New Look Plastics is a manufacturer of high quality plastics for use in interior decoration and fittings of toilets and bathrooms. The business has a mission of ensuring the provision of high quality and affordable fittings for the modern home decorator. The target audience is the middle-aged homeowner aged 25 to 45. The company is not only involved in the manufacture of the product, but also the marketing and retailing of the product. The slogan of the company is “Providing affordable beauty and functionality for your house”. The products include plastic fittings for the kitchen, as well as furniture. The other section of the business involves the manufacture of plumbing items for bathrooms and kitchens. The company has grown steadily since it started in 2005, and has been able to achieve dominance in the US with strong sales growth and improvement in customer base. Although the US market is not yet saturated, the organization is considering venturing in the international market.
The planned internalization is aimed at enabling the organization to benefit from economies of scale due to increased production and venturing into new markets in order to improve sales. The internationalization will also be beneficial for the company to venture in labor markets that are more competitive and cost-effective. The country selected for FDI by New Look Plastics is China. The rationale behind the selection of China is the strong economy growth and construction sector. The Chinese market has an unsatisfied need for affordable fittings and plumbing. The country is also one of the most cost-effective labor markets, making it suitable for setting up of production facilities. Therefore, the expansion will involve setting up production facilities for the company in China, as well as setting up retail sales stores in the country.
Benefits of FDI to the Host Country
FDI is influential in the economies of the host country because of the increased level of production resulting from the stimulus. FDI results in factor productivity and growth in national income beyond the stimulus of the initial investment. Factors of production in the host country become more productive because of the involvement of foreign businesses in the domestic economy. Empirical studies indicate that FDI results in improved incomes and factor productivity than the domestic companies. FDI also enables the host country to utilize resources, such as labor that would otherwise not be utilized by the local industries (OECD, 2002).
FDI is also beneficial to the host country due to triggering the release of domestic investment in supporting activities undertaken by the business. FDI triggers the development of intermediaries for the business, thus providing employment for the domestic workers. The local economy also gains from FDI because of increased integration into the global economy. This increases access to global markets for the local industry and the developing country, which is the recipient of FDI (Jones & Wren, 2008). The labor market will have improved access to the international economy, thus fetching improved wages.
Technology transfer is another benefit of FDI to the host country. Technology used in the home country is used in the production facilities set up in the host country. The company will have to transfer skilled workers from the home country to the new production plants. This will involve the introduction of new technology that improves efficiency and productivity of labor from the host country. The host country workers will also benefit from skills learnt in the operation of the machinery used by the company. Know-how is transferred from the home country of the company to the local workforce in the host country.
Competition in the host economy will be improved because of the advancement in technology and processes resulting from the setting up of new production plants by the company. Competition in the domestic economy of the host country will be initiated by the increase in goods, in the local market. The companies working in the host country will have to improve their quality and price competitiveness. This is essential for the company to compete effectively with the foreign company. This will lead to production of products that have improved quality and price responsiveness than before the investment by the foreign company. Processes will also be improved in order to gain efficiency in the production process used by the companies in the host country.
Benefits of FDI to the Home Country
The home country benefits from FDI because of increased access to the foreign market. The larger market results from access by the company to large numbers of potential consumers from the host country. The company has the capability to reach markets that were initially underserved by the local industries. The home country will benefit from increased revenue emanating from operations in the foreign country, thus bringing in foreign exchange. The increased foreign exchange for the country will improve the balance of payments.
The home country will also benefit from increased access to cheap labor. This access to cost effective labor will enable the home country to produce competitive goods that are based on price. This will enable the home country to optimize costs in pursuing growth goals. Utilizing resources from the host country, such as labor and raw materials, will enable the company to increase profits without significant increases in costs of operation. Diversification will also be beneficial for the company, thus enabling the home country to prevent volatility in the economy.
Costs of FDI to the Host Country
Costs of FDI to the host country are that it may result in crowding out of investment. This means that the cost of investment in the host country may rise because of the foreign country using domestic resources. Domestic companies may find it expensive to compete with the foreign company, which may be paying higher prices for the resources. This increases the cost of operations for the businesses in the home country, thus reducing the profits for the domestic companies.
Increased competition in the home country may have a negative effect on the income of the domestic companies. This is because the foreign company may have the ability to produce the commodities at lower cost. Therefore, the domestic companies have to lower their prices as a way of retaining their market share. The foreign country may reduce the price of commodities to levels that are not profitable for the domestic companies. This results in driving the local companies out of business (Jones & Wren, 2008).
Costs of FDI to the Home Country
The costs associated with FDI to the home country include the exportation of jobs from the home labor market. This exportation of jobs results from the setting up of a company in the foreign country, which will employ labor from the host country, as opposed to the home labor. This may result in job losses for workers in the home country, thus causing reduced incomes for workers in the home country. Employment level for other factors of production, such as capital, may also decline because of the transfer of production to the foreign country. Diversification into the foreign market may result in the reduction of investment in the home country, thus reducing the income and level of economic activity in the home country. This may reduce economic growth in the home economy and negatively affect its residents (Neary, 2008).
The MNE will open production facilities in China through foreign direct investment. The commodities produced in the foreign production plants will be sold in both the home and host countries, as the company focuses on marketing in the foreign market. The company will also set up distribution networks in China in order to enhance distribution and sale in the Chinese market. The distribution networks set up by the company will involve opening distribution centers and retail stores. The distribution networks will work in conjunction with domestic networks with the domestic retailers in order to distribute them in the local market.
The MNE will utilize the local suppliers in the procurement of raw materials. The company will have to form strategic networks with the producers of the raw materials in order to improve efficiency. Strategic alliances with the suppliers will be essential in order to enable the business ensure that the suppliers are efficient in delivery of raw materials to the company. The business will still operate in the US market through production and retail sale of products in the local market. The scale of production in the US market will not be reduced immediately after the diversification in the foreign market. This is essential for preventing shortages in the market due to diversification. Production in the foreign country will commence immediately after the plant is set up and the required staff acquired. Retail networks in the foreign country will be set up after production of adequate stock. The company will improve the production based on the market demand as analyzed by the marketing department. The MNE will market the commodities in the foreign and domestic market in order to reach the market. After the company has achieved dominance in the market, the production will be scaled up in order to cover the market adequately.