Previous

Part - VI

3.5 Transaction Cost Associated With a Mode

An MNC that wants to enter an emerging economy through the subsidiary route can either chose a greenfield project or acquire an existing firm in the host economy. If a MNC opts for a Greenfield entry, it has to incur the cost of putting together the resources that are required to build a company and the business networks that are required to enable this company to function profitably. On the other hand, if the MNC opts for acquisition of an existing company, it has to incur the cost of adapting the company's production process, organizational structure, management style and business networks to suit its own requirements. The eventual choice between a Greenfield entry and an acquisition would be determined by the relative (transactions) costs associated with the two modes of entry.

MNCs prefer to enter into a JV only when the agency cost associated with sharing a proprietary technology with a local partner, is less than the benefits that it can accrue from such a relationship.

3.6 Privatization in Host Country

Acquisitions have been dominant in the countries where the government has done extensive privatization. Due to the privatization of state owned enterprises in countries of Latin America, the entry of FDI in these countries through mergers and acquisitions grew much more rapidly than investment in new assets and rose to 60% of total FDI in 2000.

In India entry through acquisitions has been less because of the government restrictions on foreign equity holding in the privatized companies. In case of private sector the entry through acquisitions has been less due to the lack of availability of acquirable companies, stringent takeover code and high promoter holdings.

Next

* Contributed by: -
Abhishek Gupta & Anurag Ghuwalewala,
PGP-2, Batch 2003-2005,
IIM Bangalore.