Potential
Revision in
Host Country
Tax Laws or
Other
Provisions
MNCs Access
to Foreign
Financing
International
Interest Rates
on Long-Term
Funds
Existing
Host Country
Tax Laws
Exchange
Rate
Projections
Country Risk
Analysis
MNCs Cost
of Capital
Risk Unique to
Multinational
Project
Estimated
Cash Flows of
Multinational
Project
Multinational
Capital
Budgeting
Decisions
Required
Return on
Multinational
Project
13
Chapter
Chapter Objectives
To describe common motives for initiating
direct foreign investment (DFI); and
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Enter profitable
markets.
Exploit
monopolistic
advantages.
React to trade
restrictions.
Diversify
internationally.
Use foreign
technology.
React to exchange
rate movements.
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Benefits of International
Diversification
The key to international diversification is
to select foreign projects whose
performance levels are not highly
correlated over time.
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25%
25%
Standard deviation of
projects return
.09
.11
Correlation of projects
return with return on
existing U.S. business
.80
.02
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w A2 2A w B2 B2 2w Aw B A BCORR AB
Diversification Analysis of
International Projects
Like any investor, an MNC with projects positioned around the
world is concerned with the risk and return characteristics of
the projects.
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Expected Return
Risk-Return Analysis of
International Projects
Frontier of efficient
project portfolios
A
B
C
D
E
Project A has
the highest
expected
return and
greatest risk.
Risk
Diversification Analysis of
International Projects
Project portfolios along the efficient frontier
exhibit minimum risk for a given expected
return.
Diversification Analysis of
International Projects
Some MNCs have frontiers of possible
Expected Return
Diversification Analysis of
International Projects
Our discussion suggests that MNCs can
achieve more desirable risk-return
characteristics from their project
portfolios if they sufficiently diversify
among products and geographic markets.
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Decisions
Subsequent to DFI
Some periodic decisions are necessary:
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Barriers to DFI
Governments are less anxious to
encourage DFI that adversely affects local
firms, consumers and the economy.
Government-Imposed Conditions
to Engage in DFI
Some governments allow international
acquisitions but impose special
requirements on the MNCs that desire to
acquire a local firm.
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