What is a key reason for establishing FDI close to markets?

Establishing foreign direct investment (FDI) close to markets is primarily motivated by the desire to minimize transportation costs and mitigate the risks associated with protectionist measures. When companies invest in facilities or operations in proximity to their target markets, they significantly reduce the costs associated with logistics, shipping, and distribution, which can be substantial, particularly for bulky or perishable goods.

In addition, being near the market allows firms to respond more swiftly to changing consumer demands and market conditions, enhancing their competitiveness and operational efficiency. Protectionism, which refers to government policies that restrict international trade to protect local businesses, can also heavily influence the decision to invest locally. By establishing operations in the target country, companies can better navigate these regulatory environments and avoid tariffs or trade barriers that could impact their profitability.

Other options, such as higher profit margins, increased competition, and reduced advertising expenses, may influence investment decisions in certain contexts, but they do not encapsulate the fundamental logistical and strategic efficiencies gained from having a local presence in proximity to the market.