Chapter 13 Motivates for DFI: A. Revenue-related motives a. Attract new source of demand. b. Enter profitable markets c.

Exploit monopolistic advantages d. React to trade restrictions e. Diversify internationally B. Cost-related motivations a. Full benefit from economy of scale- lower average cost per unit resulting from increased production) b. Use foreign factors of production labor, land, c. Use foreign raw materials d. Use foreign technology e. React to exchange rate movements f. **Cost related motivates in the expanded European Union- countries that became part of EU in 2004 and 2007 were targeted for new DFI by MNCs that wanted to reduce manufacturing costs. g. ****selfish managerial motives for DFIi. managers may want to expend due to possible increase in their compensation ii. high-level managers may have large holdings of company stocks and would prefer to MNC to diversify its business internationally in order to reduce risk. C. Comparing benefits of DFI among Countries: Countires in Western Europ have well-established markets, with large demand for products and services. Easter Europe, Asia and Latin America tend to have low cost of land and labor.

Benefits of International Diversification: reduce a firms overall risk as a result of international diversification.
2 2 2 2 2 p wA A wB B 2wA wB A B CORRAB

w proportion of total funds in investments A or B standard deviation of returns on investments A or B CORR correlation coefficient of returns A and B
A. Diversification analysis of international projects: MNC with investments around the world is concerned about the risk and return characteristics of the investment. a. Comparing portfolios along the Frontiers: b. Comparing frontiers among MNC: actual location of the frontier of efficient procejt portfolios depends on the business in which the firm is involved B. Diversification among Countries: A countrys stock market value reflects the expectation of business opportunities and economical growth. Since changes in stock markets very among countries, business and economical conditions vary among countries. Host government views of DFI A. Incentive to encourage DFI: the idea of DFI solves the problem of unemployment and lack of technology without taking business away from local firms. B. Barriers to DFI : Governments are less anxious to encourage DFI, that adversely affects locally owned companies. a. Protective barriers: when MNCs consider engaging in DFI by acquiring a foreign company, they may face various barriers imposed by host government agencies. All countries have one or more government agencies that monitor margers and acquisitions. b. Red Tape barriers: an implicit barrier to DFI in some countries is the red tape involved, such as procedural and documentation requirements. MNC is subject to a different set of requirement in each country. c. Industry barriers: local firms if some industries in particular countries have substantial influence on the government and will likely use their influenc to prevent competition from MNC. d. Environmental Barriers: each country enforces its own environmental constraints. e. Regulatory barriers: each country also enforces its own regulatory constraints pertaining to taxes, currency convertibility, earnings remittance, employee rights, and other policies that can affect cash flows of a subsidiary established there. f. Ethical differences: there is no consensus standard of business conduct that applies to all countries. Practice that is perceived to be unethical in one country may be totally ethical in another. g. Political instability. Government of some counties may prevent DFI. C. Government imposed conditions to engage in DFI; some gov. allow international acquisitions but impose special requirements on MNCs that desire to acquire a local firm.