Final answer:
Internalization theory explains why firms prefer foreign direct investment over portfolio investment as a strategy to enter a foreign market due to long-run focus, managerial responsibility, and the time-consuming nature of FDI.
Step-by-step explanation:
Internalization theory is used to explain why a firm would prefer foreign direct investment over portfolio investment as a strategy to enter a foreign market.
Foreign direct investment (FDI) refers to purchasing a firm (at least ten percent) in another country or starting up a new enterprise in a foreign country, while portfolio investment involves purchasing less than ten percent of a company.
One reason why firms may prefer FDI is that it allows them to have a more long-run focus and assume managerial responsibility, while portfolio investment is often made with a short term focus. Additionally, FDI is typically more difficult and time-consuming to carry out than portfolio investment, which can be withdrawn from a country more quickly. Internalization theory is used to explain why a firm would prefer foreign direct investment over portfolio investment as a strategy to enter a foreign market.
With foreign direct investment, a firm acquires at least ten percent of another company in a foreign country, which often involves assuming some managerial responsibility. As a result, this type of investment has a more long-term focus, compared to portfolio investments where less than ten percent of a company is bought, often with a short-term focus. With portfolio investments, an investor can withdraw them quickly, but foreign direct investment takes longer to plan and execute, highlighting its commitment to longer-term engagement in the foreign market.