This article discusses the motivation behind direct foreign investments and the different types of foreign investment strategies. It explores the reasons why companies choose to invest in foreign markets and the factors that influence their decision-making process.
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1FINANCE Table of Contents Motivation for Direct Foreign Investments................................................................................2 Reference....................................................................................................................................4
2FINANCE Motivation for Direct Foreign Investments Foreign Direct Investment is defined as the investments in the business by the investors from the other country for which the investors of foreign have control over the purchase of company. It is the investment, which is in the form of controlling the ownership of the business in the one country by the company that is based in another country. Hence, it is thus distinguished from the foreign portfolio investments by the notion of the direct control. The firms are limited in the total number of the investment opportunities that is considered at any of the given time (Blomstrom 2014). Foreign investment is generally undertaken by most of the monopolistically competitive companies who does not invest unless they have some advantage of monopoly over the earning higher profits in foreign than what they earn at home. The motives behind the direct foreign investments are seeking the naturalresources,FDIthatseeksefficiencyandmarketseeking.Thedirectforeign investment that is resource driven includes the low cost availability of unskilled labor, quality of the physical infrastructure as well as skilled labor. Moreover, the aim of the direct foreign investment that is market seeking is serving to the domestic markets that refers to the goods that are produced in the country of host and it is sold to the local market (Chen and Pérez Ludeña 2014). Hence, it result this FDI is influenced by the demand of the domestic country such as high income and large market in the country of host. Growth, wage levels and market size become the important features of the countries that host direct foreign investment of market seeking. This direct foreign investment of market seeking is also known as the horizontal direct foreign investments because it usually includes building of the similar plants in the foreign locations for supplying it to the market. Lastly, the direct foreign investment that is efficiency seeking aims for minimizing the cost by using the factors of the productions at the international level. It has the focus on the prospects for lowering the costs by utilizing the structural imperfections which is government induced such as differentials in tax or the
3FINANCE reduction of the risk by the diversifications of the production. The focus of this is on the cost of the resources, productivity of the labor, participations of the frameworks of the regional integration. The direct foreign investments that is efficiency seeking aims at locating in that countries which includes disciplined workforces, skilled workforce as well as good physical and technological infrastructure (Cui, Meyer and Hu 2014). Hence, direct foreign investment is defined as that category of the investment which reflects the aim or objectives of the resident organization in the one economy by obtaining the long lasting interest in the resident enterprise of the another economy. However, this long lasting interest is based on the criteria of long-term relationship that exist between the organization and the investors and the degree to which the management of the organization is influenced (Lyles, Li and Yan 2014).
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4FINANCE Reference Blomstrom, M., 2014.Foreign Investment and Spillovers (Routledge Revivals). Routledge. Chen, T. and Pérez Ludeña, M., 2014. Chinese foreign direct investment in Latin America and the Caribbean. Cui, L., Meyer, K.E. and Hu, H.W., 2014. What drives firms’ intent to seek strategic assets by foreign direct investment? A study of emerging economy firms.Journal of World Business,49(4), pp.488-501. Lyles, M., Li, D. and Yan, H., 2014. Chinese outward foreign direct investment performance: The role of learning.Management and Organization Review,10(3), pp.411-437.