The decision to invest capital in a project abroad should be based upon considerations of expected return and risk (just like investing locally). However, these factors are different in different countries.

(a) Risk considerations

International diversification is often more effective than domestic diversification in reducing risk in relation to expected return. This is due to differences in economic cycles in different countries.

(b) Return considerations

Domestically, competitive pressures may be such that only a normal rate of return can be earned. A firm may invest abroad so as to produce more efficiently due to existence of cheaper factors of production.

(c) Taxation

Tax laws are different in different countries and therefore a firm may invest abroad to minimize tax payment to the government.