People Innovation Excellence

Eclectic Paradigm in Foreign Direct Investment

Written By: Selly Novela, ST, MM

foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country. Most foreign direct investment is taken by firms and multinational corporations, who hope to benefit from some benefit, there are lower labour costs in other countries (e.g. India), proximity to raw materials rather than transport them around the world, avoid tariff barriers and other non-tariff barriers to trade, reduce transport costs. For example, by producing cars in UK, Nissan has lower transport costs for selling to UK market. And the last benefit/advantage is opportunities for using local knowledge to help tap into domestic markets. For example, by investing in a foreign country and working with  local workers, a multinational can gain a better insight into what works well for local markets.

FDI (Foreign Direct Investment) is a way to expand a business by injecting funds directly to the destination in the wake of expansion of assets and property in the name or brand of the business, an example of a company that does FDI in Indonesia is Nestle, Unilever, etc. The purpose of a company doing FDI is generally to obtain raw materials is easier and cheaper, closer to the target market, obtain cheaper labor. Then, in general, also a company that does FDI is companies from developed countries to developing countries. FDI that has above 10% ownership is usually in the fields of cement, glass, metal, pharmaceuticals, agriculture, etc.

FDI difference with licensing and exporting is FDI requires ownership, location, and Internalization compared to licensing which only took ownership and export that requires ownership and location only.

There are Eclectic Paradigm Checklist as drivers for a company to do direct investment in other countries:

  • Does it large company with a lot of resources or small company with limited resources?
  • Does company has experience in the international market?
  • Does it is in a very good economic situation and wants to expand globally?
  • Do the products able to compete in the potential market? Does it has differentiated products?
  • Do the Market growth objectives have good potency?
  • Does the target location offer high potential market?  (The complexity of trade and political circumstances in target country)
  • Does company face high contractual risk or transaction cost in the target country?​

There are the eclectic paradigm in FDI compare to other strategies:

Eclectic Paradigm Licencing Export FDI
Ownership Yes Yes Yes
Location No No Yes
Internalization No Yes Yes

FDI generally provides the benefits of efficiency and effectiveness, as well as innovation and flexibility for companies that do.

When a development country get a financial crisis (e.g: Indonesia), FDI curve is upward slope and get bigger. For example is Djarum company in Indonesia. By the 1970’s Djarum was one of the largest clove cigarette suppliers in the world, and owners Budi and Bambang Hartono decided to diversify the company. Following the Asian financial crisis in 1998, Djarum was part of a consortium (which included Lippo Group) that bought Bank Central Asia.

The biggest porportion in foreign direct investment is in Manufacture such as Toyota, Nestle, etc. Following by others (e.g: chemical, mining, etc), real estate, and construction (e.g: Adikarya). This is the proportion of foreign direct investment: manufacturing and processing industry (76%), Real Estate (7,4%), construction (6%), others (10%).

Why FDI came to Indonesia? Because labor in Indonesia is easy to getting the permit and state of Indonesia mostly as consumers and target markets that exist in Indonesia. As a concrete example is the company Unilever.

Developing countries receive FDI for their investment flows from developing countries are making increased investment to his country. Various industry FDI is cement, glass, rubber, plastic, textile, forest/plantations such as palm oil, construction (Making highway).

FDI is one contributor to a major investment for the economy of Indonesia. Many countries are interested in doing FDI in Indonesia because of the abundant natural resources, and human resources cost. Sector investment in interest by foreign investors is mining. There was also the tourism, hospitality, reproduction and many more. For foreign investors this is an advantage for them because all of its already available in Indonesia. they need to bring from their home country is a technology and its work culture. Local residents should follow the work culture of his superiors. His example of his boss comes. but on the other hand there are things that make investors “reluctant” to invest in Indonesia, the reason for using government regulations that make it difficult for investors. Her examples like Japan, they prefer to join venture with local entrepreneurs for the benefit of Japanese lazy to deal with the Indonesian government. Because laws in Indonesia itself is still unclear. For example Russian companies who want to enter Indonesia on the basis of the Internet, they are still confused about whether there are government regulations governing Internet-based business.

Published at :
Written By
Selly Novela, ST, MM
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