Reasons for Direct Foreign Investment

When evaluating a potential direct investment in a foreign market, a company must evaluate a complex set of key factors before making its decision.  For example, one of the main reasons that US companies invest in foreign operations is to realize cost savings for production, transportation or administrative activities; however, a particular project should be carefully analyzed in advance to see whether the projected cost savings is realistic.  The election to launch a new foreign branch or subsidiary may also be driven by sales goals and objectives such as the need to follow a key domestic customer, diversify, build a new customer base or respond to competitive pressures.  Finally, direct foreign investment may be required in order to avoid or minimize the impact of trade restrictions in foreign countries or a company may be drawn to invest in a particular foreign market by incentives offered by local governments.   This month's report explores each of these reasons for considering direct foreign activities and also analyzes the impact of financial, political and economic conditions in the target market.

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