Direct Foreign Investment

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Presentation transcript:

Direct Foreign Investment C H A P T E R 13 Direct Foreign Investment

Chapter Overview A. Motives for Direct Foreign Investment B. Benefits of International Diversification C. Decisions Subsequent to DFI D. Host Government Views of DFI

Chapter 13 Objectives This chapter will: A. Describe common motives for initiating foreign direct investment B. Illustrate the benefits of international diversification

A. Motives for Direct Foreign Investment 1. Revenue-Related Motives a. Attract New Sources of Demand b. Enter Profitable Markets c. Exploit Monopolistic Advantages d. React to Trade Restrictions e. Diversify Internationally

A. Motives for Direct Foreign Investment 2. Cost-Related Motives: Reduce Costs a. Fully Benefit From Economies of Scale b. Use Foreign Factors of Production c. Use Foreign Raw Materials d. Use Foreign Technology e. React to Exchange Rate Movements

A. Motives for Direct Foreign Investment 3. Comparing Benefits of DFI among Countries

Summary of Motives for Direct Foreign Investment

A. Motives for Direct Foreign Investment 4. Comparing Benefits of DFI Over Time Countries the choice of target countries for DFI has changed over time

B. Benefits of International Diversification 1. Diversification Analysis of International Portfolios a. Comparing Portfolios along the Frontier b. Comparing Frontiers Among MNCs 2. Diversification Among Countries

Risk-Return Analysis of International Projects 13.3

Risk-Return Advantage of a Diversified MNC 13.4

C. Decisions Subsequent to DFI 1. Need for frequent review 2. Decision on use of Subsidiary profits by the subsidiary or headquarters 3. Importance of economic conditions in the subsidiary’s country

D. Host Government Views of DFI 1. Incentives to Encourage DFI 2. Barriers to DFI a. Protective b. “Red Tape” Barriers c. Industry Barriers d. Environmental Barriers e. Regulatory Barriers f. Ethical Differences g. Political Instability

D. Host Government Views of DFI 3. Government-Imposed Conditions to Engage in DFI a. Environmental Regulations b. Labor Policy Restrictions c. Requirements to Use Local Parts d. Output and Local Competition Restrictions