Foreign Direct Investment

Foreign Direct Investment (FDI)

The most complex internationalization strategy by which the firm establishes a physical presence abroad through direct ownership of productive assets (such as capital, technology, labor, land, manufacturing plant, and equipment). Foreign direct investment occurs when an individual or a business invests in an across-border enterprise and holds a minimum 10% of the capital or voting power, so FDI is riskier, more expensive and less flexible than other entry strategies, but offers greater control. [2] 

Video introduction about the basic of FDI and the basic motivations by the YouTube channel Mike Moore (GWU econ professor) here. 

Foreign Portfolio Investment (FPI)  

If the investing entity owns less than that minimum percentage, like passive ownership or small stock investments made by the average investors, this type of investment is known as foreign portfolio investment (FPI). [10] It's a popular way of investing in a cross-border economy - investors hold security and other financial assets where they are not provided with direct ownership as the investors have no stake in a company or hold less than 10% of the capital. FPI holdings may include stocks, bonds, mutual funds, or exchange traded funds. This allows investors a quicker return on their investment, greater liquidity if needed when compared to an FDI. However, the investors do not actively participate in the management of an enterprise, being content with receiving dividends, and therefore, have no control over the company they decided to invest in. [54]

FDI has three key components: 

•   Equity capital

•   Reinvested earnings

•   Intra-company loans [10]

Many entities are deciding to take advantage of policies for attracting FDI. These policies aim to provide investors with an environment for higher profitability business and less unnecessary risks. Some of the most important factors that should be considered by investor are predictable and non-discriminatory: regulatory environment, a stable macroeconomic environment followed with sufficient and accessible resources. The most effective actions taken by host country authorities to meet investors` expectation would be safeguarding public sector transparency, non-discrimination between foreign and domestic enterprises and international regulatory law. Further factors taken into consideration are the right of free transfers related to an investment and a healthy competitive environment in the domestic business sector. Creating a more positive environment by removing obstacles to international trade and readdressing the tax system increases the possibility for attracting FDI. [5]

Comparison FDI and FPI 

When it comes to th comparison between FDI and FPI the first difference is the capital share. With FDI the company holds more then 10% of the capital and has a lot mor control. In contrast FPI applies, when the company holds less then 10 % of the capital.[54] FDI is also concentrad on a longterm partnership. In addition FDI is more active then FPI. The direct investors also act as managers of the new project in the new country. Through that they are more informed and their work is more effective. On the other side FPI doesn´t require active participation . The investors gain ownership without control of the domestic firms and delegate the decisions to the managerso on site. However, it is less efficient then FDI, because pure delegation of tasks often leads to information asymmetries and misundrstandings. [60]

To distinguish between the various forms of FDI, it's important to understand why companies go abroad in the first place: to serve a foreign market and/or to take advantage of geographical benefits. We can classify FDI activities by 

• level of integration (horizontal versus vertical)

• form (greenfield versus mergers and acquisitions) 

• and nature of ownership (wholly owned versus joint venture). [2]

Types of FDI by Level of Integration

In general the are two common types of foreign direct investment, horizontal and vertical FDI. Achieved trough it there is also an additional type, conglomerates FDI. A distinciton is made according to the production function acitivities. 

Horizontal FDI 

refers to a business investing funds in a foreign company that operates a similar type of business operations as in its home country.

Vertical FDI

refers to an investment made in a complementary business, but not directly in the same industry. This is the case when a business invests in a foreign company to split its production geographically. Since manufacturing prices often vary across countries, it becomes financially profitable for a firm to invest abroad and make use of location advantages. [1] Moreover, there is a further distinction within vertical FDI: backward vertical FDI and forward vertical FDI:

• Backward vertical integration

A company invests in a (potential) material supplier. This would be the case if Dallmayr, a German coffee manufacturer, would look to invest into coffee bean producers in Colombia. Since the firm would be utilizing the Columbian company as a source of raw product, in this instance, coffee beans. As it could be cheaper to acquire them in Columbia rather than another country. [1]

• Forward vertical integration

A company invests in a business it sells its products to and operates as “distributor”. In this case Dallmayr would look to invest into a company such as Amazon, to which it could sell its products to the local market. [1]

Conglomerate FDI

is an investment made that is unrelated to its core business, meaning there is no direct link to the investors business, unlike horizontal and vertical FDI. In general it is uncommon, bcause it has two ovrcome two barriers, entering a new country and a new market.

Export Platform FDI: 

• in a platform FDI, a business exports to a froeign country. The output from th first step is xportet to another country.

• This mostly happens in low cost locations inside of free trade areas.

Types of FDI by Form: Greenfield and Brownfield Investments

Choosing an appropriate mode of entry into new markets is an important and strategic decision for international businesses.

Greenfield Investment

refer to a company that is establishing a subsidiary across-border, building it from the ground up. This includes the acquisition of land on which new workplaces will be built and the hiring of new employees who will be trained according to the training methods of the parent company. [6]

• Gives investors the opportunity to create a new organization to its own specifications. 

• Implies a gradual market entry. 

Currently the highest groth was in South Asia and India, where the number of greenfield investments doubled. The number of projects also increased by two thirds in West Asia, because auf the rise of activity in the United Arab Emirate. Which is now the fourth largest recipient of greenfield projects in the world. [67]

Brownfield investment 

Another way of entering into new markets would be through acquisition. Here, one company takes control of another company and all of its workplaces, employees and processes. Acquisition is therefore characterized by a purchase or a lease of an existing company. 

Oftentimes, acquired firms are extensively restructured, meaning processes are adapted to those of the investors company. They might also train their employees according to the training methods of the parent company [11]

• Facilitates speedy entry of the local market and access to resources. 

• Attractive if local resources are necessary. [8]

Brownfield M&A (Mergers & Acquisations)

is a specific part of brownfield investments, focused on entry strategies involving acquisations and mergers. [58]

A Merger is an additional type of FDI where two existing companies agree to unite themselves into one company. This allows companies to expand their reach and market share. [55]

Possibilities of Global Collaboration: Types of FDI by Nature of Ownership

Collaborations, often known as international partnerships or international strategic alliances, are essentially joint ventures between two or more companies. They assist businesses in overcoming the typically significant risks and expenses associated with completing international projects that may be beyond the capability of any single firm functioning alone. To complete large-scale initiatives such as inventing new technologies or finishing huge enterprises such as power plants, companies sometimes create partnerships. By working together, the focal firm can access a variety of complementary technologies that are only available from other companies, allowing it to innovate and produce new goods. These benefits assist to explain why these types of partnerships have become so common in recent decades. Although collaborative ventures can take place in each level of a value chain, the three most important activities subjected to collaboration are 

• R&D

• Manufacturing

• Marketing. 

Let’s take as an example high tech sectors such as telecommunication and microprocessors, firms combine their competences, resources and capabilities in order to project a new technology or product. [2]

Basically, international collaborative ventures can be of two types, equity joint ventures and project based, non-equity ventures. [2]

Equity joint venture  

An equity joint venture is a type of joint venture in which two or more parties create a separate legal company that serves as a vehicle for the implementation of the project. This new company is usually located in the same country as one of the two partner companies, with the purpose of mutually establishing a business with its own objectives: marketing and distribution, research, production, etc. The joint venture contract establishes all the necessary agreements to start and operate the joint venture. Joint Ventures are normally formed when no one party possesses all the assets needed to exploit an available opportunity. In a typical international deal, the foreign partner contributes capital, technology, management expertise, training or some type of product. The local partner contributes the use of its factory or other facilities, knowledge of the local language and culture, market navigation know-how, useful connections to the host-country government, or lower-cost production factors such as labor or raw materials. European firms often seek joint ventures to gain access to markets in Asia. The partnership allows the foreign firm to access key market knowledge, gain immediate access to a distribution system and customers, and attain greater control over local operations. [2]

Project-based, non-equity venture 

Project-based, non-equity ventures are based on a partnership in which businesses collaborate on a project with a limited scope and a well-defined timeline without incorporating a new legal entity. The project-based, nonequity venture is becoming more common in cross-border business. The partners pool their skills, resources, and competencies to work on innovative technologies or goods until the venture bears fruit or they no longer value collaboration. The most important difference from equity joint ventures is that no new legal entity is created, partners carry on their activities within the guidelines of a contract. Sometimes, some companies, not only in the high-tech sector, can go through moments of financial crisis, and fail to generate cash flow necessary to support innovation processes by investing in R&D. This is the example of Aston Martin, which having gone through a decade with a continuous negative net result, has decided to use this tool to support an important strategic lever in the automotive sector, innovation. In fact, there are several collaborations that it has decided to activate during the last decade, among these are those with FlexSys (2020) Juniper Networks and finally AMG-Mercedes benz. [2]

Consortium 

• is project-based, usually a nonequity venture initiated by multiple partners to fulfill a large-scaled project

• typically formed with a contract that delineates the rights and obligations of each member

• popular for innovation in industries such as commercial aircraft, computers, pharmaceuticals, and telecommunications, where the costs of developing and marketing a new product often reach hundreds of millions of dollars and require wide expertise.

• Work is allocated to the members on the same basis as profits. In a three-partner consortium, for example, if each party performs one-third of the work, then each earns one-third of the profits. 

• Often, several firms pool their resources to bid on a major project such as building a power plant or a high-tech manufacturing facility. Each brings a unique specialty to the project but would be unable to win the bid on its own. 

• No formal legal entity is created; each firm retains its individual identity. In this way, if one party withdraws, the consortium can continue with the remaining participants. 

• iNavSat is a consortium formed among several European firms to develop and manage Europe’s global satellite navigation system. [2]

Cross-licensing agreement 

• project-based, nonequity venture in which the partners agree to allow access to licensed intellectual property developed by the other on preferential terms. 

The goeal of FDI and international collaborative ventures:

• Improving the company´s worldwide competitiveness. [2] 

In terms of economic motives for FDI, it should be mentioned that they are based on the expectations of gaining advantages, such are:

• the creation of jobs

• the increase of the amount of capital invested in the economy and the increase of government budget revenues

• the access to modern management

• the stimulation of domestic investments

• the increase of markets and exports

• the improvement of workforce’s qualification

• the support of privatization and restructuring

• the improvement of efficiency and competitiveness in local companies [2]

The field of FDI has been studied from an economical perspective for a long time, however, from a scientific standpoint, there is still no final unified framework when it comes to one of the most important questions - why do firms invest abroad?

• Efficiency seeking

is a motivation often found in the stage of maturity of the operations when foreign investors have long-term goals or want to get access to well-developed markets. They “take advantage of differences in the availability and costs of traditional factor endowments in different countries”; or “of the economies of scale and scope and of differences in consumer tastes and supply capabilities”. [21]

• Strategic asset seeking

can be found when companies decide to purchase certain assets or enter into alliances in order to promote long-term strategic interests. It should be mentioned that the main source of company competitiveness is that multinational firms pursue a global or regional integration strategy and strive for ensuring competitive power in an unknown environment. FDI thereby aim at acquiring a new technological base, rather than exploiting an existing asset. [4] 

It is important to emphasize that foreign direct investments do not automatically lead to all the beneficial effects mentioned above. In conclusion, FDI is not driven by a single motive, it’s most typically found as a combination of those. 

In relation to the motives there are factors standing behind them when considering the attractiveness of some nations as FDI destinations. Cavusgil et al (2019) summarized them into 8 groups:

• market factors (size and growth of national and regional markets)

• human resource (cost, availability and productivity of skilled labour and managerial workforce)

• infrastructural (cost and availability of local manufacturing, utilities and finance)

• political and governmental (political stability and government interventions)

• profit retention (tax system, rate of inflation)

• economic (cost of land and facilities, currency stability)

• legal and regulatory (FDI regulations, intellectual property protection, trade barriers)

Which countries are the best in attracting FDI?

• The most attractive countries attracting FDI are those having growing economies (devloping countries).

• In these countries a lot of attention is given to research and education: Thereby it is possible to get significant cost advantages for materials, labor and construction of new infrastructre.

• The decision of many multinational companies to invest becomes determined by the ability of creation and technological innovation.

• Governments also seek to attract foreign direct investment in order to implement policies aimed at boosting innovation systems and technology transfer. 

• Future outlook: It is expected that the decisive role in attracting foreign direct investment will be taken by the combination between localisation and th existence of technological capacity.

Because of the ongoing globalization, more and more organizations in the world are willing to internationalize and make the company's products and services suitable for selected foreign markets. After identifying the attractive regions, the company may choose FDI as a main strategy. When the headquarter decides to invest in a new country, there are of course a number of opportunities that can open for the business, but there are also several challenges and dangers that have to be considered before investing. In the following chapter we will discuss and evaluate the main benefits, as well as disadvantages and risks associated with FDI.

Benefits

Economic and Employment Boost

As investors establish new businesses in other countries, FDI can contribute significantly to a country’s economic growth. FDI stimulates the manufacturing and service sectors, resulting in the creation of jobs and a reduction in the country's unemployment rate. This is one of the main reasons why a country (particularly a developing one) will seek to attract foreign direct investment. Increased employment leads to better wages and more purchasing power for the population, strengthening a country's overall economy. [2]

Reduced Costs

It is increasingly important for companies to control their cost structure. This can be achieved by investing in countries that provide specific comparative advantages - lower cost for materials, labor and construction of new infrastructure. Another reason is that foreign investors receive tax incentives that are very beneficial regardless of your selected field of business. That is why a lot of organizations decided to invest in the last 20 years in Eastern Europe - Poland, Bulgaria, Romania and Czech Republic have been the most popular destinations of FDI inflows. The main reason is that the costs of raw materials, wages and establishing infrastructure are lower than in other European countries. [14]

Technology and Resource Transfer, Increase in Exports

Companies can obtain many advantages from locating at the center of leading-edge knowledge and innovation for their industry. By doing so, the firms are able to have a presence in an important technological cluster promoting the improvement of its know-how and development of new technologies and finally the establishment of collaborative networks that are stimulated by geographical proximity. Many FDI produced goods are exported rather than consumed domestically. The creation of 100% export oriented units helps to assist FDI investors in boosting exports from other countries. [14] 

Human Capital Development

Recent studies have shown that between 50-70% of a company's assets are explained by non-monetary factors such as skills, competencies and training of human resources. As a result, some companies seek to internationalize through FDI in order to penetrate countries to take advantage of the skills and training of human resources. To give an example, the Oresund district (the world's largest biotech district) expands across two countries - Denmark and Sweden: innovation, human resources preparation and R & D are hereby the essential strategic aspects. [13] 

Exchange Rate Stability

Inflows of FDI can also be beneficial to national economies. For example, the flow of FDI into a country translates into a continuous flow of foreign exchange, helping a country’s Central Bank to keep a strong foreign exchange reserve and hence maintain stable exchange rates. Financial inflows are especially helpful to countries with limited domestic resources and limited options for raising cash on international capital markets.

Creation of a competitive market

By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps create a competitive environment and break local monopolies. A healthy competitive environment pushes firms to continuously improve their processes and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of competitively priced products. [14]

The following table summarises and illustrates the advantages of FDI for the foreign investor and for the host country.

Weaknesses

Political Risks and Uncertainty

Establishing a permanent, fixed presence abroad makes the firm vulnerable to national risk and local governments' intervention. In addition to local labor practices, direct investors also must deal with local economic conditions such as inflation and recessions. [2] Political movements and changes in a country’s business environment can have a negative effect on a company's profit or other goals and hamper the investors. Moreover, constant political changes can lead to expropriation. In this case, those countries’ governments will have control over investors’ property and assets. [14]

Legal risks

Legal aspects such as intellectual protection (patents, trademarks) may be of less importance in developing countries, and this can lead the company to very expensive legal procedures as a result of intellectual property theft.

Cultural risks

Firms that enter through FDI are dealing more intensely with culture and other aspects of the host country. MNEs with high-profile, visible operations are especially vulnerable to close public scrutiny of their actions. To minimize potential problems, managers often prefer investing in countries that are culturally and linguistically familiar. For example, when setting up a shop in continental Europe, U.S. firms frequently choose the Netherlands because English is widely spoken there. [2]

Ethics and Social Responsibility

Companies that internationalize through FDI are often criticized for ethical failures and irresponsible behavior because such firms hold substantial power in the markets where they are most strongly invested. For example, some MNEs operate foreign factories under harsh working conditions, while others engage in bribery to pursue their interests. Some MNEs market defective products or employ questionable marketing practices through their foreign subsidiaries. [2]

The disadvantages of FDI are closely linked to the factors described in the previous chapter. In conclusion, the company, when deciding to invest large sums of money abroad, must have a deep understanding of the political, legal and cultural context of the country to which the investments are destined.

The FDI flows into non-OECD G20 economies dropped by 15% in the first half of 2023. They decreased by 13% in Q1 and by a further 27 % in Q2. [33] 

Crossborder M&A trends

Cross-border M&A sales reached $707 billion in 2022 – down 4 per cent (table I.7). In manufacturing, cross-border M&As fell by 42 per cent to $142 billion, while deals targeting services decreased slightly, by 5 per cent, to $442 billion. In the primary sector, M&A values more than quadrupled to $122 billion, breaking the decade-long downward trend. After the rise in value in 2021, M&A sales in pharmaceuticals fell by 51 per cent to $36 billion, while the number of deals dropped by 22 per cent to 169. The largest deal of the year was recorded in the pharmaceutical industry: the $11 billion acquisition of Vifor Pharma (Switzerland) by CSL Behring (Australia) and the purchase of the biosimilars business of Viatris (United States) by Biocon Biologics (India) for $3.3 billion. [67]

In the automotive sector most of the top 100 MNEs enjoyed an increase in revenues and invested overseas in new ventures, often to integrate the supply chain of their electric vehicle production or to expand production capacity. 

In the tech industry, only semiconductor MNEs (Intel and Micron Technology, both United States) significantly increased their overseas investment. 

Global competition and geopolitical tensions pushed the world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Corp (Taiwan Province of China) to start setting up semiconductor manufacturing facilities in the United States, in Japan and possibly in Europe. Until 2020, it had off-island production facilities only in China and its foreign long-term assets were below $2 billion; at the end of 2022, its foreign assets had already more than quadrupled, to $8.5 billion.

Other top MNEs in the technology sector did not expand their operations abroad, although their revenues continued to grow in 2022. All major United States tech companies :

• Alphabet, Microsoft

• Apple 

• Amazon 

These 3 companies shifted their operational footprint to the domestic market, reducing foreign assets.

Asian MNEs:

•  Tencent (China) 

• Hon Hai (Hong Kong, China)

•  Huawei (China)

•  Samsung (Republic of Korea) 

• Sony (Japan)

also reduced their foreign assets relative to domestic assets[57].

Covid-19, the global pandemic that probably started in the country of the "factories of the world", had a considerable impact on the world economy. Foreign direct investment has obviously not been spared. The European Union, a single market between an international economic organization and a federation, has been challenged by this health crisis. 

The main purpose of this introduction is to provide readers with a perspective on the impact of the pandemic on foreign direct investment in the European Union. To this end, this preamble will discuss the EU's response, the policy measures put in place and their potential long-term impacts. 

The first wave of the virus had a strong impact on the economy of the European Union as well as the rest of the world economy, resulting in a decrease in foreign direct investment. 

Why such a decrease? 

Well, a pandemic is a rare and unpredictable phenomenon, which until now has been little considered in the scenarios of foreign investors, so it has caused confusion and a form of uncertainty. If we add this phenomenon to other consequences of the virus such as supply chain problems and a drop in demand. [32] Faced with these threats directly impacting its economy, the European Union has reacted with policy measures aimed not at totally nullifying the economic consequences of the pandemic, but simply at reducing its effects. The most symbolic and notable measures were the European Recovery Plan and the European Next Generation Fund. The objective of these two measures was to stimulate economic recovery (within the EU) and to support the member countries. [24] 

Nevertheless, thanks to very specific sectors such as those related to new technologies and renewable energies, foreign investments have started to increase again. [31] Another interesting development in terms of FDI t in the European Union, thanks to the health crisis, is the acceleration of the digital transformation of the European territory. This has influenced the investment strategies of foreign investors. Although the pandemic no longer has a direct impact on the European territory, the virus will continue to impact the economic trajectory of the European Union and therefore foreign investments thanks to the indirect consequences of the pandemic. 

Research on the influence of Covid on FDI in the EU has the advantage of providing a better understanding of the specific economic resistance of the EU, an observation of the effectiveness of the political measures put in place in the european union (in the short and medium term, the long term not being accessible for the time being in 2023), as well as on the evolution of foreign direct investment. These results could be useful in other crisis contexts and for other economic regions, allowing us to understand all the opportunities and threats. 

The First Effects of COVID-19 on Foreign Direct Investment in the European Union

The spread of the coronavirus has had a profoundly negative impact on the world economy, illustrated in the European Union by an increased drop in foreign direct investment. This is the result of several indirect consequences of this health crisis:

• economic contractions

• difficulties related to the supply chain 

• finally the irregular impact of this crisis on several industries. 

The health policy implemented by many member states within the European Union, embodied in temporary confinements and the promotion of social distancing, has resulted in a decline in economic activity throughout the area. In concrete terms, this was illustrated by a contraction of approximately 6.2% of the gross domestic product in the European Union. [28] Faced with an economic decline within the European Union and also on the world stage, uncertainties about the possible developments of the coronavirus, this has led to a decrease in investments, embodied by postponements or cancellations, causing a decline in foreign direct investment. [32]

Global supply chain vulnerabilities have been highlighted by the health crisis (well illustrated by microprocessor supply issues between 2021 and 2022). Suppliers and transportation networks affected by the pandemic have impacted European companies and more specifically their performance and capabilities. Thus, a form of dependence of European companies on global value chains (perfectly embodied by the dependence of European states on China) have been accentuated by the health crisis. [30] This context has created an unfavorable environment for foreign direct investment, forcing European companies to review their investment strategies by establishing priorities in order to secure their position at the expense of potential developments. This has resulted in prioritization, postponement and even cancellation. 

Like any crisis, this one has had an uneven impact on the economy. The same is true for foreign direct investment. Although the impact was globally negative for all sectors, it was nuanced and uneven. Sectors that were particularly affected:

• analysis

• the automotive

• tourism

• hotel

• aviation

• retail

Why these sectors?

Because of sanitary measures such as lockdowns, travel restrictions, as well as a general decline in consumption. [30]

Other sectors, in contrast, were able to take advantage of the opportunity generated by the health crisis, such as:

• the pharmaceutical sector

• the health sector 

• the new technology sector

These sectors experienced increased investment during the pandemic. [30] 

In the European Union, the retail sector is a key sector for regional economic growth, accounting for about 4.5% of the European gross domestic product and 20 million people depend on this sector. [25] This sector, like its consumers, has evolved over the last decades, with changes resulting from new consumer needs and concerns, technological developments and the expansion of the single market. 

What are the particularities of the European retail sector?

First of all, this sector is composed by a diversity of small, medium and large companies, and it offers a wide range of products to local and international consumers.  

In the world's largest single market, foreign direct investment is an essential component of the development of the retail sector. These investments encouraged by the European Union. These foreign direct investments have:

• created jobs in the sector

• increased competition

• fostered innovation

• stimulated economic growth.[24] 

Foreign direct investment has opened up opportunities for expansion by increasing the scope of the retail sector including opening up access to other local markets. This demonstrates the linkage and importance of foreign direct investment to the retail sector and the need for states to take it into account when designing strategy. 

Factors Attracting Foreign Direct Investment in the Retail Sector of the European Union

The European Union has built a strategy of attracting foreign direct investment, the retail sector attracts many foreign direct investments. There are several reasons for this phenomenon:

• The European Union has built a business-friendly environment. The World Bank ranks most member states in the top tier based on the ease of doing business criteria.

• The European Union consists of 440 million consumers, making it the largest single market in the world. European consumers are diverse and have a high purchasing power.

• The European Union has the competitive advantage of having a skilled and educated workforce, an attractive element for foreign investors. Another asset of Europe’s attractiveness is its high quality infrastructure.

• The European Union’s unified regulatory framework and the principles of the European Union’s single market have the enormous advantage of simplifying the cross-border operations of companies operating in the single market, thereby eliminating national variations in this particular area.

Foreign Direct Investment's Advantages in the Retail Sector

The foreign direct investment is critical in the retail industry since it provides a variety of benefits that can spur growth and development. Some of these advantages will be discussed in this section.

• Foreign direct investment almost always creates new employment, both directly and indirectly. When a foreign firm establishes a retail store or a franchise, it immediately produces job possibilities. These investments may indirectly help to create jobs in allied areas including logistics, real estate, and manufacturing. [38]

• Through foreign direct investment, international companies have the ability to transfer technology and experience to their host countries on a regular basis. This is particularly visible in the retail sector. Advances in digital payments, inventory management, and customer relationship management have the potential to significantly improve operational efficiency and consumer experience. [39]

• The presence of foreign retailers in a market (and in this case the European single market), generally increase competition in that market, which can foster innovation and improve product quality. The impact of competition is to force existing firms to innovate to maintain market share, making the retail sector more dynamic and innovative (to differentiate from competitors). This dynamism and innovation are attractive arguments for foreign direct investment. [40]

• Foreign direct investment, properly invested as part of a strategy promoting logistics and transportation, can improve supply chain efficiency. Foreign traders typically bring innovative supply chain management systems, which can provide: cost savings, faster delivery times, and improved service levels. [41] Foreign traders bring innovations that can benefit the entire retail sector.

• The Foreign direct investment also has the advantage of helping European companies enter new markets. Collaborations between foreign investors and European retailers also provide access to new customer bases and distribution networks, allowing them to expand their operations abroad and diversify their revenue streams. [42]

Concerns and Difficulties Affecting Foreign Direct Investment in the Retail Sector

Despite the benefits that foreign direct investment in the retail sector can bring, there are obviously a number of obstacles and challenges that are associated with it. Here are some of the challenges that illustrate the issues associated with foreign direct investment:

• When multinational companies enter a new market, cultural differences can be a major obstacle. Understanding consumer behavior, tastes, and local customs is critical to retail success, so downstream research is essential to understand market characteristics (especially in a single market as unique as the European Union). Failure to adapt to the local culture can result in a mismatch with customer requirements and preferences, which is detrimental to the success of the business. [43]

• Foreign direct investment can potentially have a mixed effect on domestic small and medium-sized enterprises. While such foreign direct investment can help local organizations connect to global value chains, it can also increase competitiveness at the expense of small and medium-sized enterprises unable to compete with large firms. This issue presents a strong controversy in the retail sector, with small firms typically facing strong competition from international chains. [44]

• Foreign investors often face regulatory barriers (despite a European regulatory policy favoring foreign direct investment in the case of the European single market) in the retail sector, which can range from strict investment laws to time-consuming licensing procedures (constituting a significant constraint). In some cases, protectionist measures may be taken to defend local firms by making it more difficult for foreign traders to enter the market (in an attempt to protect them from multinationals). [45] 

• Geopolitical tensions and uncertainty can have a significant influence on foreign direct investment flows (as Russia has seen with the departure of Western companies). Trade wars, political unrest and political uncertainty can deter foreign investors by increasing the risk of investing in a particular country or region (the Taiwan context at the center of the Sino-U.S. conflict is a perfect example*). Foreign investors face an additional level of complexity due to ongoing geopolitical tensions and trade conflicts (hence the creation of companies selling information to other companies on these specific aspects, allowing them to reduce risks). [46]

Strategies for European Retailers to Maximize Foreign Direct Investment Benefits

European traders need to develop strategic measures to take full advantage of foreign direct investment (as the European Union seeks to attract such investment). Some strategies to consider include:

• In order to expand, it is essential to determine which markets have the greatest potential for development for multinational retail companies. Thorough market research is necessary to understand the desires, tastes and spending patterns of customers in multiple locations. A clear understanding of market dynamics can help retailers make informed investment decisions. Therefore, it is the prerequisite for any foreign direct investment. [47]

• Strategic alliances with local companies or foreign investors can be a potentially profitable strategy for European stores, a way to enter markets while limiting risks. These collaborations can lower market entry barriers, provide access to local expertise and resources, and share investment risks through the sharing of financial resources, skills and technologies. [48]

• Successful foreign traders frequently adapt their products, services, and business methods to meet the needs of local markets and consumers, as each local market may have different needs for cultural and other reasons. This may involve customizing product offerings, changing pricing tactics, or implementing local business practices. Understanding local customer behavior and cultural sensitivity can be a competitive advantage in the marketplace. [49] 

• In the retail sector, innovation is a key driver of competitiveness, especially in this highly competitive sector. European retailers can take advantage of Foreign Direct Investment to invest in new technologies and business strategies. Investing in digital transformation efforts, e-commerce platforms, data analytics or supply chain technology are the most typical examples (especially in the EU market). These expenditures can boost operational efficiency, improve customer satisfaction, and create a competitive advantage. [50] 

• Foreign Direct Investment has had a tremendous impact on the European Union's retail industry. On the one hand, it has resulted in several positives such as job creation, technology and knowledge transfer, increased competitiveness, greater supply chain efficiency, and access to new markets. On the other side, it raises issues such as cultural adaptability, possible consequences on Small and medium-sized regulatory barriers, and geopolitical uncertainty.

Literature

[1] Boyce, P. (2021). Foreign Direct Investment (FDI) Definition.  

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Images

Image 1: https://www.visualcapitalist.com/mapped-foreign-direct-investment-by-country/

Image 2: https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD 

Image 3:https://blog.investyadnya.in/what-is-foreign-direct-investment-fdi/ 

Image 4: https://www.semanticscholar.org/paper/Vertical-and-Horizontal-Foreign-Direct-Investments-  

               Protsenko/013646c9877a93b1551b2d06cdfaf51d3c6ef6e7 

Image 5: https://blog.investyadnya.in/what-is-foreign-direct-investment-fdi/ 

Image 6: https://unctad.org/system/files/official-document/wir2023_en.pdf 

Image 7: https://www.wallstreetmojo.com/brownfield-investment/ 

Image 8: https://corporatefinanceinstitute.com/resources/knowledge/strategy/eclectic-paradigm/ 

Image 9: https://unctad.org/system/files/official-document/wir2022_en.pdf 

Image 10: https://unctad.org/system/files/official-document/wir2023_en.pdf

Image 11: https://www.oecd.org/corporate/mne/statistics.htm

Image 12: https://www.oecd.org/investment/statistics.htm

Image 13: https://www.oecd.org/corporate/mne/statistics.htm

Image 14: https://unctad.org/system/files/official-document/wir2023_en.pdf

Image 15: https://unctad.org/system/files/official-document/wir2023_en.pdf

Image 16: https://unctad.org/system/files/official-document/wir2023_ch01_en.pdf 

Image 17:  https://unctad.org/system/files/official-document/wir2023_ch01_en.pdf 

Image 18: https://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-April-2023.pdf

Image 19: https://www.fdiintelligence.com/content/data-trends/countries-setting-new-fdi-records-in-2023-83094

Image 20: https://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-April-2023.pdf

Image 21: https://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-April-2023.pdf

Image 22: https://unctad.org/system/files/official-document/wir2023_en.pdf

Image 23: https://www.argumentum.al/en/the-future-of-the-eu-one-block-or-two-block-eu/

Image 24: https://www.consilium.europa.eu/de/documents-publications/library/library-blog/posts/think-tanks-reports-on-covid-19-and-the-recovery-fund/

Image 25: https://www.consilium.europa.eu/de/documents-publications/library/library-blog/posts/think-tanks-reports-on-covid-19-and-the-recovery-fund/

Image 26: https://www.statista.com/statistics/1134911/eu-coronavirus-recovery-fund/

Videos

Mike Moore (GWU econ professor): https://www.youtube.com/watch?v=4NBzBS0jZkc

The Volatilian: https://www.youtube.com/watch?v=MPd2SfbFYdA

OECD Business and Finance: https://www.youtube.com/watch?v=KPumDE60IDk