Why do firms invest abroad, and what the positive and negative consequences can be for home and host countries? | Homework.Study.com (2024)

FAQs

Why do firms invest abroad? ›

i) Resource seeking: the main motive of the firm is the acquisition of particular resources not available at home (natural resources or raw materials) or available at a higher cost (unskilled cheap labour); ii) Market seeking: firms invest abroad to profit from foreign markets.

These benefits can lead to increased profitability and economic development for the host country. However, FDI also has drawbacks, such as the potential for exploitation of cheap labour and resources and the risk of cultural clashes and political instability.

Offshore Investing: An Overview

Depending on your situation, offshore investing may offer you many advantages including tax benefits, asset protection, and privacy. Disadvantages include increasing regulatory scrutiny on a global scale and high costs associated with offshore accounts.

FDI can also promote competition in the domestic input market. Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country. Profits generated by FDI contribute to corporate tax revenues in the host country.

Advantages for the company investing in a foreign market include access to the market, access to resources, and reduction in the cost of production. Disadvantages for the company include an unstable and unpredictable foreign economy, unstable political systems, and underdeveloped legal systems.

the form of direct investments in the reporting economy from foreign investors and to external economies by domestic investors. Negative values of FDI net inflows for a particular year show that the value of disinvestment by foreign investors was more than the value of capital newly invested in the reporting economy.

Investing internationally provides diversification and potential for growth, especially in emerging markets, but it comes with a set of risks. Among them, the main ones are the higher costs, the changes and fluctuations in currency exchange rates, and the different levels of liquidity in markets outside the U.S.

What are advantages and disadvantages of going abroad? ›

By investing abroad, you reduce the component of 'country risk' in your investment portfolio. In other words, if the Indian economy slows down, which may affect your domestic investments, your investments abroad may appreciate as a result of high economic growth in the foreign country.

Foreign investment is also seen as an important part of building ties between different countries. It boosts international trade and makes it easier for the world to share its resources, which, in theory, should benefit everyone.

A negative nexus between FDI and environmental quality is considered because industrialized countries relocate their polluting factories and set up offices in developing countries due to their weak environmental regulations, which result in environmental degradation in the host developing countries.

FDI enhance economic growth by ensuring improvement of various kinds of capitals, and research and development (R&D). Through means of technological transfer and its repercussions in the host nation, MNCs can boost industrial production, improve human capital and enhance cooperation on R&D (Ikiara, 2003).

This type of investment is called an export platform because it helps firms move beyond trade barriers like tariffs and get physically closer to their target market, thus reducing logistics and transportation costs. This can also happen in the service sector.

Two of the chief reasons why people invest in international investments and investments with international exposure are: Diversification. International investing may help U.S. investors to spread their investment risk among foreign companies and markets in addition to U.S. companies and markets. Growth.

Foreign investment is also seen as an important part of building ties between different countries. It boosts international trade and makes it easier for the world to share its resources, which, in theory, should benefit everyone.

Some of the most common reasons behind a move to internationalisation and expansion into foreign markets include: extending the life cycle of a product or technology. reducing business costs by outsourcing larger-scale production at lower costs, for example in developing countries (driving economies of scale)