British Brands Gone - FDI.

There have been several cases of high profile UK brands being snapped up by foreign companies recently. American based Kellogg’s recently bought Pringles for £1.7bn, Kraft bought Cadbury’s for £11.5bn and most recently Muller have bought Scottish based milk producer Robert Wiseman Dairies for a more modest £300m.



What is foreign direct investment?

Any company that takes managerial control over a company or assets outside of its domestic boarder can be identified as foreign direct investment (FDI). All three cases above are acquisitions, where the company has bought the shares of the foreign company to take managerial control. There are two other methods of FDI, greenfield and joint venture.

Greenfield investment is when companies literally buy a field and build from the ground up. Greenfield investments are popular within the car industry, for example Hyundai started construction in 2006 of a plant in the Czech Republic to supply is European operations. The advantage for Hyundai is a purpose built, state of the art production site that is specifically designed for their products. Greenfield investments have advantages for both the company and the local economy, and often governments offer financial support packages to attract large greenfield projects. The main advantage to the company is the complete control they have over the project, usually 100% owned they have no diluted of returns for shareholders. However they do require large capital investment and the planning and construction period mean it’s the slowest method to market, which are all risk factors to shareholders money.

Many companies also chose to enter into a joint venture, usually choosing to work with an established company to make use of their existing assets and infrastructure. For example Marks and Spencer bought a 51% stake in the Indian retailer Reliance for £29m to take advantage of its store locations. The advantage of entering into a joint venture is the knowledge transfer and experience the companies can share. Usually a large company enters into a JV with smaller company to take advantage and enter the market quickly, the smaller company is usually happy for the investment and the economies of scale the large investor brings. JVs are usually the cheapest method into a foreign location, however they do have disadvantages, there can be issues sharing technology and trade secrets that can potentially reduce competitive advantage. There can also be management and culture synergy issues, again which could potentially damage shareholder wealth if the project fails.

Is FDI the only way to generate sales abroad?

There are other options available to generate sales in a foreign market, such as exporting or licensing. Exporting offers one of the fastest routes to market but must be balanced with the costly transportation. Exporting is the only option for some companies that are restricted by resource location, such as diamond mines. Also exporting is seen as the only option for companies who rely on location branding benefits such as Barbour, Bentley and Aston Martin, who all use the UK production as part of their brand image.

Licensing is the process of granting the rights to sell a product under a specific brand. Again this is a fast entry to market with little capital required, however the loss of control of the brand can be potentially damaging in the long term. There can also be issues with loss of control over technology and trade secrets, effectively reducing competitive advantage.

Management must consider all of the above methods when considering FDI. The company must be aware of the potential risks of each method and select the option that will result in the greatest shareholder wealth production.

 Source: UNCTAD, UNCTADstat

FDI – The rich helping the rich?

There is no doubt FDI has major economical benefits for both parties involved, however the latest figures show the majority of FDI is still between developed countries. On one hand it makes sense you would aim to sell your products in the developed world, where disposable incomes are higher, but at the same time the developing countries would benefit from major FDI the most. Huge capital investment and job creation would create a self supporting spiral of wealth for the developing countries, but companies just aren’t willing to take the risk. Yet.