130
AN INVESTMENT PERSPECTIVE ON GLOBAL VALUE CHAINS
part because developing-country firms may have an institutional advantage in other developing countries, given their experience operating in uncertain and untrustworthy investment climates (Cuervo-Cazurra and Genc 2008). Firms that engage in OFDI can do so via various modalities, each with its own advantages and disadvantages. In general, firms choose among three main modalities: they can establish a fully new operation in the host country (greenfield investment), engage in a new partnership with an existing company (a joint venture), or acquire an existing firm (through a merger or acquisition) in the host country (figure 3.11). Greenfield investment has the advantage that parent firms retain full control of the investment process, including over the subsidiary’s location and operational scale. It also allows firms to maintain tight oversight of their management techniques, technology, and patents (that is, it minimizes the risk of proprietary information leaking to competitors). However, there is significant cost and risk to setting up operations in a foreign country without knowing the host country’s culture, business environment, and institutional setting (Buckley and Ghauri 2004; Cooke 2013; de Caldas Lima 2008). This type of investment also exposes the parent firm to the most intense competition because it will have to acquire market share from other companies; such projects are thus the least likely to survive the early stage. The experience of firms
FIGURE 3.11 Advantages and disadvantages of different outward foreign direct investment modalities
Greenfield investment
Firm choosing to invest abroad
Joint ventures
Mergers and acquisitions
Advantages • Full control of operations (selection of location, scale) • Full control and use of technology and patents • Low institutional costs; effective management Disadvantages • More expensive in foreign exchange finance • More intensive competition (acquire market share from others) and more difficult to survive at early stages
Advantages • Reduces the up-front financial investment requirements • Lower operational risks through local partner Disadvantages • Possible risk of leaking intellectual property • Some institutional costs; culture difference between firms
Advantages • Easier and faster to obtain new assets and enter markets • Lower operational costs (no need for new offices or factories) Disadvantages • Requires larger up-front financial investments • High institutional costs; culture differences between firms
Source: World Bank elaborations on de Caldas Lima 2008 and Xiao and Liu 2015.
