Foreign Direct Investment Research Paper

This report will analyse the prospects and the problems for a Multi National Enterprise who proposes to make a Foreign Direct Investment, therefore many factors will need to be considered by the MNE, as this is arguably one of the most important decisions that faces a multinational company (Demirag and Goddard 1994). This is namely because of the large capital outlay over a duration of time, a decision once made that cannot be easily reversed. 

Company Background

British American Tobacco is a large Multi National Enterprise established in 1902 by consolidating two companies American Tobacco co. and the Imperial Tobacco of the UK this was hoped to end an intense trade war, 'Under the agreement, the two companies will not trade in each other's domestic markets and acquire the right to use each other's brands and trade marks in their own territory. Imperial Tobacco's and American Tobacco's businesses outside the 'home' markets of the UK and US are transferred to British American Tobacco'. Then in 1911 the American tobacco Co divest its shares and the company becomes listed on the London Stock Exchange.

Country Background

Country of choice is the northern African country of Libya which for some time has been sanctioned by both the US and the UN, its tobacco industry is state owned, however articles in the October 2003 country report have made suggestions that this will soon become privatised. BAT would obviously like to monopolise on the situation this is because the sanctions imposed in Europe are being lifted ahead of those from the US, the theory behind getting in there first is highlighted by (Shapiro 1989) ' The essence of corporate strategy is creating and then taking advantage of imperfections in the product and factors markets'.  

Libya is a country that has in the past two decades been crippled by trade sanctions for its national's roles in various activities such as the Pan Am bombing over Lockerbie. These have meant that it's main source of income the export of crude oil and natural gasses. The country has a GDP $45.4 Billion (purchasing Power Parity 2000 est.) 

Source: CIA the world fact book 2001 its industry break down is mainly manufacturing and service due to the bad climatic conditions and poor soils, with 55% of incomes from manufacturing. With the sanctions in place the oil and petrochemicals have been traded with Italy, Germany, Spain, France, Turkey, Greece, and Egypt. Libya is in great need of FDI's with its main source of income becoming devalued due to the oil reserves of Iraq being place onto the market (see appendix 1). The country is in need of these FDI to buoy its flagging economy. With Col. Muammar Abu Minyar al-QADHAFI and the government are introducing reforms that will catalyse the process and whose core objective is privatisation and to adapt itself more gearing towards strengthening its global economic relationships, a stronger acceptance will in turn lead to more investment

The Economic Activity

The tobacco industry factors three main segments the raw material, leaf growing, manufacturing, and the distribution and sales, I will be focusing on the manufacturing process, and will report on the advantages of transportation and the economies of scale. A contributing factor to any MNE hoping to make a FDI is the market control and getting there first is best with the UN sanctions lifted ahead of American one's it allows for working relationships and loyalty to be build.

The economic advantages are a great pull factor according to with good economic growth of GDP at 6.5% est. for 2000, current high unemployment will mean that there is a willing work force with a 30% unemployment rate, with most MNE paying more that the state operated industries. The currency exchange rate is the most important financial factor having been a multi tiered system whereby one its one for government organisations and foreign companies and one for the people but this has been abolished and with the devaluation of the Dinar for foreign trade on 1 January 2002 to 21.30 Dinar per US dollar; the previous official rate was 0.63 Dinar per US dollar (Dec 2001). 

Barriers to Entry: –

There are various factors as to why a company may not want to make a FDI or possibly why a company cannot make investment, these are known as the barriers to entry, barriers to entry can come from various aspects competition represents one of the legal barriers the other being economic barriers. The case brought against WorldCom-Sprint, the FTC charged that the merger would have increased concentration in long-distance telecommunications and created "barriers to entry" that would have excluded competitors (D.T.Armentano Barriers to entry April 2004).