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Direct Foreign Investment

13. Direct Foreign Investment. Chapter Objectives This chapter will: A. Describe common motives for initiating foreign direct investment B. Illustrate the benefits of international diversification. 2. Motives for Direct Foreign Investment: Revenue Related Motives.

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Direct Foreign Investment

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  1. 13 Direct Foreign Investment Chapter Objectives This chapter will: A. Describe common motives for initiating foreign direct investment B. Illustrate the benefits of international diversification 2

  2. Motives for Direct Foreign Investment: Revenue Related Motives • Attract new sources of demand • Enter profitable markets • Exploit monopolistic advantages • React to trade restrictions • Diversity Internationally

  3. Motives for Direct Foreign Investment:Cost Related Motives • Fully benefit from economies of scale • Use foreign factors of production • Use foreign raw materials • Use foreign technology • React to exchange rate movements

  4. Motives for Direct Foreign Investment:Other • Cost-related motives in the expanded European Union • Selfish managerial motives for DFI • Comparing Benefits of DFI: • Among countries: based on expectations of capitalizing on one or more of the potential benefits. • Over time: choice of target countries for DFI has changed over time.

  5. Exhibit 13.1 Summary of Motives for Direct Foreign Investment 6

  6. Benefits of International Diversification • Select foreign projects whose performance levels are not highly correlated over time. • Diversification analysis of international projects • Diversification among countries • Comparing portfolios along the frontier of efficient projects • Comparing frontiers among MNCs

  7. Exhibit 13.3 Risk-Return Analysis of International Projects 8

  8. Exhibit 13.4 Risk-Return Advantage of a Diversified MNC 9

  9. Host Government View of DFI • Incentives to encourage DFI • Barriers to DFI • Protective barriers • Red tape barriers • Industry barriers • Environmental barriers • Regulatory barriers • Ethical differences • Political instability • Government-imposed conditions to engage in DFI

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