Firms are continually looking for investment options to maximize their return on capital entrusted upon them by the shareholders. Given the sluggish economic growth in the developed markets of the west and the rise of East Asian and South American economies, companies are looking further afield to exploit opportunities in these emerging markets. The trend for moving to distant lands is further supported by the forces of globalization that have led o emergence of a near homogenous consumer culture. Emerging middle classes in these rapidly growing economies promise continued demand for products.

There are two main avenues that companies pursue in their quest to serve the emerging economies. Firms can start from scratch by building brand new facilities in the target markets. This also requires hiring local manpower to man their operations. This can be expensive and time consuming. Besides, many local laws in the target markets put restrictions on the level of ownership that foreigners hold.

To circumvent these restrictions, firms opt to acquire local firms in their target markets. The investing firm takes over a local entity as a going concern. The advantage of such mode of entry is that the investing form can hit the ground running as all the production and marketing infrastructure is intact. However, it is likely that the acquiring firm may fail to synergize operations of the merged entities resulting in a messy operation.

Factors that drive firms to embark on investing in emerging markets: Mercedes Benz green field investment and Volkswagen acquisition

Volkswagen acquired Skoda following the latter’s string of losses. Years of underinvestment in research and development made the company’s production facilities outdated and low quality output. In 1991, VW bought 30% stake in Skoda and invested heavily in research and development and human resource training to boost the product quality. The result was a resurgent Skoda brand that was overwhelmingly accepted by the market.

Mercedes Benz wanted to lunch its products in India. Given the location of its production facilities in high wage countries, importing foreign made products into the Indian market was going to be uncompetitive. Besides, well healed rivals had already made inroads into the market with favorable prices. In 2007, the company acquired 100 acres of land to put up a manufacturing plant in Pune, India. The plant had an annual capacity of more than 5000 units and used local labor and materials save for those that couldn’t be found in the country.

The following are the reasons that drive a company to pursue investment opportunities in foreign countries;

Cutting costs