Foreign direct investment typically occurs when Select one: a. The earnings of the parent company are invested in plant expansion overseas b. The parent company transfers jobs overseas c. The parent company closes its foreign production plants d. The parent company purchases bonds of foreign governments
The correct answer and explanation is:
The correct answer is a. The earnings of the parent company are invested in plant expansion overseas.
Foreign direct investment (FDI) refers to a situation where a company or individual makes an investment in a business located in another country. This often involves either acquiring a significant portion of a foreign company or setting up new operations such as a subsidiary or a branch in the foreign country.
FDI is typically motivated by the potential for market growth, access to cheaper resources or labor, or an effort to diversify risk across geographic regions. In option a, the parent company is using its own earnings to expand its operations in a foreign country. This is the essence of FDI since the company is directly investing in the foreign market by building or expanding its plant or facility. This expansion is often aimed at increasing production, gaining market share, or reducing costs in a foreign market.
Option b refers to outsourcing jobs, which involves shifting jobs to foreign countries without necessarily making an investment in the foreign business. While outsourcing may involve foreign countries, it is not classified as FDI, since it does not include establishing a direct ownership stake in the foreign operation.
Option c suggests closing foreign production plants, which is the opposite of what FDI typically entails. FDI is about expansion, not contraction.
Option d refers to purchasing bonds of foreign governments, which is a financial investment but does not involve direct investment in the operations of a foreign business. This is different from FDI, where the focus is on the direct control of operations and assets in a foreign country.
Therefore, the correct and most fitting answer is a, where the parent company uses its earnings to establish or expand a production plant in a foreign country.