The motives for direct investments abroad are generally the same as earning higher returns, possibly resulting from higher growth rates abroad, more favourable tax treatment or greater availability of infrastructure and diversifying risks. Indeed, it has been found that firms with a strong international orientation, either through exports or through foreign production and/or sales facilities, are more profitable, and have a much smaller variability in profits than purely domestic firms. Although these reasons are sufficient to explain international investments, they leave one basic question unanswered with regard to direct foreign investments. That is, they cannot explain why the residents of a nation do not borrow from other nations and themselves make real investments in their own nation rather than accept direct investments from abroad. After all, the residents of a nation can be expected to be more familiar with local conditions, and thus to be at a competitive advantage with respect to foreign investors. There are several explanations for this. The most important is that many large corporations, usually in monopolistic and oligopolistic markets, often have some unique production knowledge or managerial skill that could easily and profitably be utilized abroad and over which the corporation wants to retain direct control. In such a situation, the firm will make direct investments abroad. This involves horizontal integration or the production at home. This helps serve the foreign market better by adapting to local conditions than through exports.
What advantage do large corporations have in oligopolistic markets?
