Which of the following is true for firms considering foreign direct investment?

• A. Foreign direct investment is only possible for multinational corporations with more than 10,000 employees.
• B. Firms considering foreign direct investment do not face any risks related to exchange rates.
• C. Firms engage in foreign direct investment to gain direct control over production and operations in another country.
• D. Foreign direct investment always guarantees higher profits than exporting goods.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of Foreign Direct Investment (FDI). FDI occurs when a firm invests directly in facilities to produce or market a product in a foreign country, gaining control over operations there.
2. Step 2: Evaluate the statement about FDI being only possible for multinational corporations with more than 10,000 employees. Consider that FDI is not limited by firm size but by the firm's strategic goals and resources.
3. Step 3: Analyze the claim that firms do not face exchange rate risks in FDI. Recognize that investing abroad exposes firms to currency fluctuations, which can affect costs and revenues.
4. Step 4: Consider the statement that FDI always guarantees higher profits than exporting. Understand that while FDI can offer advantages, it also involves risks and costs that may not always lead to higher profits compared to exporting.
5. Step 5: Conclude that the true statement is that firms engage in FDI to gain direct control over production and operations in another country, which is a primary motivation for such investments.