International Financial

Management
HARISHA.B.V
AIP(FINANCE AND CONTROL)
IIM BANGALORE
MODULE 5

MODULE 5
FOREIGN INVESTMENTS DECISIONS
INTERNATIONAL PORTFOLIO
DIVERSIFICATION
FDI
MULTINATIONAL CAPITAL BUDGETING
INTERNATIONAL PROJECT APPRAISAL
POLITICAL RISK AND COUNTRY RISK

FOREIGN INVESTMENTS

1.
a.
b.
c.
d.

Why do firms invest abroad?

Theories
Based on market structure
Cost of capital
Economies of scale
Infrastructure for R&D
Funds for advertisement etc.

2. Theory of product cycle.( Raymond Vernon)

3. Hymers theory of imperfect markets
4. Theory of internationalization of markets of
intermediate products.

Hymers theory of imperfect

markets
Economies of scale

Organization of production

Organization of marketing

Organization of R&D

Organization of human resources

Theory of internationalization of markets

of intermediate products.
Propounded by P.K. Buckley and
M.casson.
Patents, Trade marks and Know-Hows are
intermediate products.
Internationalizing signifies selling patents,
licenses etc.
The firm should continue to be the owner .

5.Theories based on the organization of firms

a. Managerial approach.
b. Strategy of the Enterprise Approach.

Offensive strategy

Defensive strategy.

c. Theories of Y.Tsurumi and K. Kojima.

6.Eclectic Theory of International production

Eclectic theory
Ownership advantage
locational advantage
Internationalization advantage

How to invest abroad?

FDI
Cross border M&A
Joint ventures
Licensing
Franchising
Strategic alliance
Turnkey projects

Multinational capital
budgeting
Mainly discounted cash flow
method is accepted
NPV is widely used
IRR is used in some cases.

NPV
Cash Inflows
Cash outflows

PROBLEMS
CAPITAL BUDGETING
PROBLEMS.xls
CAPITAL BUDG PROBLEM 2.xls
IRR IRR.xls

Country risk Analysis

The country risk is the economic

opportunity against political odds
Types of country risk
1. Political risk
2. Sector risk
3. Project risk

Political risk

Political risk is the risk that results

from the political changes or
instability in a country .

Factors which affects country risk

1. Political factors
2. Economic factors.

Political factors
Stability of local political
environment.
Consensus regarding priorities
Attitude of host and home govts
War

Economic indicators
Inflation rate
Current and potential state of the
countrys economy
Resource base
Adjustment to external shocks.

Techniques to Assess
Country Risk

Debt related factors

Balance of payments
Economic performance
Political instability
Checklist approach COUNTRY
RISK ANALYSIS.xls

SECTOR RISK
Many studies have indicated that
certain sectors are prone to greater
risk than other in some countries.

Project risk
The risk is sometimes different for
different projects.
Within the same sector different
projects of different size , different
life , may create this types of risks.

Thank you.