True or false: A disadvantage of direct investment is that profits must be shared with other firms

True or false: A disadvantage of direct investment is that profits must be shared with other firms

• A. True
• B. False
• C. Not sure
• D. It depends

Answer: (B)

Direct investment means owning and controlling a foreign operation, such as a wholly owned subsidiary or a full acquisition. With that level of ownership, the investing firm keeps the profits generated by the operation and does not have to share them with another firm. Sharing profits is associated with partnerships like joint ventures, where ownership and returns are split with a local partner. So the idea that profits must be shared is not a disadvantage of direct investment; its main drawbacks are the large capital outlay, higher risk, and greater management complexity. If the venture were a joint venture rather than a direct investment, profits would indeed be shared.

Direct investment means owning and controlling a foreign operation, such as a wholly owned subsidiary or a full acquisition. With that level of ownership, the investing firm keeps the profits generated by the operation and does not have to share them with another firm. Sharing profits is associated with partnerships like joint ventures, where ownership and returns are split with a local partner. So the idea that profits must be shared is not a disadvantage of direct investment; its main drawbacks are the large capital outlay, higher risk, and greater management complexity. If the venture were a joint venture rather than a direct investment, profits would indeed be shared.