Foreign Direct Investment Term Paper Example | Topics and Well Written Essays - 1000 words

Foreign Direct Investment - Term Paper Example The power 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. 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.   Therefore a firm according to this macroeconomic theory will invest abroad due to their abundance in capital and they will invest in the country which uses labor-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 labor cost is lower as the cost of labor in the home country is higher than the country abroad.  Ã‚   investing overseas, the firm which invests 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 organizational know-how which aid in experiencing the economies of scale when they invest abroad. The firms, therefore, will experience economies of scale in the market abroad due to their possession of technological know-how whereby they will be in a position to reduce their cost of production.   Location advantage theory: This theory explains the product cycle which involves the production of new products using new technology and this products are first introduced to the home market, by investing abroad therefore the firm will be in a position to easily shift the production of these new products due to the nearness to the market abroad and also low cost of factors of production.