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

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

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

4. 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

5. 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

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

7. Summary of Motives for Direct Foreign Investment

8. 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

9. 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

10. Risk-Return Analysis of International Projects
13.3

11. Risk-Return Advantage of a Diversified MNC
13.4

12. 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

13. 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

14. 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