Risk diversification theory of FDI suggests that firms undertake FDI activities to diversify the risks by operating in multiple markets.
The risks of foreign investments are known as transportation costs, trade barriers (tariffs and quotas), political and economic risks. Given these risks, the theory of diversification through FDI reduces the total risk of international investments.
Diversification allows foreign firms to enjoy product and factor market diversification and it further minimizes variances in profits.
Also Read: Internationalization Theories/Models.
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