company may lose a potential market which may affect its profitability. Country risks: these are perils related to lending or investing in a specific nation which may come from business environment variations and in turn, affects the value of assets or working profits. These risks affect the performance of foreign domestic investments, and they may perform poorly due to such risks (Chetty et al. 2015, p.1440). Also, the political situation of the host country can change, which may put the FDIs at risk. Political instability can affect business operations and may seem risky for foreign domestic investments.

Business or commercial risks: these are risks associated with the financial institution making insufficient profits as a result of uncertainties such as increasing competition, changes in consumer preferences, strikes, changes in tastes obsolescence, and changes in government policies. A particular country may develop policies which hinder some business operations in their country, such as insurance laws, banking policies, and interest rates (Chetty et al. 2015, p.1440). Competition from domestic companies and other foreign businesses may also affect the way the foreign entity conducts business. These business risks pose a threat to the productivity and profitability of the business. In the United States, FDIs dropped in 2018 due to tax reforms introduced by the Trump administration. The United States still strive to maintain their positioning being the leading global FDI investor.

Before businesses engage in any kind of a venture, it is imperative to ascertain the benefits it will provide to society through the evaluation of its advantages and disadvantages. FDIs have been portrayed as effective market entry strategy in the United States Market. It is therefore recommended for the provision of financial services in the U.S. The following sub heading will discuss how licensing impacts market entry in the United States. Respective advantages and disadvantages will be analyzed.

 Licensing

A global licensing agreement is intended to enable foreign organizations, either entirely or partially, to produce a certain product or offer service for a predetermined period in a particular market. The licensor is usually the home country in this entry mode, and it makes resources or rights accessible to the licensee. Such rights include managerial skills, trademarks, patents, and technology which enables the licensee to sell in the foreign nation a similar good or service to the one the licensor sales in the home country, which does not require the licensor to set up new operations overseas (Egger and Wamser, 2015, pp.77-80) The earnings of the licensor come in as royalty payments, technical dues, or one-time payment, calculated based on total revenue. Licensing can be considered to be a flexible work agreement where the licensor and licensee work together to accommodate the interest of both parties (Hollender, Zapkau, & Schwens 2017, p.250). When offering a financial service, the financial institution may draft an agreement with another company in the host nation to continue offering the same service, like mortgage selling or insurance, and pay off the other company a percentage of the profits.

Advantages of Licensing

The organization can reach markets which cannot be accessed through exporting. Such markets lead to increased revenues and productivity. The mode of entry is attractive to organizations which are new in the international business as they intend to expand their new operations to a foreign country where their products are not common. There are minimal risks as the licensee is normally 100 per cent domestically owned which eliminates instances of business and intercultural risks (Hollender et al. 2017, p.251). Also, there is more potential for expansion which is less risky and requires less capital investments, and the corporation can benefit from additional income from technical services and know-how.

 Disadvantages of Licensing

There are low returns unlike other modes of entry like the foreign direct investments. An incompetent partner may pose risks of ruining reputation and trademarks for the corporation which may affect the relationship between the business and potential clients. There may be loss of governance of the licensee’s market and manufacturing practices and activities which may compromise quality. Therefore, for most financial institutions, licensing may not be an effective entry mode as the foreign partner may become a competitor through marketing their services in the host country (Hollender et al. 2017, p.253). As a result, it is essential to assess potential partners before drafting any kind of agreement.

As discussed above, licensing may not be a viable mode of entry in the United Sates market. It is an unfamiliar method for financial institutions. This may be due to low returns from the strategy as opposed to other strategies of market entry. Although it is a less risky strategy, financial institutions prefer methods with higher returns and possibility of expansion like the foreign direct investments. The following sub heading will analyze how franchising is applied as a market entry.

 Franchising

This mode of entry works by allowing semi-independent commercial operators know as a franchisee to pay royalties or fees to a holding company known as franchiser for rights to be identified with the franchisers trademarks, and trade its goods and services, and utilize its business systems and formats (Badrinarayanan and Kim 2016, p.3943). Franchising agreements are usually longer compared to licensing and offer a comprehensive package of resources and rights which consists of an operational handbook, management structures, equipment, site authorization, preliminary training, and any additional support required to run operations as done by the franchisor effectively.

Advantages of Franchising

Low costs of starting up operations such a business registration which are normally made by the franchisor. Minimal political, business, cultural, and financial risks which lead to business efficiency and productivity. Franchising allows for simultaneous expansion into other regions across the globe and the financial institution can make additional income (Badrinarayanan and Kim 2016, p.3943). If an appropriate partner is selected, they can bring in management competences and financial investments to the operation.

 Disadvantages of Franchising

The initial costs of acquiring a franchise may be higher, which include management fees, and the franchisee has to agree to purchase the services of the franchisor. It may be challenging to sell the franchise as the franchisor has to approve the other party (Wu 2015, p.1581). Franchises are not flexible and may hinder both parties from introducing changes in the business to respond to the market requirements or business expansion

Direct Exporting

Direct exporting involves you directly exporting your goods and products to another overseas market. For some businesses, it is the fastest mode of entry into the international business. 

Direct exporting, in this case, could also be understood as Direct Sales. This means you as a product owner in India go out, to say, the middle east with your own sales force to reach out to the customers.

In case you foresee a potential demand for your goods and products in an overseas market, you can opt to supply your goods to an importer instead of establishing your own retail presence in the overseas market.

Then you can market your brand and products directly or indirectly through your sales representatives or importing distributors.

And if you are in an online product based company, there is no importer in your value chain. 

Advantages of Direct Exporting

• You can select your foreign representatives in the overseas market.

• You can utilize the direct exporting strategy to test your products in international markets before making a bigger investment in the overseas market.

• This strategy helps you to protect your patents, goodwill, trademarks and other intangible assets.

Disadvantages of Direct Exporting

• For offline products, this strategy will turn out to be a really high cost strategy. Everything has to be setup by your company from scratch. 

• While for online products this is probably the fastest expansion strategy, in the case of offline products, there is a good amount of lead time that goes into the market research, scoping and hiring of the representatives in that country.

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Licensing and Franchising 

Companies which want to establish a retail presence in an overseas market with minimal risk, the licensing and franchising strategy allows another person or business assume the risk on behalf of the company.

In Licensing agreement and franchise, an overseas-based business will pay you a royalty or commission to use your brand name, manufacturing process, products, trademarks and other intellectual properties.

While the licensee or the franchisee assumes the risks and bears all losses, it shares a proportion of their revenues and profits you.

When does this work the best?

I explored this strategy in the case where one of the established companies of the other country already had a loyal audience with them.

At the same time, their product line had gaps which I was able to fill up. Therefore, just like two pieces of jigsaw, it made complete sense for them to carry my product.

How is this different from a Joint Venture, you would think? It is.

And in this case, I shall explain the little difference in the subsequent part of the article.

Advantages of Licensing and Franchising

• Low cost of entry into an international market

• Licensing or Franchising partner has knowledge about the local market

• Offers you a passive source of income

• Reduces political risk as in most cases, the licensing or franchising partner is a local business entity

• Allows expansion in multiple regions with minimal investment

Disadvantages of Licensing and Franchising

• In some cases, you might not be able to exercise complete control on its licensing and franchising partners in the overseas market

• Licensees and franchisees can leverage the acquired knowledge and pose as future competition for your business

• Your business risks tarnishing its brand image and reputation in the overseas and other markets due to the incompetence of their licensing and franchising partners

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 Joint Ventures

A joint venture is one of the preferred modes of entry into international business for businesses who do not mind sharing their brand, knowledge, and expertise.

Companies wishing to expand into overseas markets can form joint ventures with local businesses in the overseas location, wherein both joint venture partners share the rewards and risks associated with the business.

Both business entities share the investment, costs, profits and losses at the predetermined proportion.

This mode of entry into international business is suitable in countries wherein the governments do not allow one hundred per cent foreign ownership in certain industries.

For instance, foreign companies cannot have a 100 hundred per cent stake in broadcast content services, print media, multi-brand retailing, insurance, power exchange sectors and require to opt for a joint-venture route to enter the Indian market.

Here is what’s the difference between a Licensing/Franchisee kind of a setup and a Joint Venture.

The subtle nuance that I came across while recently creating a strategy was that a franchise setup would work well when you as a franchiser are a bigger brand in that particular product.

You could be big in your own country and not necessarily in the franchisee’s country.

In case of a Joint Venture, both the brands have a similar level of brand strength for that particular product. And therefore, they wish to explore that product in that international market together.

Advantages of Joint Venture 

• Both partners can leverage their respective expertise to grow and expand within a chosen market

• The political risks involved in joint-venture is lower due to the presence of the local partner, having knowledge of the local market and its business environment

• Enables transfer of technology, intellectual properties and assets, knowledge of the overseas market etc. between the partnering firms

Disadvantages of Joint Venture

• Joint ventures can face the possibility of cultural clashes within the organisation due to the difference in organisation culture in both partnering firms

• In the event of a dispute, dissolution of a joint venture is subject to lengthy and complicated legal process.

Strategic Acquisitions 

Strategic acquisition implies that your company acquires a controlling interest in an existing company in the overseas market. 

This acquired company can be directly or indirectly involved in offering similar products or services in the overseas market.

You can retain the existing management of the newly acquired company to benefit from their expertise, knowledge and experience while having your team members positioned in the board of the company as well.

Advantages of Strategic Acquisitions

• Your business does not need to start from scratch as you can use the existing infrastructure, manufacturing facilities, distribution channels and an existing market share and a consumer base

• Your business can benefit from the expertise, knowledge and experience of the existing management and key personnel by retaining them

• It is one of the fastest modes of entry into an international business on a large scale

Disadvantages of Strategic Acquisitions

• Just like Joint Ventures, in Acquisitions as well, there is a possibility of cultural clashes within the organisation due to the difference in organisation culture

• Apart from that there mostly are problems with seamless integration of systems and process. Technological process differences is one of the most common issues in strategic acquisitions.

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 Foreign Direct Investment 

Foreign Direct Investment involves a company entering an overseas market by making a substantial investment in the country. Some of the modes of entry into international business using the foreign direct investment strategy includes mergers and acquisitions, joint ventures and greenfield investments.

This strategy is viable when the demand or the size of the market, or the growth potential of the market in the substantially large to justify the investment.

Some of the reasons because of which companies opt for foreign direct investment strategy as the mode of entry into international business can include:

• Restriction or import limits on certain goods and products.

• Manufacturing locally can avoid import duties.

• Companies can take advantage of low-cost labour, cheaper material.

Advantages of Foreign Direct Investment

• You can retain your control over the operations and other aspects of your business

• Leverage low-cost labour, cheaper material etc. to reduce manufacturing cost towards obtaining a competitive advantage over competitors

• Many foreign companies can avail for subsidies, tax breaks and other concessions from the local governments for making an investment in their country

Disadvantages of Foreign Direct Investment

• The business is exposed to high levels of political risk, especially in case the government decides to adopt protectionist policies to protect and support local business against foreign companies

• This strategy involves substantial investment to be made for entering an international market