FOREIGN INVESTMENT DECISION

OR
MULTI-NATIONAL CAPITAL BUDGETING

 COMPANIES INVEST ABROAD:

 To avail themselves of comparative advantage
 To diversify risks
 Local resources in host countries
 To penetrate into the market
 To reduce the cost of distribution and transportation
 To forest all competition
 To do business
 To avoid high tariff or non tariff barriers
 To overcome operational constraints
Developing countries offer various types of incentives
to attract foreign direct investment. These include
benefits of lower tax rates or the definition of the
taxable income may offer specific advantages to the
investing company. These are known as “TAX
HAVENS”

Switzerland, Hong Kong, Kuwait ,the Bahamas Cayman

islands, Liechtenstein and Panama.

MNC’s are frequently charged of using (misusing) tax

havens to minimize their tax liability to host countries.
MARKET CHARACTERISTICS AND DIRECT
INVESTMENT
 A high return on the investment
 Increasing competition
 Product life cycle approach
 Exploit monopolistic advantage
 Following a leader in an oligopolistic market structure

 OTHER FACTORS
G E has been making direct foreign investment abroad

• To stabilize market rather than engage in cut throat competition

• To diversify holdings
• To enforce payments
• To meet national aspirations of host countries
• Maximize U.S. exports
PROBLEMS IN MULTINATIONAL BUDGETING
 DIFFICULTIES IN THE DETERMINATION OF CASH FLOWS
• Joint projects
• Economics of scales
• Tied-in-scales
• Inflationary tendencies
• Equipment contribution
• Opportunity cost
• Transfer pricing
• Overhead expenses
 TAXATION IN THE HOST COUNTRIES
 REPATRIATION OF FUNDS
 DIFFERENCE IN CAPITAL STRUCTURES
 PROJECTS Vs PARENT CASH FLOWS
APPRAISING PROJECT PROFITABILITY

 PAY- BACK PERIOD

 NPV

 IRR

 ARR
RISK EVALUATION IN FOREIGN INVESTMENT

BROADLY CATEGORISED INTO TWO HEADS:-

1. ECONOMIC RISKS
2. POLITICAL RISKS

 ECONOMIC RISKS INCLUDES:

• Business risks
• Financial risks
• Inflationary conditions
• Exchange rate fluctuations

 POLITICAL RISKS INCLUDES:

• Blockage of funds
• Expropriation