Foreign Direct Investment

In Anglo-American organisations is it argued that the overall aim of the company is to maximise shareholder wealth. One way to do this is through foreign direct investment (FDI). FDI is the purchase of physical assets or a significant amount of a company's ownership in another country so as to gain a measure of management control. But, why do companies choose FDI over other options such as exporting or licensing?

Truthfully there is no simple answer to this question. It depends on the circumstances of the organisation. If I was a UK based organisation looking to expand my target market, and sell my products in Europe the sensible choice would be to export. It would be relatively low cost and wouldn't require any large levels of financing or transferring of knowledge. But if I was the same organisation looking to expand my target market, and sell my products in Latin America, licensing and FDI would be more sensible choices than incurring large transport costs through exporting. The choice lies solely with the organisation. But that does not mean we can't speculate why an organisation has opted to do something the way they have.

Let's take Kraft, for example. Kraft Foods Group Inc are a US based food conglomerate who in 2012 announced their acquisition UK based chocolatier, Cadbury. The reason? So they could expand into the snack business of emerging markets, in particular India. But why, if their sole aim was to expand into new markets, did Kraft choose to invest into the UK?

In FDI theory there are a number of reasons discussed as to why organisations choose FDI over exporting or licensing. A lot of these theories, such as market imperfections, transport costs and eclectic paradigm, could be easily applied to Kraft if they had opted to invest in India, or another developing market, rather than the UK. But the question is not why India, the question is why UK? Why Cadbury?

I think the answer to that is in the question itself. Kraft have not chosen to invest in the UK for it's location, it's easy access to other locations, it's stable economy etc. They have chosen to invest in the brand, Cadbury. And who could blame them? Cadbury as a brand name was known in over 50 countries worldwide and was the industry's second largest globally. Having Cadbury in their brand portfolio was not only going to provide Kraft with an easy way into new developing markets, it was going to allow them to enter existing markets with minimal effort, develop upon existing product ranges and ultimately maximise their shareholder's wealth. Cadbury had the skills and knowledge needed to operate on their own so Kraft was not risking any knowledge transfers and was minimising it's exporting costs to some places in the process.

The Kraft takeover wasn't as smooth as Kraft would have probably liked. There was a lot of negative press regarding the takeover, especially in the UK, and Cadbury themselves weren't keen on the acquisition in the first place. Up until now I've never really had an opinion on the Cadbury takeover, but it's seems to me that Kraft's reason for acquiring Cadbury isn't as transparent as the reason they gave to the press. Yes saying you're buying Cadbury so as to reach new developing markets may be true, but it just seems that there are a number of other ways FDI options that could have been explored which would have made more sense, theoretically anyway. In my honest opinion, the whole purpose behind this method of FDI was to maximise shareholder wealth by buying into the brand. And since I've already said that is the main aim of an organisation, I can't really argue against the decision.