Direct Foreign Investment

Motives for Direct Foreign Investment

1. Revenue-Related Motivesa. Attract New Sources of

Demandb. Enter Profitable Marketsc. Exploit Monopolistic

Advantagesd. React to Trade Restrictionse. Diversify Internationally

Motives for Direct Foreign Investment

2. Cost-Related Motives: Reduce Costsa. Fully Benefit From Economies of Scaleb. Use Foreign Factors of Productionc. Use Foreign Raw Materialsd. Use Foreign Technologye. React to Exchange Rate Movements

Motives for Direct Foreign Investment

3. Comparing Benefits of DFI among Countries

Summary of Motives for Direct Foreign Investment

Motives for Direct Foreign Investment

4. Comparing Benefits of DFI Over Time Countries

the choice of target countries for DFI has changed over time

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

13.3

Risk-Return Analysis of International Projects

13.4

Risk-Return Advantage of a Diversified MNC

Decisions Subsequent to DFI

1. Need for frequent review2. Decision on use of Subsidiary profits by the subsidiary or headquarters

3. Importance of economic conditions in the subsidiary’s country

Host Government Views of DFI1. Incentives to Encourage DFI

Host Government Views of DFI2. Barriers to DFI

a. Protectiveb. “Red Tape” Barriersc. Industry Barriersd. Environmental Barrierse. Regulatory Barriersf. Ethical Differencesg. Political Instability

Host Government Views of DFI

3. Government-Imposed Conditions to Engage in DFIa. Environmental Regulationsb. Labor Policy Restrictionsc. Requirements to Use Local Partsd. Output and Local Competition Restrictions