Internalization theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.

Question

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Internalization theory argues that firms prefer foreign direct investment because it allows them to retain greater control and capture a larger share of the profits compared to licensing. FDI also provides opportunities for greater learning and knowledge transfer between the parent company and subsidiary, which can lead to improvements in efficiency and innovation.

Internalization Theory Seeks to Explain Why Firms Often Prefer Foreign