Lecture International financial management - Chapter 13 describe common motives for initiating foreign direct investment and illustrate the benefits of international diversification. Inviting you refer. | 1 1 2 Part 4 Long-Term Asset and Liability Management 3 13 Direct Foreign Investment Describe common motives for initiating foreign direct investment Illustrate the benefits of international diversification 3 Chapter Objectives 3 4 Motives for Direct Foreign Investment: Revenue Related Motives Attract new sources of demand MNCs commonly pursue DFI in countries experiencing economic growth so that they can benefit from the increased demand for products and services there. Enter profitable markets When similar industries are generating very high earnings in a particular country, an MNC may decide to sell its own products in those markets. Exploit monopolistic advantages Firms possessing resources or skills not available to competing firms may attempt to exploit it internationally. React to trade restrictions MNCs may pursue DFI to circumvent trade barriers. Diversity Internationally By diversifying sales (and possibly even production) internationally, a firm can make itsnet cash flows less volatile. 5 Motives for Direct Foreign Investment: Cost Related Motives Fully benefit from economies of scale Lower average cost per unit resulting from increased production. Use foreign factors of production Labor and land costs can vary dramatically among countries. Use foreign raw materials Develop the product in the country where the raw materials are located. Use foreign technology React to exchange rate movements When a firm perceives that a foreign currency is undervalued, the firm may consider DFI in that country, as the initial outlay should be relatively low. 6 Benefits of DFI Though disadvantages of DFI may exist, MNCs can compare benefits of DFI among countries and use DFI to achieve those benefits (Exhibit ). MNCs measure the benefits of DFI by following the steps in Exhibit MNCs apply a multinational capital budgeting process to compare the benefits and costs of international projects. This capital budgeting analysis commonly involves international . | 1 1 2 Part 4 Long-Term Asset and Liability Management 3 13 Direct Foreign Investment Describe common motives for initiating foreign direct investment Illustrate the benefits of international diversification 3 Chapter Objectives 3 4 Motives for Direct Foreign Investment: Revenue Related Motives Attract new sources of demand MNCs commonly pursue DFI in countries experiencing economic growth so that they can benefit from the increased demand for products and services there. Enter profitable markets When similar industries are generating very high earnings in a particular country, an MNC may decide to sell its own products in those markets. Exploit monopolistic advantages Firms possessing resources or skills not available to competing firms may attempt to exploit it internationally. React to trade restrictions MNCs may pursue DFI to circumvent trade barriers. Diversity Internationally By diversifying sales (and possibly even production) internationally, a firm can make itsnet cash flows
