Question

6. When cultural factors need to be taken into consideration by managers in their strategic planning of foreign direct investment (FDI). What are the impacts of these factors on FDI risk assessment, entry mode choice (joint venture vs. wholly owned foreign subsidiary), and establishment method (greenfield investment vs. acquisition)

Answer 1

Differences in culture can be important barriers to economic exchange and specially direct investment.Investors are induced to invest in countries with similar culture and legal system.With the decrease in the familiarity of the host country's customs and culture, the cost of collecting information will increase .Thus MNC's invest less in culturally distant countries. As for example US FDI investment in Canada is more because of cultural similarity.Again it can be said that to overcome disruption and market failures,cultural differences can be considered as a cause for increased FDI flows between home and host countries.Thus cultural differences can lead to positive confluence or disruption. It is often seen that investing in a country carries greater risk than trading ,if the countries are culturally different.The choice of mode of entry is the most important choice that the MNC has to take when deciding to enter a foreign market.The various types of entry modes are equity and non equity mode.Equity modes bring more return on investment but have high risks.Eqiuty modes may be joint ventures and wholly owned foreign subsidiary.Wholly owned subsidiaries include two types of strategies,greenfield investment and acquisition. Deciding which mode to choose depends on certain situations . Greenfield investment is high risk because of cost of investment in foreign country but acquisition has become popular mode of entry because of its quick .access and low risk .Even though acquisition is attractive , integrating two companies may be difficult due to cultural differences in the two organisations.