In a short essay, discuss resource and asset-seeking motives for FDI. Why might a company favor acquisition over greenfield investment as an FDI approach?

What will be an ideal response?

Firms frequently want to acquire production factors that are more abundant or less costly in a foreign market. Or they may seek complementary resources and capabilities of partner companies headquartered abroad. Specifically, FDI or collaborative ventures may be motivated by the firm's desire to attain:

1. Raw materials needed in extractive and agricultural industries. Firms in the mining, oil, and crop-growing industries have little choice but to go where the raw materials are located. In the wine industry, companies establish wineries in countries suited for growing grapes, such as France and Chile.

2. Knowledge or other assets. FDI provides the foreign firm better access to market knowledge, customers, distribution systems, and control over local operations. By collaborating in R&D, manufacturing, and marketing, the focal firm can benefit from the partner's know-how.

3. Technological and managerial know-how. Companies often benefit by establishing themselves in industrial clusters abroad, such as the robotics industry in Japan, chemicals in Germany, fashion in Italy, or software in the United States. Many firms enter collaborative ventures abroad as a prelude to operating wholly owned FDI.

An international firm may favor acquisition over greenfield investment as an FDI approach. Greenfield investment occurs when a firm invests to build a new manufacturing, marketing, or administrative facility, as opposed to acquiring existing facilities. As the name greenfield implies, the investing firm typically buys an empty plot of land and builds a production plant, marketing subsidiary, or other facility there for its own use.

An acquisition is the purchase of an existing company or facility.

Multinational enterprises may favor acquisition over greenfield FDI because it confers ownership of existing assets such as plant, equipment, and human resources, as well as access to existing suppliers and customers. Acquisition also provides an immediate stream of revenue and accelerates the MNE's return on investment. However, host country governments usually want MNEs to undertake greenfield FDI, and offer incentives to encourage it, because it creates new jobs and production capacity, facilitates technology and know-how transfer to locals, and improves linkages to the global marketplace.