Final answer:
The last step of the internalization process, direct foreign investment, involves a significant purchase of a company and the assumption of managerial responsibility. This form of investment is long-term and has a complex exit strategy compared to portfolio investments. Currency exchange rates impact the level of foreign investment, with a weaker domestic currency potentially decreasing it, and a stronger domestic currency attracting more foreign investment.
Step-by-step explanation:
In the context of international business, the last step of the internalization process involves direct foreign investment, where an investor purchases a significant portion of a company, often more than ten percent, and typically assumes some managerial responsibility. This tends to indicate a long-term commitment to the foreign enterprise, as opposed to portfolio investment, which is generally more short-term and involves less ownership. Direct foreign investment is characterized by a slower withdrawal process compared to portfolio investments, as the acts of buying or selling a company are much more complex and time-consuming.
For example, a U.S. firm looking to acquire a business that manufactures automobile parts in the United Kingdom will find that the planning and execution of such a transaction could take weeks or even months. This long-term focus of foreign direct investment is aligned with a strategic intent and a greater degree of influence over the operations of the acquired company.
Further, fluctuations in currency exchange rates affect the attractiveness of foreign investments. A weaker domestic currency increases the cost of investing abroad, which can lead to a reduction in the amount of outflow for direct investment. Conversely, for foreign investors, a stronger domestic currency can enhance the appeal of investing in the domestic market, potentially leading to an increase in foreign investment inflows.