Question

Direct investment occurs when a domestic firm ______.

A. creates a partnership with a foreign entity to sell its products.
B. chooses to create and own a foreign subsidiary or division.
C. gets government assistance to set up businesses in foreign locations.
D. gets government assistance to encourage growth despite foreign competition.

Answer 1

Direct investment by a domestic firm refers to creating and owning a foreign subsidiary, known as foreign direct investment (FDI). This involves long-term engagement and managerial responsibilities, distinguished from short-term portfolio investments.

Step-by-step explanation:

Direct investment occurs when a domestic firm chooses to create and own a foreign subsidiary or division. This is known as foreign direct investment (FDI), which involves purchasing a significant interest in a firm in another country or starting up a new enterprise abroad. Unlike portfolio investment, FDI usually entails more than ten percent ownership of a company, often comes with managerial responsibilities, and has a long-term focus.

For instance, the acquisition of Anheuser-Busch by the Belgian company InBev is an example of FDI. Rather than short-term portfolio investments, which can be quickly liquidated, foreign direct investments take time to plan and execute, often weeks or months.