Advantages after Direct Investment
Advantages after Direct Investment
In order to support large-scale expenditures (such as expenditures for R&D) that are necessary to maintain a domestic competitive viability, companies frequently must sell on a global basis. To do this, they often must establish direct investments abroad. The advantage accruing to more internationally oriented firms by spreading out some of the costs of product differentiation, R&D, and advertising is apparent in a comparison of their profitability with that of other firms. Among industry groups and groups of similar size that spent comparable amounts on advertising and R&D and had similar capital
intensity, the more internationally oriented firms in almost every case earned more than the other firms.38
Economies in different countries are in different stages of the business cycle at different times. Companies that operate in these different economies are known to be able to reduce fluctuations in year-to-year sales and earnings more than firms operating only in a domestic environment,39 thereby effectively reducing their operating risks.
LOOKING TO THE FUTURE In the near future, as in the recent past, direct investment should
continue to grow more rapidly than trade or gross national prod-| ucts. The reasons for this growth should remain the same as those described in the chapter, but resource-seeking investments might grow more rapidly than market-seeking investments. The reasons are that trade restrictions on products continue to be reduced, thus making the use of least-cost production facilities more practical, and companies have more experience in manufacturing abroad and thus perceive less risk in integrating global production.
FDI in services may also grow in relative importance because of the difficulty of removing protectionist barriers on service trade, because service providers (such as investment bankers, advertising agencies, and insurance firms) need to react quickly to the overseas needs of their clients, and because service firms need to provide a full geographic range of activities to clients who are global.
The triad areas of Western Europe, North America, and Japan should continue to be the major sources and recipients of direct investment because of the wealth of the companies based there and the outlook for economic growth within these regions. The special trading relations being developed between Canada and the United States and among the members of the European Community should further stimulate this growth. The former Eastern bloc of nations should get much more attention now that regulatory changes permit some foreign ownership for the first time in the post-World War II era and as potential investors become more optimistic about risk and opportunities there. Among LDCs, regulatory changes should also be a factor. Such countries as Argentina, Brazil, and Mexico are privatizing many state companies and are allowing levels of foreign investment that have until very recently been prohibited. These moves should stimulate their receipt of FDI as well.
In order to support large-scale expenditures (such as expenditures for R&D) that are necessary to maintain a domestic competitive viability, companies frequently must sell on a global basis. To do this, they often must establish direct investments abroad. The advantage accruing to more internationally oriented firms by spreading out some of the costs of product differentiation, R&D, and advertising is apparent in a comparison of their profitability with that of other firms. Among industry groups and groups of similar size that spent comparable amounts on advertising and R&D and had similar capital
intensity, the more internationally oriented firms in almost every case earned more than the other firms.38
Economies in different countries are in different stages of the business cycle at different times. Companies that operate in these different economies are known to be able to reduce fluctuations in year-to-year sales and earnings more than firms operating only in a domestic environment,39 thereby effectively reducing their operating risks.
LOOKING TO THE FUTURE In the near future, as in the recent past, direct investment should
continue to grow more rapidly than trade or gross national prod-| ucts. The reasons for this growth should remain the same as those described in the chapter, but resource-seeking investments might grow more rapidly than market-seeking investments. The reasons are that trade restrictions on products continue to be reduced, thus making the use of least-cost production facilities more practical, and companies have more experience in manufacturing abroad and thus perceive less risk in integrating global production.
FDI in services may also grow in relative importance because of the difficulty of removing protectionist barriers on service trade, because service providers (such as investment bankers, advertising agencies, and insurance firms) need to react quickly to the overseas needs of their clients, and because service firms need to provide a full geographic range of activities to clients who are global.
The triad areas of Western Europe, North America, and Japan should continue to be the major sources and recipients of direct investment because of the wealth of the companies based there and the outlook for economic growth within these regions. The special trading relations being developed between Canada and the United States and among the members of the European Community should further stimulate this growth. The former Eastern bloc of nations should get much more attention now that regulatory changes permit some foreign ownership for the first time in the post-World War II era and as potential investors become more optimistic about risk and opportunities there. Among LDCs, regulatory changes should also be a factor. Such countries as Argentina, Brazil, and Mexico are privatizing many state companies and are allowing levels of foreign investment that have until very recently been prohibited. These moves should stimulate their receipt of FDI as well.
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