Economics - Essay Example

e the micro theories and the macro theories, micro theories include the power theory, the ownership advantage theory, location advantage and internalisation advantage. This theory explains why a firm will invest abroad, it is a classical theory developed by the work of Adam smith who stated that as firms grow and profits increase foreign direct investment enable the firm to shift surplus capital by investing elsewhere, the firm will also invest abroad due to increased competition in the home country and therefore decides to invest abroad where there is low competition.

1 The work of Karl Marx also explains the existence of foreign direct investment, according to Marx as the rate of consumption in the home country decreases the profits of the firm declines and for this reason the firm will invest abroad for the reason of increasing consumption levels and profit levels.2 Therefore a firm according to this macro economic theory will invest abroad due to their abundance in capital and they will invest in the country which uses labour intensive means of production in order to increase profits as the cost of production is lower, the firm will find it more advantageous to invest in a country where labour cost are lower as the cost of labour in the home country is higher than the country abroad.

According to this classical theory therefore a Firm will locate in other countries for the reason of expanding their market size, avoiding the tariffs and trade barriers between countries and the access to cheap and skilled labour. According to this theory firms will experience economies of scale that arises by investing overseas, the firm which invest in other countries will experience economies of scale by investing in other countries which will be experienced due to the intangible assets that they possess, such intangible resources include skilled management and organisational know how which aid in experiencing the economies of scale when they invest abroad. The firms