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Questions and Answers
What percentage of voting power must an investor hold to be considered a subsidiary?
What percentage of voting power must an investor hold to be considered a subsidiary?
Which of the following is NOT classified as a motive for Foreign Direct Investment (FDI)?
Which of the following is NOT classified as a motive for Foreign Direct Investment (FDI)?
Which entry mode falls under the organizational and entry mode perspectives of FDI?
Which entry mode falls under the organizational and entry mode perspectives of FDI?
Cost-related motives for FDI include all of the following EXCEPT:
Cost-related motives for FDI include all of the following EXCEPT:
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An associate is defined as an investor holding what percentage of voting power?
An associate is defined as an investor holding what percentage of voting power?
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A company reacting to exchange rate movements is an example of which type of motive for FDI?
A company reacting to exchange rate movements is an example of which type of motive for FDI?
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Which of the following forms of FDI involves the establishment of a new operation from the ground up?
Which of the following forms of FDI involves the establishment of a new operation from the ground up?
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What is one reason companies seek to enter profitable markets through FDI?
What is one reason companies seek to enter profitable markets through FDI?
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What does foreign direct investment (FDI) primarily reflect?
What does foreign direct investment (FDI) primarily reflect?
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Which of the following entities qualifies as a direct investment enterprise under the OECD definition?
Which of the following entities qualifies as a direct investment enterprise under the OECD definition?
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How does OECD's definition of FDI align with IMF’s statistical standards?
How does OECD's definition of FDI align with IMF’s statistical standards?
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Which of the following is NOT a form of foreign direct investment?
Which of the following is NOT a form of foreign direct investment?
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What is a common motive for firms to engage in foreign direct investment?
What is a common motive for firms to engage in foreign direct investment?
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Which type of investment does NOT fall under FDI according to the definitions provided?
Which type of investment does NOT fall under FDI according to the definitions provided?
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What is essential in determining whether an investment is classified as FDI?
What is essential in determining whether an investment is classified as FDI?
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In the context of international portfolio theory, what is a benefit of diversifying investments internationally?
In the context of international portfolio theory, what is a benefit of diversifying investments internationally?
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What is a potential reason for using licensing arrangements or joint ventures when entering a foreign market?
What is a potential reason for using licensing arrangements or joint ventures when entering a foreign market?
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Which theory focuses on the combination of ownership, location, and internalization advantages?
Which theory focuses on the combination of ownership, location, and internalization advantages?
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What should firms consider before making foreign investments?
What should firms consider before making foreign investments?
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In the context of international diversification, what is a key characteristic of the foreign projects that should be selected?
In the context of international diversification, what is a key characteristic of the foreign projects that should be selected?
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Which methodology is associated with assessing a combination of projects in international diversification?
Which methodology is associated with assessing a combination of projects in international diversification?
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What formula represents the calculation of expected portfolio variance in international diversification?
What formula represents the calculation of expected portfolio variance in international diversification?
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What is one of the key principles behind country risk assessment?
What is one of the key principles behind country risk assessment?
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What does diversification aim to achieve in the context of international finance?
What does diversification aim to achieve in the context of international finance?
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What is the expected annual after-tax return of the new project?
What is the expected annual after-tax return of the new project?
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How does the variability in returns of the new project located in the U.S. compare to the existing business?
How does the variability in returns of the new project located in the U.S. compare to the existing business?
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What is the correlation of the project's return with the return on the existing U.S. business?
What is the correlation of the project's return with the return on the existing U.S. business?
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What is the portfolio variance for the overall firm if the new project is located in the U.K.?
What is the portfolio variance for the overall firm if the new project is located in the U.K.?
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What is the standard deviation of Merrimack’s return on existing U.S. business?
What is the standard deviation of Merrimack’s return on existing U.S. business?
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What scenario is suggested to provide better stability in returns for an MNC during a global crisis?
What scenario is suggested to provide better stability in returns for an MNC during a global crisis?
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Which crisis is mentioned as an example where international diversification could be beneficial?
Which crisis is mentioned as an example where international diversification could be beneficial?
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Which benefit is associated with international diversification for multinationals?
Which benefit is associated with international diversification for multinationals?
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What is the primary benefit of international diversification in a portfolio?
What is the primary benefit of international diversification in a portfolio?
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Which decision is NOT typically considered after foreign direct investment (FDI)?
Which decision is NOT typically considered after foreign direct investment (FDI)?
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What aspect is most crucial for a host government to effectively attract FDI?
What aspect is most crucial for a host government to effectively attract FDI?
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Which of the following is an example of an incentive that a host government might offer to attract FDI?
Which of the following is an example of an incentive that a host government might offer to attract FDI?
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What type of cooperation does an ideal FDI by host governments aim to achieve?
What type of cooperation does an ideal FDI by host governments aim to achieve?
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Which of the following is NOT a common barrier imposed by host governments on FDI?
Which of the following is NOT a common barrier imposed by host governments on FDI?
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A multi-national corporation (MNC) needs to consider which factor when deciding on further expansion after FDI?
A multi-national corporation (MNC) needs to consider which factor when deciding on further expansion after FDI?
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Which of the following factors can discourage FDI from entering a host country?
Which of the following factors can discourage FDI from entering a host country?
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What does E (CFj,n) represent in the calculation of MNC’s value?
What does E (CFj,n) represent in the calculation of MNC’s value?
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In the formula for MNC's value, what does $r$ denote?
In the formula for MNC's value, what does $r$ denote?
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Which factor is NOT included in the consideration for long-term asset and liability management for MNCs?
Which factor is NOT included in the consideration for long-term asset and liability management for MNCs?
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What is the potential impact of revision in host country tax laws on FDI?
What is the potential impact of revision in host country tax laws on FDI?
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Why is estimating country risk important for multinational capital budgeting decisions?
Why is estimating country risk important for multinational capital budgeting decisions?
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In the context of MNCs, what does E (ERj,n) represent?
In the context of MNCs, what does E (ERj,n) represent?
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What could be a direct consequence of high international interest rates on MNC projects?
What could be a direct consequence of high international interest rates on MNC projects?
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Which of the following factors influences the expected cash flows for an MNC?
Which of the following factors influences the expected cash flows for an MNC?
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Study Notes
International Financial Management: Foreign Investment Decisions
- Foreign investment decisions involve multinational corporations (MNCs) engaging in intra-firm investments in real assets and projects, as well as establishing new companies (direct investments).
- Foreign Direct Investment (FDI) requires a clear understanding of its definitions and forms.
- Common motivations for FDI include revenue-related incentives (like attracting new demand markets where home country growth is limited) and cost-related incentives (taking advantage of cheaper production factors, raw materials or technology).
- FDI decisions encompass both project combinations (e.g., international diversification and portfolio theory) and individual project assessment through multinational capital budgeting and traditional capital budgeting methods.
- International diversification benefits are enhanced when projects are not highly correlated, thereby reducing risk. Portfolio theory considerations, like the correlation coefficient, are crucial for calculating portfolio variance.
- Host government perspectives on FDI include the need for solutions to issues like unemployment and technology deficiency without potentially harming local businesses. Governments might use incentives (like tax breaks) or barriers (like ownership restrictions) to encourage or discourage foreign investment.
FDI: Definitions and Forms
- OECD's definition of Foreign Direct Investment (FDI) centers on obtaining a lasting interest by a resident entity in one economy in an entity resident in another.
- This lasting interest is indicated when a foreign investor owns 10% or more of the ordinary shares or voting power of an incorporated company, or the equivalent for unincorporated enterprises.
- Subsidiaries are entities where the investor (parent company) holds more than 50% of the voting power.
- Associates are entities where the investor owns between 10% and 50% of the voting power.
- FDI forms include Joint Ventures (JVs), Mergers and Acquisitions (M&A), and Green-field investments (Brownfield).
Forms of FDI
- FDI frequently involves decisions regarding the investment approach, considering capital and risk-sharing implications.
- JVs represent a collaborative arrangement between a foreign and local entity.
- M&A involves combining or acquiring existing businesses, often incorporating privatization.
- Green-field investments involve establishing a new business from the ground up. Brownfield investments utilize existing structures.
FDI Motives
- FDI motives can be broadly categorized as revenue-related and cost-related.
- Revenue-related motives include entering profitable markets, exploiting monopolistic advantages (access to unique resources or skills not readily available to local competitors), and reacting to trade restrictions.
- Cost-related motives include leveraging economies of scale (especially in firms utilizing specialized machinery), utilizing cheaper production factors abroad, acquiring foreign raw materials, leveraging foreign technology, responding to exchange rate movements, and diversifying sales/production internationally (related to the internalization theory).
Choosing the Optimal Entry Mode
- The most beneficial entry approach relies on host country characteristics.
FDI Project Assessment
- Diversification benefits arise from distributing investment across various countries to mitigate risk, based on the project's expected return and correlation with existing business returns.
Post-FDI Decisions
- Subsequent to FDI, decisions like further expansion, repatriation of profits, or using them in the subsidiary become crucial. Withholding taxes are a key factor in these decisions.
Host Government Perspective
- Host governments seek FDI with the aim of addressing unemployment, boosting technology, and/or preventing local market losses.
- Common incentives include tax breaks, subsidized energy, and low-interest loans.
- Barriers can include majority ownership restrictions or excessive documentation requirements.
Long-Term Asset and Liability Management
- FDI decisions are part of long-term strategic considerations that include examining existing host country taxation and financial laws, projections on exchange rates, country risk assessment, the MNC's cost of capital, risk unique to the projects, required return calculations, and cash flows.
Value of FDI
- The value of FDI is determined by the present value of expected cash flows, considering the currency and exchange rate aspects associated with each period of the investment, in line with the company's weighted average cost of capital.
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Description
Test your knowledge on Foreign Direct Investment (FDI) concepts, including definitions, motives, and classifications. This quiz covers essential topics such as investor voting power, entry modes, and the OECD's definition of FDI. Perfect for students or professionals looking to reinforce their understanding of FDI principles.
