investment modalities

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 Advantages

• Full control of operations (selection of location, scale) • Full control and use of technology and patents • Low institutional costs; e ective management

Disadvantages

• More expensive in foreign exchange finance • More intensive competition (acquire market share from others) and more di cult to survive at early stages

Firm choosing to invest abroad

Joint ventures 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 di erence between firms

Advantages

• Easier and faster to obtain new assets and enter markets • Lower operational costs (no need for new o ces or factories)

Disadvantages

• Requires larger up-front financial investments • High institutional costs; culture di erences between firms

Mergers and acquisitions

Source: World Bank elaborations on de Caldas Lima 2008 and Xiao and Liu 2015.