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Analyzing the Reasons for Investing Abroad - Essay Example

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Analyzing the Reasons for Investing Abroad Introduction Every company that thinks of investing abroad should thoroughly conduct a cost-benefit analysis. There are a number of factors to take into account at first with regard to the reasons companies must invest abroad, and several broad aspects can be associated with the general degree of risk a specific host country has for a multinational company (MNC) planning to or attempting to invest abroad…
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Analyzing the Reasons for Investing Abroad
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Download file to see previous pages This essay critically analyzes and discusses the reasons why a firm chooses to invest abroad. Investing Abroad Firms decide to invest abroad for various reasons. Even so, companies that choose to invest overseas largely strive to strengthen their global competitiveness. Numerous global companies choose to invest abroad to penetrate bigger overseas markets. In order to sustain growth, a company should boost its sales or profits, which could be unattainable in the local market. In general, according to Cohen (2007), local markets are restricted to a specific growth rate and size and are highly exposed to competition from other local markets with comparable production, marketing, and product capacities. In this setting, investing abroad is a rational decision for a firm planning to penetrate a bigger market. Aside from the profitability of an additional, bigger market, foreign markets usually provide further competitive gains to the company (Ajami & Goddard 2006, 221). Such markets, for instance, may not have organizational capabilities that are comparable with or of similar level as those of a company investing abroad and the level foreign market competition may not be as heavy as competition in local markets (p. 221). At times companies should do business abroad to penetrate global markets because government regulations of host countries mandate that the products of the company be produced locally. These regulations are commonly enforced to heighten the growth of the national economy, employment, and overall domestic production (Carbaugh 2010, 12). Hence, the firm that plans to penetrate a foreign market has to spend for foreign facilities that are supervised by local managers, in domestic subsidiaries, or by means of several other mechanisms. A company penetrating a foreign market may prefer to do business there if it realizes that it is more cost-effective to produce products locally, instead of producing them at home and selling them abroad. Production economies may take place via other dynamics if the local market is huge and the demand is sustainable to give good reason for investment in the facility and tools required to establish a production system. For instance, the marketing and delivery costs could be cheaper than those of processes at home, the sources of needed raw materials could be nearer to the facility abroad, and the labor costs could be cheaper abroad (Frishberg 2010, 139). Another major aspect is the company’s location. A facility located overseas could also be a lot more productive for a developing market. Generally, companies do business in direct competition with other global and local companies. This form of competition is especially strong in markets where only a small number of major companies dominate. In this setting, the strategies of a particular company are swiftly imitated and rivaled by the others. As a result, if a company invests overseas, its rivals carry out the same tactic (Ajami & Goddard 2006, 222). One apparent reason for investing overseas is to be on a par with the established company in new markets and total sales/profit. Another reason is the necessity of rivaling competitors’ overseas tactic; otherwise, the competition may gain ...Download file to see next pagesRead More
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