Foreign Ownership and Market Entry
When a firm wishes to sell in a foreign market, it can do so either by exporting to that market or by investing in a local production unit. The latter mode of servicing a foreign market is referred to as a foreign direct investment (FDI). International production has increased rapidly during the last two decades, and particularly since the second half of the 1980s. This paper describes the facts, explains why firms choose FDI, and evaluates FDI in terms of impact on host economies. Particular emphasis is placed on firms’ choice between the two types of foreign investment; “greenfields”, which involves the establishment of a new production facility, and cross-border mergers and acquisitions, which involves taking over an existing production unit in a foreign market. The paper also contains a fairly extensive discussion of the consequences of economic integration on market entry.
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