Question

Why would a company participate in foreign direct investment? What would they gain from it? Are they any risk or complications and is so, how can the firm avoid such risk? Thank you.

Answer 1

company participate in a foreign direct investment in order to explore opportunities in other countries in order to explore different Markets and expand its existing market so that it can help in managing its business efficiently in order to enhance the profits and grow into a larger company which is more global in nature.

A company participates into foreign direct investment in order to gain from advantage such as-

1. Tax incentives-host country can offer various kinds of tax incentive to the business.

2.lower labour cost in other country can also help in bringing down the cost of production to a substantial amount.

3. Subsidies and preferential tariff weather host country can also offer in bringing down the cost of production.

4. It can helps in market diversification as there would be different products and different consumers.

There are various complications and risk involved with foreign direct investment and they could be related to the loss and rules and regulations with host countries and , they could lead to profit repatriation as well as displacement of the local business.

Companies can use various kinds of strategies such as mergers and acquisitions and going for a joint ventures for starting a subsidiary to mitigate the risk associated with investment into a foreign country.