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1、Part IV Long-Term Asset and Liability Management,Direct Foreign Investment,13,Chapter,South-Western/Thomson Learning 2003,13 Direct Foreign Investment Chapter Objectives,To describe common motives for initiating direct foreign investment (DFI); and To illustrate the benefits of international diversi
2、fication.,Motives for DFI,Motives for DFI,Exploit monopolistic advantages, especially for firms that possess resources or skills not available to competing firms. React to trade restrictions.,Revenue-Related Motives,Enter profitable markets.,Cost-Related Motives Fully benefit from economies of scale
3、, especially for firms that utilize much machinery. Use cheaper foreign factors of production. Use foreign raw materials, especially if the MNC plans to sell the finished product back to the consumers in that country.,Motives for DFI,Motives for DFI,React to exchange rate movements, such as when the
4、 foreign currency appears to be undervalued. DFI can also help reduce the MNCs exposure to exchange rate fluctuations. Diversify sales/production internationally.,Cost-Related Motives,Use foreign technology.,The optimal method for a firm to penetrate a foreign market is partially dependent on the ch
5、aracteristics of the market. For example, if the consumers are used to buying domestic products, then licensing arrangements or joint ventures may be more appropriate.,Motives for DFI,Before investing in a foreign country, the potential benefits must be weighed against the costs and risks. As condit
6、ions change over time, some countries may become more attractive targets for DFI, while other countries become less attractive.,Motives for DFI,Change in Distribution of DFI,By U.S. Firms Over Time,Which countries should you invest in?,Online Application,Consult the Country Commercial Guides prepare
7、d by embassy staff at http:/www.usatrade.gov/website/ccg.nsf/ccghomepage?openform.,Visit the Library of Congress at lcweb2.loc.gov/frd/cs/cshome.html.,Refer to the CIAs World Factbook at http:/www.odci.gov/.,Consult http:/ and http:/ Visit the Yahoo! International Finance Center at http:/ Applicatio
8、n,Which countries should you invest in?,Check out http:/ciber.bus.msu.edu.,Benefits of International Diversification,The key to international diversification is to select foreign projects whose performance levels are not highly correlated over time.,Diversification Benefits for Merrimack Co.,Merrima
9、ck Co. is a U.S. firm that is considering the location of a new investment project.,In terms of return, neither new project has an advantage. With regard to risk, the new project is expected to exhibit slightly less variability in returns if located in the U.S.,Diversification Benefits for Merrimack
10、 Co.,Suppose that the project constitutes 30% of Merrimacks total funds, and that the standard deviation of Merrimacks return on existing U.S. business is .10. If the new project is located in the U.S., the portfolio variance for the overall firm,Diversification Benefits for Merrimack Co.,If the new
11、 project is located in the U.K., the portfolio variance for the overall firm,Diversification Benefits for Merrimack Co.,Thus, as a whole, Merrimack will generate more stable returns if the new project is located in the U.K.,An MNC may not be insulated from a global crisis, since many countries will
12、be adversely affected. However, as can be seen from the 1997-98 Asian crisis, an MNC that had diversified among the Asian countries might have fared better than if it had focused on one country. Even better would be diversification among the continents.,Benefits of International Diversification,Real
13、 Growth in GDP,Annual % D in GDP (constant prices),For Selected Asian Economies,Real Growth in GDP,Annual % D in GDP (constant prices),For Selected Non-Asian Economies,As more projects are added to a portfolio, the portfolio variance should decrease on average, up to a certain point. However, the de
14、gree of risk reduction is greater for a global portfolio than for a domestic portfolio, due to the lower correlations among the returns of projects implemented in different economies.,Benefits of International Diversification,Benefits of International Diversification,An MNC with projects positioned
15、around the world is concerned about the risk and return characteristics of its projects.,Benefits of International Diversification,Project portfolios along the efficient frontier exhibit minimum risk for a given expected return. Of these efficient portfolios, an MNC may choose one that corresponds t
16、o its willingness to accept risk.,Benefits of International Diversification,The frontiers of efficient project portfolios of some MNCs are more desirable than the frontiers of other MNCs.,Benefits of International Diversification,Decisions Subsequent to DFI,Some periodic decisions are necessary. Should further expansion take place? Should the earnings be remitted to the parent, or used by the subsidiary?,Host Gov
