The strategy of investment

The strategy of investment

Investment strategies can differ greatly from a rapid growth strategy where an investor focuses on capital appreciation to a safety strategy where the focus is on wealth protection. The most important part of an investment strategy is that it aligns with the individual's goals and is closely followed by the investor.

The most important reason for entering a foreign market is to sell products that the firm already sells successfully in its home country. A reason that grown in importance as international transportation costs have fallen substantially is to lower production costs by producing in a low-cost country for sales in other countries. The reasons are grouped into supply-side and demand-side categories. While a company may focus on a particular reason as the basis for a given FDI decision, both kinds of factors should be considered when making the decision.

Supply-side

1. To lower production costs

A company may discover that its product can be produced at less cost in the foreign country than at home, because of lower wages, cheaper real estate, or other differences in cost conditions. One strategy is to import the product from the country in which it can be produced more cheaply. Another strategy is to establish operations in the lower-cost country.

2. To lower delivery costs

The appropriate cost to use in choosing among production locations is delivered cost – so the cost of transporting products to the market should be considered along with the production cost. Delivery costs are defined to include both the cost of transportation and regulatory costs such as tariffs.

3. To acquire a necessary raw material

A firm may look at foreign countries not only as targets for the sale of its products but also as potential sources of needed raw materials.

4. To do offshore assembly

To do offshore assembly is used to gain access to a factor of production, namely labor, that is cheaper or more productive than the home country supply. Alternatively, a firm may choose to carry out its entire production process in the foreign country, using that site as a source from which to sell to the home country – hence the second label, foreign sourcing.

5. To establish a “portfolio”  of production sources

Having several sources of inputs lessens the danger of problems with any one supplier company or type of material.

6. To obtain an access to technology and management skills are key competitive advantages in an industry.

Demand-side

1. To explore new markets, and to serve a “portfolio” of markets

2. To fill the demand of the foreign market by setting up production in the host country if production in and export from the host country are less-costly, a quota or total embargo will limit or eliminate sales through exports. 

3. To establish a local presence with service and product availability

Local production permits the firm to adapt products more closely to local demand conditions – a flexibility that does not exist for firms that simply export.

4. To meet “buy national”  rules or preferences in the host country

5. To gain visibility as a “local” firm, employing local people, paying local taxes, and otherwise participating in the host society.