ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Investing in Stocks, Bonds, Real Estate, More

THE THEORY OF INTERNATIONAL INVESTMENT

Updated on May 7, 2012

The Theory of International Investment

To understand international investment, its motivation, process, and implications, we return to the basic premise of international trade15. Trade is the production of a good or service in one country and its sale to a buyer in another country. In fact, we specifically note that it is a firm (not a country) and a buyer (not a country) that are the subjects of trade, domestically or internationally. A firm therefore is attempting to access a market and its buyers. The producing firm wants to utilize its competitive advantage for growth and profit.

Although this sounds easy enough, consider any of the following potholes on this smooth freeway to investment success. Any of the following potholes may be avoided by producing within another country:

(1) Sales to some countries are difficult because of tariffs imposed on your product when it is entering that country. If you were producing within the country, your product would no longer be an import.

(2) Your product requires natural resources that are available only in certain areas of the world. It is therefore imperative that you have access to these natural resources. You can buy them from that country and bring them to your production process (import) or simply take the production to them.

(3)Competition is constantly pushing you to improve efficiency and decrease the costs of producing your product. You therefore may wish to produce where it will be cheaper-cheaper capital, cheaper energy, cheaper natural resources, or cheaper labor. Many of these factors are still not mobile, and therefore you will go to them instead of bringing them to you.

There are thousands of reasons why a firm may want to produce in another country and not necessarily the country that is cheapest for production or the country where the final product is sold. And there are many shades of gray between the black and white of exporting or investing directly in the foreign country.

The subject of international investment arises from one basic idea: the mobility of capital. Although many of the traditional trade theories assumed the immobility of the factors of production, it is the movement of capital that has allowed foreign direct investments across the globe. If there is a competitive advantage to gained, capital can get there.

The Foreign Direct Investment Decision

Consider a firm that wants to exploit its competitive advantage by accessing foreign markets as illustrated in the decision-sequence tree of the first choice is whether to exploit the existing competitive advantage in new foreign markets or to concentrate resources in the development of new competitive advantages in the domestic market. Although many to do both as resources will allow, more and more firms are choosing to go international as at least part of their expansion strategies.

Second, should the firm produce at home and export to the foreign markets or produce abroad? Customarily, the firm will choose the path that will allow it to access the resources and markets it needs to exploit its existing competitive advantage. That is the minimum requirement. But it also should consider two additional dimensions of each foreign investment decision:(1)the degree of control over assets, technology, information, and operations, and (2) the magnitude of capital that the firm must risk. Each decision increases the firm's control at the cost of increased capital outlays.

For some reason, possibly one of the potholes described previously, the firm decides to produce abroad. There are, however, many different ways to produce abroad. The distinctions among different kinds of foreign direct investment, licensing agreements to greenfield construction (building a new facility from the ground up) vary by degrees of ownership. The licensing management contract is by far the simplest and cheapest way to produce abroad: another firm is actually doing the production, but with your firm's technology and know-how. The question for most firms is whether the reduced capital investment of simply licensing the product to another manufacturer is worth the risk of loss of control over the product and technology.

The firm that wants direct control over the foreign production process next determines the degree of equity control, to own the firm outright or a joint investment with another firm. Trade-offs with shared ownership continue the debate over control of assets and other sources of the firm's original competitive advantage. Many countries, trying to ensure the continued growth of local firms and investors, may require that foreign firms operate jointly with local firms.

The final decision branch between a ''greenfield investment''--building a firm from the ground up---and the purchase of an existing firm, is often a question of cost. A greenfield investment is usually the most expensive of all foreign investment alternatives. The acquisition of an existing firm is often lower in initial cost but may also contain a number of customizing and adjustment costs that are not apparent at the initial purchase. The purchase of a going concern may also have substantial benefits if the existing business possesses substantial customer and supplier relationships that can be used by the new owner in the pursuit of its own business line.

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      indu kc 6 years ago

      wow..fabulous.very useful.i m ver thankful~!

    • Philipo profile image

      Philipo 6 years ago from Nigeria

      Very educative. Thanks for sharing.

    • profile image

      PenMePretty 6 years ago from Franklin

      Voted useful. Such great information--you must have the patience of Job! Wish I could make a good investment. Thanks for sharing your work.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)