It is interesting to look at how U.S. businesses have managed the internalization of our planet for 40 years. Why? Because it shows that many of them chose to invest abroad in a substantial to grow and thrive. The proof is that between 1982 and 2022, U.S. companies’ direct investments went from $580 billion to $6.4 trillion. How can companies establish themselves in other countries, and why do they make that decision? Here is the explanation.
Ways in Which American Companies Can Establish Themselves Abroad
It was easier for American companies to grow or survive these last four decades if they had not invested abroad. That is because the world went in a completely new direction during that time, where it seemed as if all countries could collaborate to create and share the wealth produced around the world. Now that we went through the closure of frontiers during the pandemic and that a war is raging in Ukraine, dividing the world into two camps, this dynamic will likely change. But as it was still going on, there were many ways for American businesses to establish themselves abroad, and they took advantage of each.
These investments involve a long legal process in which a lot of documentation requires to be exchanged between the parties involved and the authorities of the countries where the investment will be made. These documents must often be certified or legalized to be recognized in a foreign country. Chicago companies use firms that are specialized in apostille services in Illinois for all their certification needs. Once they have everything sorted out, they can focus on the task at hand, which can take the form of direct investment, licensing, franchising or its simplest form, exporting. Another road they may take is to enter a strategic alliance with companies already based in foreign lands. The choice often depends on the company’s goals, resources, and risk tolerance.
Reasons Why Companies Invested Abroad During the Last Four Decades
Foreign direct investment by American companies grew ten times in only forty years. That indicates how important the movement was here in the U.S. and worldwide. The main region where our businesses invested is Europe, as more than 60 % of the $6.4 trillion found its way to our Western world partners. Only four countries were on the list for over half of these investments. But why were these investments made?
In a competitive world, saving money whenever possible is more important than ever to reinvest it inside the business. Companies making a physical investment abroad could reduce their tax burden by taking advantage of the foreign tax credit offered by the U.S. tax code and the lower tax rates in some of these foreign countries. This was often the main reason which led companies to invest abroad.
Access to Foreign Markets
Investing abroad allows American companies to establish a physical presence in these countries. Setting up local operations, such as subsidiaries or joint ventures, helps them better understand local market requirements and enables them to respond to people’s needs more efficiently. By building relationships with local partners and customers, they can tailor their products or services in a way they previously could not. This helps them gain a competitive advantage over competitors with no local presence.
Lower Labor and Manufacturing Costs
When U.S. companies invest abroad, they can lower labor and manufacturing costs. That is because foreign countries often offer lower salaries to their citizens and provide access to cheaper raw materials. This is how U.S. companies can produce goods at a lower cost, which translates into higher profits and lower consumer prices.
Additionally, investing abroad can help American companies overcome trade barriers and restrictions that might be in place. This allows them to access markets that may have been difficult or impossible to penetrate otherwise. All these benefits come together to explain why American companies’ direct investment abroad grew exponentially between 1982 and 2022.