13 Direct Foreign Investment Chapter Objectives This chapter will: A. Describe common motives for initiating foreign direct investment B. Illustrate the benefits of international diversification 2
Motives for Direct Foreign Investment: Revenue Related Motives • Attract new sources of demand • Enter profitable markets • Exploit monopolistic advantages • React to trade restrictions • Diversity Internationally
Motives for Direct Foreign Investment:Cost Related Motives • Fully benefit from economies of scale • Use foreign factors of production • Use foreign raw materials • Use foreign technology • React to exchange rate movements
Motives for Direct Foreign Investment:Other • Cost-related motives in the expanded European Union • Selfish managerial motives for DFI • Comparing Benefits of DFI: • Among countries: based on expectations of capitalizing on one or more of the potential benefits. • Over time: choice of target countries for DFI has changed over time.
Exhibit 13.1 Summary of Motives for Direct Foreign Investment 6
Benefits of International Diversification • Select foreign projects whose performance levels are not highly correlated over time. • Diversification analysis of international projects • Diversification among countries • Comparing portfolios along the frontier of efficient projects • Comparing frontiers among MNCs
Host Government View of DFI • Incentives to encourage DFI • Barriers to DFI • Protective barriers • Red tape barriers • Industry barriers • Environmental barriers • Regulatory barriers • Ethical differences • Political instability • Government-imposed conditions to engage in DFI