Foreign Direct Investment Quiz

Foreign direct investment (FDI) occurs when a resident entity in one economy, the 'direct investor,' acquires a lasting interest in an entity resident in a different economy, the 'direct investment enterprise.'

The OECD defines FDI as aiming to establish a lasting interest in an entity in a different economy, typically exceeding 10% ownership in an incorporated enterprise or voting power.

FDI can be in the form of investments in physical assets like property, plant, and equipment (PP&E) or projects, or in the creation or acquisition of existing companies.

The OECD and IMF's Balance of Payments Manual (5th ed.) share the same definition of FDI, ensuring consistency in statistical reporting.

Direct investment enterprises can be incorporated as subsidiaries or associate companies or unincorporated as branches.

MNCs engage in FDI to gain control or influence over foreign businesses or operations, potentially for market access, resource acquisition, or production cost reduction.

International diversification can benefit a portfolio by reducing overall risk and enhancing returns, as assets in different countries may not move in perfect correlation.

By investing in various countries, companies can mitigate volatility and improve overall returns by leveraging opportunities and avoiding losses in specific regions.

A company where the investor (parent) owns more than 50% of the voting power, giving them control over the company's management decisions.

A company where the investor (including subsidiaries) owns between 10% and 50% of the voting power, giving them some influence but not control.

An investment strategy where a company expands into a foreign market by acquiring an existing company.

An investment strategy where a company builds a new facility from scratch in a foreign market.

An investment strategy where a company acquires an existing, but sometimes partially-built, facility in a foreign market and repurposes it.

A business strategy where two or more independent companies collaborate to share resources and risks in a foreign market.

Investing abroad to increase profitability and shareholder wealth by boosting revenue, cutting costs, or expanding into new markets.

A motive for FDI focused on entering markets with high growth potential, especially when domestic markets are limited.

A company's expansion into international markets by establishing a physical presence, such as factories or offices. This involves direct ownership and control of assets.

A framework that analyzes the benefits and costs of FDI. It considers ownership-specific advantages (firm's unique skills), location-specific advantages (host country's resources) and internalization advantages (operational efficiency).

A method used to assess the risk of investing in a specific country. It analyzes factors like political stability, economic outlook, and legal environment to determine investment attractiveness.

A method of evaluating multiple investment projects by considering their risk and return profiles. It aims to diversify the portfolio to minimize overall risk.

A method of evaluating individual investment projects by considering their future cash flows and discounting them back to present value. It assesses the financial viability of an investment.

The reduction of overall risk by diversifying investments across different markets or industries. It aims to reduce the impact of negative correlations between investments.

The potential for a global portfolio to reduce risk more effectively than a domestic portfolio due to lower correlations between returns of projects in different economies.

Companies decide whether to expand further, whether to keep earnings in the subsidiary, or remit them to the parent company, considering potential withholding taxes.

The goal of a host government is for FDI to create jobs, attract capital and technology, without harming local businesses.

Governments use incentives like tax breaks and subsidies to attract desirable FDI while creating barriers like restrictions on ownership and regulations to discourage unwanted FDI.

The attractiveness of a country to foreign investors is determined by factors like market size, resources, government regulations and incentives.

The incentives offered by host governments to attract foreign investors, including tax breaks, subsidies, and relaxed regulations.

Examples of barriers imposed by host governments to discourage certain types of FDI, such as ownership restrictions, regulatory burdens, and limitations on operations.

The variability of returns for an investment, measured as the standard deviation.

The degree to which the returns of two investments move together, measured as a correlation coefficient.

The formula used to calculate portfolio variance, which considers the weights of each investment, their individual variances, and the correlation between them.

A situation where the returns of two investments are not perfectly correlated, allowing for risk reduction through diversification.

The possibility that a multinational corporation (MNC) may not be completely protected from a global crisis, as multiple countries could simultaneously experience negative effects.

The potential advantage an MNC with diversified investments across Asia may have experienced during the 1997-98 Asian crisis, mitigating losses compared to those focused on a single country.

The strategy of diversifying investment across continents to further reduce risk and enhance returns, potentially mitigating the impact of regional crises.

The value of a multinational company's (MNC) project is calculated by discounting expected future cash flows from the project, adjusted for exchange rate fluctuations. This value is then compared to the MNC's cost of capital to evaluate the project's profitability.

This refers to the expected cash flows an MNC anticipates receiving from its foreign operations, adjusted for exchange rates. These cash flows are essential in determining the overall value of an MNC's foreign investment.

This represents the expected exchange rate at which the foreign currency received from an MNC's foreign operations will be converted back to the home currency (parent's currency). Fluctuations in exchange rates can significantly impact the value of foreign investments.

Factors like host country tax laws, exchange rate fluctuations, and potential revisions in regulations all influence the projected cash flows from an MNC's foreign operations.

The process of evaluating the potential risks and rewards associated with investing in a particular country, including political stability, economic conditions, and legal framework, is crucial for MNCs making FDI decisions.

MNCs must consider their access to foreign financing, their cost of capital (including international interest rates), and the specific risks of a project when evaluating FDI opportunities.

MNCs make strategic decisions on the type of business operation and location of their FDI, based on factors like market access, resource availability, cost advantages, and government incentives.

Strategic decisions involving the establishment of long-term assets and liabilities are crucial for MNCs as they manage their foreign investments. This involves careful consideration of factors like host country tax laws, currency risks, and project returns.