Multinational companies are seeking alternatives to foreign direct investment to improve access to other world markets. Survey finds two-fifths interested in Brazil, India and China expansion.
The nature of business transactions is continuously evolving to respond to new technological and economic realities. Traditionally, multi-national corporations (MNCs) are engaged in cross-border business, either through direct ownership of foreign affiliates in host countries or by arm's length trade. Over the past few years, with the emergence of global value chains, this trend gradually started changing and companies increasingly began considering alternatives to foreign direct investment in order to gain efficiencies or access to foreign markets. These alternatives or less traditional forms of investment include contract manufacturing, services outsourcing, franchising, licensing and management contracts. Since these alternatives entail investment in a form other than "equity," they are often referred to as non-equity modes of investments. Foreign direct involvement (FDI) and non-equity modes of investment (NEM) are not mutually exclusive, therefore multinationals that enter a host country using NEMs, often, over time decide to invest more directly through full or partial ownership creating foreign subsidiaries or joint ventures. The decision to either internalize or externalize production of goods, services and flow of information ultimately depends on the relative costs and benefits, as well as the associated risks. Thus, cross-border investment today can take two forms: direct equity investments and commercial contractual arrangements between foreign investors and local enterprises.
In case of the latter the foreign investors' investment consists of making available its brand name, intellectual property, know-how, technology, skills or business processes or other intangible assets. Given this, in addition to FDI and trade, NEMs can be another vehicle to integrate developing countries into global value chains, potentially address unemployment, increase productive capacity and increase local value added.
To understand this phenomenon better, specifically with respect to franchising, the Trade and Competitiveness Global Practice of the World Bank Group and the International Franchise Association partnered to conduct a survey of international franchisors. The objective of the survey was to better...