Foreign direct investment Essay Example | Topics and Well Written Essays - 500 words

Foreign direct investment - Essay Example Foreign direct investment refers to a direct investment into production or business within a country by an entity in another country, either by purchasing a company within a target country, or by broadening operations of a present business within that country. The reasons that may make exporting unfeasible include cheaper producing abroad, reducing transportation costs, lack of domestic capacity such as when demand exceeds the capacity, the need to alter products and services, trade restrictions, and country of origin effects (OECD 57). There are three critical reasons for entities to seek a controlling interest; internalization theory (self-handling of operations), appropriation theory (denying rivals or potential rivals access to resources such as trademarks, capital, patents, and management know-how), and freedom to seek global objectives (participate in global or transnational strategy) (Nicholls 42). Reasons for buying existing operations entail avoiding start-up problems, getti ng an immediate cash flow instead of tying up capital, and gaining easier financing. Overall, the motives for collaborative arrangements entail to spread and reduce costs, specialize within distinct competencies, avoiding or counter competition, learning from other companies (gain knowledge), and securing vertical and/or horizontal linkages. The international motives for undertaking collaborative arrangements encompass aspects such as gaining location-specific assets, diversifying geographically, overcoming governmental constraints, and minimizing exposure in risky environments (Nicholls 44). Companies utilize equity and non-equity arrangements that can range from wholly owned subsidiaries, equity alliances, licensing, franchising, management contracts, turnkey operations, and joint ventures. Foreign direct investment is perceived as a means of enhancing the efficiency with which the world’s scarce resources are employed. Foreign direct investment