INTERNATIONAL FINANCE Lecture 31. Review DFI motives DFIs in emerging Markets Issues.
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Transcript of INTERNATIONAL FINANCE Lecture 31. Review DFI motives DFIs in emerging Markets Issues.
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INTERNATIONAL FINANCE
Lecture 31
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Review
• DFI motives
• DFIs in emerging Markets
• Issues
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DIRECT FOREIGN INVESTMENT
Lecture 32
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• If the new project is located in the U.K., the portfolio variance for the overall firm
Diversification Benefits forMerrimack Co.
ABBABABBAA CORRwwww σσ2σσ 2222
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• Like any investor, an MNC with projects positioned around the world is concerned with the risk and return characteristics of the projects.
• The portfolio of all projects reflects the MNC in aggregate.
Diversification Analysis of International Projects
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Expect
ed R
etu
rn
Risk
• When the projects are combined appropriately, the project portfolio may be able to achieve a risk-return tradeoff exhibited by any of the points on the frontier of efficient project portfolios.
Risk-Return Analysis ofInternational Projects
Frontier of efficientproject portfolios A
B
C
G
D
E F
Project A has the highest expected return and greatest risk.
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• Project portfolios along the efficient frontier exhibit minimum risk for a given expected return.
• Of these efficient project portfolios, an MNC may choose one that corresponds to its willingness to accept risk.
• The actual location of the frontier of efficient project portfolios depends on the business in which the firm is involved.
Diversification Analysis of International Projects
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Expect
ed R
etu
rn
Risk
• Some MNCs have frontiers of possible project portfolios that are more desirable than the frontiers of other MNCs.
Efficient frontier for a single-product MNC
Efficient frontier fora multiproduct MNC
Diversification Analysis of International Projects
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• The MNCs can achieve more
desirable risk-return characteristics
from their project portfolios if they
sufficiently diversify among products
and geographic markets.
Diversification Analysis of International Projects
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Comparison of Economic Growth Among Countries
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DecisionsSubsequent to DFI• Some periodic decisions are
necessary:
– Should further expansion take place?
– Should the earnings be remitted to the parent, or used by the subsidiary?
• These decisions should be analyzed on a case-by-case basis.
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Host Government View of DFI
• Each government must weigh the advantages and disadvantages of DFI in its country.
• The government may provide incentives to encourage desirable forms of DFI, and impose preventive barriers or conditions on other forms of DFI.
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Incentives to Encourage DFI• The ideal DFI solves problems such as
unemployment and lack of technology without
taking business away from the local firms.
• Common incentives offered by host
governments include tax breaks, discounted
rent for land and buildings, low-interest loans,
subsidized energy, and reduced environmental
restrictions.
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Barriers to DFI
• Governments are less anxious to encourage DFI that adversely affects local firms, consumers and the economy.
• DFI barriers include regulations governing mergers and acquisitions, restrictions on foreign ownership of local firms, red tape (procedural and documentation requirements), the political influence of local firms, and political instability.
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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.
• Such conditions include environmental constraints, restrictions on local sales, and employment requirements.
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Review
• DFIs International diversification
• Risks & Returns trade off
• Portfolio Variance
• Growth Rates and its effect
• Barriers
Source: Adopted from South-Western/ Thomson Learning 2006