Common Direct Investment Strategies

In last month's post I discussed some of the reasons that companies consider direct foreign investment.  This month's report follows up with an introduction to the four main strategies that companies may follow when they elect to participate directly in the economy of a foreign country.  First, the company may establish a “permanent establishment,” or branch, which is in essence a foreign operation that remains part of the company for legal purposes (i.e., a new entity, such as a subsidiary corporation, is not formed).  It can vary in size from a department such as a financial office to a single plant.  Where a permanent establishment is formed, only a few formalities may be involved.  Frequently, it is only necessary to lease or purchase the necessary real and personal property, hire companies to construct or install any equipment, and seek new employees.  Second, the company may create a separate legal entity to conduct business in the foreign country.  This strategy is sometimes referred to as a “central enterprise.”  Third, the company may enter the market in conjunction with another party, typically a local investor or entrepreneur, and do so by creating a new entity and sharing control thereof with the partner.  This strategy is usually referred to as a “joint venture”.  The creation of a central enterprise or joint venture is likely to be more tedious and time consuming.  Finally, direct investment may take the form of an acquisition of the assets or ownership interests of an existing entity.  In most cases, the acquisition is done with the intent to obtain control over the assets or entity; however, it is also possible to simply acquire a minority ownership interest in a local entity in a foreign country.

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