There are two ways companies can invest in a foreign country. They can either acquire an interest in an existing operation or construct new facilities. In a short essay, describe the advantages and disadvantages of each alternative

What will be an ideal response?

a. Reasons for buying: There are many reasons for seeking acquisitions. One is the difficulty of transferring some resource to a foreign operation or acquiring that resource locally for a new facility. Foreign companies may find it difficult to hire, especially if local unemployment is low. Instead of paying higher compensation than competitors do to entice employees away from their old jobs, a company can buy an existing company, which gives the buyer not only labor and management but also an existing organizational structure. Through acquisitions, a company may also gain the goodwill and brand identification important to the marketing of mass consumer products, especially if the cost and risk of breaking in a new brand are high. Further, a company that depends substantially on local financing rather than on the transfer of capital may find it easier to gain access to local capital through an acquisition. Local capital suppliers may be more familiar with an ongoing operation than with the foreign enterprise. This may also prevent excess capacity within the market.
b. Reasons for building: Although acquisitions offer advantages, a potential investor will not necessarily be able to realize them. Companies frequently make foreign investments where there is little or no competition, so finding a company to buy may be difficult. In addition, local governments may prevent acquisitions because they want more competitors in the market and fear market dominance by foreign enterprises. Even if acquisitions are available, they may be less likely to succeed than start-up operations. The acquired companies might have substantial problems. Further, the managers in the acquiring and acquired companies may not work well together. Finally, a foreign company may find local financing easier to obtain if it builds facilities, particularly if it plans to tap development banks for part of its financial requirements.