Foreign Direct Investments and Decision Factors


The stiff competition which has engulfed the business arena calls for equivalent strong marketing strategies in order for companies to thrive in the market. The recent economic downturn has negatively affected the operations of many companies. In addition, cultural, political and economic factors have continued to play a significant role in determining the operations of organizations. It is therefore essential that firms with a vision to go global must consider wide range of market entry strategies which they need to emulate in order to achieve a competitive edge in the market. It is also prudent to note that environmental factors greatly influence the activities of a company which is focused to invest in foreign countries. Without considering such vital factors, organizations may not only fail to give their customers quality products but also they may result to making low profits and reduced level of sales. This paper will critically discuss how political, cultural and economic factors may affect my selection of a potential market for foreign direct investment.

Foreign direct investment basically refers to the process whereby a company decides to invest its funds in another country. Foreign direct investment can be broadly categorized into two major divisions; the outward foreign direct investment which includes the involvement of the government in supporting the investment process. This can include; offering financial support to these companies in the form of government incentives, tax reduction on the export of raw materials and offering consultation services to companies who are intending to invest in foreign markets. On the other hand, inward foreign direct investment involves committing funds to the local market. Funds are invested in home diversification companies where companies major on expansion programs to try and improve the performance of its products. When a company expands its services through improved distribution channels, increased advertising services through locally advertising media and enhancing consumer loyalty programs the company establishes itself as a market leader in the home country. Vertical foreign direct investment is whereby a company becomes a shareholder in another foreign company through buying of shares from that multinational company. In this case, these companies apply different strategies to meet the same objective though they are two different companies. Horizontal foreign direct investment is whereby the company (multinational) utilizes the same strategies which are used at the parent company. This means that, this company has identical market segments and they must be on the same industry. In order for a company to apply this type of foreign direct investment, the business policies and protocols in these two countries must be similar. Government procedures and laws concerning environment conservation have to be of the same level (Fetcher and Brown, 2008, p 58)

Advantages of foreign direct investments

When a company transfers its operational strategies and machinery to another company in a foreign country, foreign exchange is earned by the country where the investment is being carried out. Taxes have to be paid by any company that invests in foreign country and in order to ensure the continuity of the company activities, an organization must adhere to tax regulations of that country. Tax act is important in the development of a country’s economy in that, they are used to improve the infrastructure and other government operations like providing health care services to its population. Employment and job opportunities are created in the country where the investment is being carried out. By building production factories, these companies provide both skilled and unskilled job opportunities to these companies. Due to the hyperinflation which has been experienced in Zimbabwe, there is need for organizations to diversify their investment in this country so as to reduce the level of inflation and return Zimbabwe economy back into the track. In many countries the importation of human resources is strictly prohibited and this leaves the company with the option of hiring locally. Through employment dependency ratio decreases significantly hence improves the standards of living. The modern day business requires that companies utilize the use of modern information technology services while carrying out its operations. The internet has enabled companies to reduce the operational costs on many of its daily processes. For instance, emailing has enabled instant communication and real-time response to customer’s queries. Reducing the gap between the consumer and the manufacturer has also been reduced by the integration of information technology to business applications. Countries which have an established information technology infrastructure perform well than those without.

Disadvantages of foreign direct investments

Research shows that when companies use foreign direct investment in a foreign country, the hosting country has less control on the internal operations of this foreign country. In this case, foreign companies are known for developing tax evasion techniques which includes manipulating the financial and accounting books. High expenditure reduces the net profits of a company which the government bases its tax rate percentages from. Foreign direct investments in a country like Zimbabwe, may emulate the hiring of foreign professionals who might not have the experience in dealing with the local employees may unsettle the working environment within the company. Another disadvantage of foreign direct investment is that the foreign country may benefit more than the host country. During foreign direct investment, production material may be imported from the parent company’s country hence resulting to decreased revenues from raw materials which are locally produced.

Cultural factors

During international business processes people from different countries who have different cultures come together to do business. Research shows that the companies who have culture-flexible employees have a high chance of excelling in the international business where different business cultures exist. Culture basically refers to personal belief on issues like tradition, religion and more importantly attitude. Culture influences how people react to different situations and these reactions may greatly differ according to an individual cultural orientation. Different countries have a unique business culture. It should be noted that, in present day business world where international business has been on the rise and companies can no long depend on domestic market, companies and firms have been known to cross different cultures in pursuit of extra gains. Business culture basically refers to the ways in which countries perform their business process. Foreign direct investment can be negatively influenced by the different cultures in the foreign country. When foreign direct investment is used, the investing company’s employees usually convey the culture to which they have been oriented from their own country. This culture may conflict with the values of the hosting company and this may cause employee rivalry hence, resulting to low productivity and lost profits. Work efficiency is realized through formation of winning teams which cannot be formed when there is employee rivalry and conflict. Business culture is very diverse even in countries from the same continent. For example, in my efforts to penetrate the Zimbabwe market, I will need to undertake a research in order to understand the diversified needs of the consumers in Zimbabwe. Taking into consideration the high demand for Sadza, a staple food for the Zimbabwe residents, low prices will result to high level of sales. In the same way, my improving the quality of my products, I will be able to attract more customers and maintain the strong loyalty of my current consumers. It is imperative to note that Cross cultural business diversity has to be analyzed before a company embarks on its advertising strategy, enhance reducing the business loses which may be realized due to poor reception of their products. The employees and the management of the foreign company must have some cross cultural adaptation abilities for them to survive in that market. Subculture is also another important aspect of business culture and should be considered before a company decides to use foreign direct investment. Subculture defines the specific difference within a given culture.

Political affiliation between countries should be considered before a company decides to use foreign direct investment. Countries have different political systems which can greatly influence the rate of expansion for foreign direct investments. Some countries have a communist type of governance while others have a capitalist governance system. Communist systems have a controlled market system where prices are controlled and determined by the government. This system discourages innovation by eliminating the perfect competition market where due to stiff competition between companies, employees have to innovate in order to remain competitive. While on the other hand, capitalist systems support a free market system where perfect competition is encouraged and market prices are dictated by the free forces of demand and supply. Innovation and research are common in these markets because competition is really tough and customers are highly valued (Hartman and Laura, 2004, p. 57).When the investing company has a socialist orientation it may experience unfair competition when investing on capitalist state where the companies are used to competition. Country’s laws differ from one country to another. These laws include taxation laws, trading laws such as the requirements a company must have before it starts it operation. Companies that originate from countries that have low taxation rates may experience some operational difficulties when investing in high tax rated countries. This is because the rate of taxation directly affects the company’s financial performance, as high taxes reduce profits thereby limiting the expenses and research activities carried out by the company. Political conditions of a country also influence the rate of foreign direct investment to be ventured in that particular country. Even though Zimbabwe has been propagating investment discrimination which entailed sending away companies owned by foreign investors especially from European countries, the country has adopted parliamentary democracy. Political instability has been known to discourage foreign investors. War prone countries especially in the African region have more investment risks which push away potential investors. Countries whose political conditions are stable attract investors in that; there is the assurance of personal security as well as to assets invested. Some countries restrict and regulate the entry of foreign companies in domestic markets. This move is done to protect domestic companies from excessive international competition which lead to unemployment. Business ethics is a major determinant of foreign direct investment rate in that, it influences the adaptability rate of foreign companies when investing in another country. Business ethics are the generally accepted business behavior and usually differ from one region to another. Companies are supposed to establish and practice ethical standards and procedures. Employee poaching which is considered as unethical business practice is widely used by some companies. Due to the increasing rate of international competition, companies find it cheaper to hire the already trained and experienced employees from their rival companies. Although employees are normally sworn to keep trade secrets, once they are recruited by rival companies they are compelled to use their understanding of the business processes of that rival company to gain any added advantage. In this regard, these employees explore the weakness of the rival company. This is unethical in that, company should prioritize in training their own employees for them to remain loyal to the employers. Dumping of cheap products to developing economies is also unethical. Multinational companies have been known to flood low developed countries with low quality products. This is fueled by the fact that different countries have different quality assessment techniques which may be lower than the foreign company’s countries. An ethical dilemma arises when making a decision whether to change the product standards and follow the host’s standards or whether to continue practicing the same standards used in the home industry. This strategy has some complications in that, high quality products demand high cost of production which concurrently increases the selling price of that given commodity. Developing countries which normally have low standards of living may not be able to purchase these high quality products hence the foreign investing company may not be able to meet its production costs. International environmental ethics should also be considered when a company decides to use foreign direct investment. In my effort to initiate an investment portfolio in a country like Zimbabwe, I will ensure that environmental conservation laws are effectively adhered to. This implies that, environmental conservation research should be conducted to establish the underlying laws to be effected. In addition, I will adopt corporate social responsibilities (CSR) programs in order to create a strong customer-company positive relationship. Effective CSR techniques will also result to enhancement of customer awareness which is very essential if positive results are expected in foreign domestic investments. It is prudent to note that some developed countries like the US the use of un-recyclable plastic packaging materials is highly discouraged and legal actions are taken to defaulters. In this regard, research on environmental laws is fundamental since some of these conservation laws may be so strict such that a foreign company cannot operate profitably (Duska, 2007, p. 93).

Economics factors

Economics represents the measure to determine whether an investment is worthy risking for. Economics analyzes the available market demand and possible sources of supply of goods and services to see whether the company will be able to operate and supply goods while making profit. Some markets may not have the adequate market demand to support the production of goods in a foreign country. Effects of hyper inflation in Zimbabwe have negatively affected the operations of many firms. Even though the government has adopted various monetary and fiscal policies to contain the situation, the level of unemployment has remained high. As a result, many households have experienced reduced level of incomes leading to low level of consumer purchasing power and reduced demand for goods and services. The demand and supply functions should be precisely analyzed to enable companies make informed business investments. Emerging markets presents new and future investment avenues to foreign investors as expanded markets result to increased productivity, economies of scale and ultimate investment returns (Fletcher and Gordon, 1989, p. 64). Issues. Foreign direct investment companies should consider and devote some funds to research on presumed market behavior changes where consumer behavior is expected to change abruptly. Consumer’s change in tastes and preferences is entirely unpredictable and therefore companies should be on the lookout to immediately change their business strategies to counter this change. Economics indicate that when new markets emerge, new market entrants utilize this change and hence increase the competition with the existing companies. Companies should therefore invest in diversification strategy which will enable the investment risks to be spread hence reducing the failure rate.

International Market entry strategies

Foreign direct investment enhances the globalization activities of the company. Globalization refers to the process where local companies decide to join and expand their operations to the international market. Multinational companies like the Coca Cola Company decided to establish its operations in the international market. The company has remained as an international market leader in the soft drink industry for the last couple of decades. When a company goes global it no longer competes with local companies only, in international markets only the companies with the best strategies survives this stiff competition (Jovanovich,1998, p.12). Many companies are known to be market leaders on their own country but when they try to go global, they are declared bankrupt within the first few months of operation. In my efforts to make foreign investment in Zimbabwe successful, I will emulate effective marketing mix which includes product, promotion, price and promotion. E-marketing will also be applied in order to reach more customers in different locations. Likewise, the use of expatriates who posses high level of investment skills will be vital in order to make my investment portfolios achieve a sustainable profit.


Based on the above analyzes it is imperative to note that macro and micro environmental factors should be considered if firms aims at going global. Due to diversified needs of the customers based on their cultural, economic and financial status adequate analyzes must be done by companies so as to effectively operate in foreign markets. In this way, international marketing challenges will be effectively faced off.


Duska, R. (2007).Contemporary Reflections on Business Ethics. Boston, Springer.

Fetcher, R. & Brown, L. (2008). International Marketing. French Forest, NSW: Pearson Education Australia.

Fletcher, Gordon. (1989). Issues of Theory and Policy for the Monetary Production Economy. Palgrave: MacMillan.

Hartman, Laura. (2004). Perspectives in Business Ethics. Burr Ridge: McGraw-Hill.

Jovanovich, M. (1998). International Economic Integration. London: Routledge.

Steger, Manfred. (2002).The new market ideology. Maryland: Rowman & Littlefield Publishers.

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