DIRECT INVESTMENT MOTIVATION
DIRECT INVESTMENT MOTIVATION
The reasons that firms engage in direct investment ownership are no different from the reasons for their pursuit of international trade. They are:
1. to expand markets by selling abroad, and
2. to acquire foreign resources (e.g., raw materials, production efficiency, knowledge).
When governments are involved in direct investment, an additional motive may be to attain some political advantage. These three objectives in turn may be pursued by any one of three forms of foreign involvement. One of these, the sale of services (e.g., licensing or management contracts), often is avoided either for fear of loss of control of key competitive assets or because of greater economies from self-ownership of production. The following discussion will concentrate on the remaining two forms: trade and direct investment. We will emphasize why direct investment is chosen in spite of the fact that most firms consider it riskier to operate a facility abroad than at home.
The reasons that firms engage in direct investment ownership are no different from the reasons for their pursuit of international trade. They are:
1. to expand markets by selling abroad, and
2. to acquire foreign resources (e.g., raw materials, production efficiency, knowledge).
When governments are involved in direct investment, an additional motive may be to attain some political advantage. These three objectives in turn may be pursued by any one of three forms of foreign involvement. One of these, the sale of services (e.g., licensing or management contracts), often is avoided either for fear of loss of control of key competitive assets or because of greater economies from self-ownership of production. The following discussion will concentrate on the remaining two forms: trade and direct investment. We will emphasize why direct investment is chosen in spite of the fact that most firms consider it riskier to operate a facility abroad than at home.
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