Page 240 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 14: Real Options and Cross-border Investments

4. Use Foreign Raw Material and Foreign Technology: Some corporations are increasingly Notes
establishing or acquiring existing overseas plants to learn about the technology of foreign
countries. This technology can then be used by corporations to improve their production
process at their various subsidiaries all over the world.
In some cases when a corporation plans to sell a finished product in a foreign country, it
may decide to develop the product in the country where the new materials are located.
This will help the corporation in saving the transportation costs which it would have
incurred in transporting the raw materials from a given country.
5. Exploit Monopolistic Advantage: In many situations, firms become Internationalised
when they possess an advantage not available to competitive firms. Even within a given
country some firms may possess an advantage over other firms in these markets. For
example, if a firm possesses advanced technology and has exploited this advantage
successfully in local markets it may attempt to exploit it internationally as well. The
advanced technology is not restricted to developing a new product – it could also represent
a more efficient production, marketing or financing process.
6. Diversify Internationally: When investors cannot effectively diversify their portfolio
holdings internationally because of barriers to cross border capital flows, firms may help
their shareholders with indirect diversification services by making direct investment in
foreign countries. The firm’s cash flows are internationally diversified when it holds
assets in many countries. Thus, shareholders of the firm can indirectly benefit from
international diversification even when they do not hold foreign shares. Capital market
imperfections may thus motivate firms to undertake FDI.
7. Political Safety Seekers: Some MNCs attempt to expand their operations in countries that
are unlikely to interfere with private enterprises and are considered politically stable.
Also, MNCs based in politically unstable countries try to establish new operations and
pursue other markets in which they may have greater flexibility to make business
decisions.
8. Knowledge Seeking: Another important reason why firms decide to enter foreign markets
is for the purpose of gaining information and experience that will be useful to them
elsewhere. For example, in industries characterised by fast technological and product
innovation it is important to collect information on foreign innovation and research and
development systematically over a period of time. This information collected can then be
used by the organisation in its own research and development, marketing and other areas.
Self Assessment

Fill in the blanks:
9. …………………… is investment made by a transnational corporation to increase its
international business.
10. The evaluation process of foreign investments is generally longer, more costly, less accurate
and involves more …………………… and foreign exchange risks.

11. Foreign Direct Investment (FDI) is one of the most important sources of ………………….
14.4 Methods to Increase Cross-border Investments

Direct Foreign Investment (DFI) is a common method of engaging in cross border investment.
But this method is generally expensive and if, for some reason, the project fails, the firms face a

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