For many small businesses, the ultimate goal is to attain consistent growth. There are many different growth strategies you can use. One strategy to which many large businesses turn is foreign direct investment, or FDI, and this strategy can also be applied to smaller organizations. Learn what factors to evaluate when deciding whether to invest capital in foreign countries.
Reasons for Foreign Direct Investment
Foreign direct investment involves using capital and investing it long term in a foreign country. This may involve buying into an already-existing business or factory or constructing a new one. For many investors and business owners, this is a good way to expand their current ventures and enter new markets.
There are many different reasons that investors need to evaluate when deciding whether to engage in FDI, and if so, where. The factors range from political stability to tax considerations to infrastructure. It depends on the kind of industry you’re in and what kind of foreign investment you want to make.
Political Stability and Potential for Economic Growth
The political situation in many countries is in flux, which is important to consider when deciding on your FDI. For example, the United Kingdom is leaving the European Union, which could cause some upheaval for businesses in both areas. While political situations can be unpredictable at times, it’s best to research the historical situation to understand what could come up in the future.
Perhaps one of the largest factors influencing FDI in international business, the scope of the economy determines the potential for return on investment. In many foreign investment deals, the goods that are produced in the country are sold to the markets of that country too as opposed to shipping them all back home. As a result, it’s prudent to understand the demographics of the foreign country and understand its needs, problems and buying power.
Working Conditions, Skills and Wages
While the United States has specific laws that establish the rights of employees, not all foreign countries do. It’s important to evaluate the working conditions of employees in the foreign country in which you’re looking to invest to see how well they are treated and whether that aligns with your company’s core values.
A major incentive for investing in foreign countries is the lower wages as a result of a lower cost of living. This can help American businesses to reduce their operating expenses considerably. In addition to wage rates, keep skill set in mind as well since you will need to ensure the country can supply the type of labor you need. Language skills are another factor that influences foreign investments, especially if staff from the United States will be working with those in the foreign county.
Transportation and Infrastructure
Depending on the industry and the kind of goods you’re developing, keeping transportation in mind is a good idea. For example, if you’re transporting the products to the world market, then it is more cost effective to transport from countries that have access to the sea since landlocked countries may have higher shipping costs.
In addition, look at infrastructure as one of the factors influencing investment decisions. Does the foreign country have the utilities required to run the factory or plant? Is there adequate housing, and are there essential supplies for the employees? Are there roads, ports and airports to bring products and people home?
Tax Structure and Exchange Rates
Some countries, such as Ireland, have lower corporate tax rates than the United States, which can help the business save a considerable amount of money. This is one of the largest factors affecting international investment. In addition, keep currency exchange rates in mind. Volatile exchange rates can cause businesses to lose money due to unpredictability.