Why Do Firms Invest Overseas?

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Companies have an incentive to invest overseas.
Companies have an incentive to invest overseas. (Image: military international court image by araraadt from <a href='http://www.fotolia.com'>Fotolia.com</a>)

During the last few decades the world has experienced a growth in multinational corporations and international investments have increased exponentially. The emergence of the global organization structure has caused a convergence between many economies, resulting in similar products to be available all across the globe. Firms today continue to show enthusiasm for investing overseas and expanding their outreach to global markets.

Developed Markets

Developed markets saturate over time, but companies still want to maintain growth. The only way to continue expanding operations in such a situation is to expand into other markets that are not yet saturated. Also, certain saturated markets may welcome variety from other developed economies and companies attempt to invest in those markets to capture some of the market share.

Benefits of Global Diversification

Companies invest overseas to decrease exposure to one market. This is a popular technique as it results in international diversification and entails benefits for the companies. For example, if one economy is undergoing recession while another economy in a completely different region is experiencing a boom, a company that operates in both countries will experience less volatility overall and will be less prone to business cycles.

Cost Efficiency

A large number of organizations have invested huge sums overseas in markets that include China, India, Tanzania and Brazil to benefit from lower costs of production in these economies. These cost efficiencies are a result of the availability of cheap labor in the developing world. Companies with labor intensive production processes have a larger incentive to invest overseas and thus benefit from these cost efficiencies.

Transportation Costs

Many global organizations sell a large portion of their products to the developing world. It is more efficient for these companies to produce in the countries where they sell these products. This is the primary reason for products that are difficult to ship or that have a high transportation cost. The best alternative is to manufacture in the countries where these companies sell their products.

Quotas and Tariffs

A number of countries impose import quotas and high tariff rates on the importers. Import quotas allow for a limited amount of the product to reach the market and restrict the supply of the product. As an alternative these companies often choose to build their production units inside the country itself to avoid the import restrictions. Similarly, the tariffs are taxes on imports that a government may impose to raise revenue or to discourage imports. Companies again have the alternative to invest directly in these countries to avoid tariffs.

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References

  • "International Finance"; Maurice Levi; 2005
  • "Fundamentals of financial management"; Eugene Brigham and Joel Houston; 2008
  • "The Global Investor Book of Investing Rules"; Philip Jenks and Stephen Eckett; 2002
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