why do firms invest abroad?
Answers
Hey friend,
Firms invest on other companies abroad to help build their strategic assets, such as technology.
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Companies choose to invest in overseas markets for a variety of reasons, often there is only one reason for expanding their operations within their home. Economist John Dunn has recognized four crucial reasons for corporate foreign investment (Global Capitalism, FDI and Competitiveness, 2002):
Market demand: The firm can go abroad to find new buyers for their goods and services. A company's top executives or owners may realize that their product is unique or better for competing in foreign markets and attempts to take advantage of this opportunity. Extra inspiration for market demand is when producers have saturated sales in their home market, or when they believe that investment abroad will bring more returns than the additional investment at home. It is often in the case of high technology items. As an analyst noted, "The minimum size of the market needed to support technical development in some industries is now larger than the largest national market" (Sutterland 1998).
Asking the resource: Just keep in mind, a company can get cheaper to sell its product in a foreign subsidiary - for the purpose of selling it at home or overseas markets. Foreign facility may be able to gain better or less expensive access to inputs (home, labor, capital, and natural resources) compared to home.
Strategic Property Demand: Firms may have to invest in other companies abroad to help with strategic assets like distribution networks or new technologies. This may include the establishment of partnership with other existing foreign firms, who specialize in some aspects of production.
Demand for efficiency: Multinational companies can also seek to reorganize their overseas holdings in response to macroeconomic changes. For example, to facilitate reducing tariff rates within the group, the creation of a new free trade agreement between a group of countries can suddenly provide more convenience in one of those countries. Fluctuations in exchange rates can also change the profit calculation of a firm, allowing the firm to move allocation of their resources.