Why Did Honda Choose the In-production Facilities Rather than Case Study

Why Did Honda Choose the In-production Facilities Rather than Contracting the US Auto Company - Case Study Example The investment in a foreign market is favored by some of the factors that are explained in the theories of Foreign Direct Investment. The following is a discussion that explains why the Honda decided to invest in production facilities. Market imperfections are the connections that exist between exchange rates and foreign direct investment. These imperfections are experienced where the world integrates the capital markets. Thus they are subjected to information limitations. In this situation, there is a domestic currency depreciation that can eventually lead to the acquisition of assets from foreign countries. This leads to international capital flow. In Honda’s case, the decrease in the dollar value leads to the increase in the foreign direct investment (Agmon 3). This chance brought an opportunity for Honda to invest in the US. Since the dollar was weaker to some extent, Honda found it easier for it to invest in the US. This was because the assets were cheap for Honda since it had a different currency. The modern theory of FDI occurs because of the domestic assets worth more under foreign control. Honda was able to manage its plant in the US than its counterpart. It accessed the same capital market with th e US hence was very easy for it to penetrate. Honda took advantage of the dollar when it depreciated and then invested in the United States. It is because, the United States becomes a cheaper place to invest when the dollar decreases in value, and thus, it was easy for Honda to produce in the United States. It is noted that the depreciation of a dollar does not affect the opportunities of the foreigners to invest in the United States. Therefore, it was a good chance for Honda to invest in the United States of America since its opportunity to produce there was not affected by the decrease in the value of the dollar (Asmussen 50). Due to the exchange rates, the United States contributed 75% of the final cost of the Honda car, and the imported parts paid the 25% cost.