Page 245 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes 14.5 Summary

FDI represents one of the forms of international capital flow and is an investment which
an investor places abroad in order to gain control over a company in which he is investing,
Firms invest abroad as FDI is one of the most important factor in stimulating economic
growth and development.
The investment strategies and business views of MNCs are also important determinants
of FDI in the country.

Companies use various alternative methods of entering foreign markets. They are –
Licensing, mergers and acquisitions, joint venture and franchising.
Strategic alliance is currently a very popular method all over the world for conducting
international business.
In India, Mobilising FDI has been a major concern of economic reforms given the steady
decline in the available of concessional debt flows globally and the spin off benefits that
long-term foreign equity may bring to the Indian economy.
It has been observed over a period of time that the foreign direct investors look for not
only prospering and stabilised countries but also new markets that offer a possibility of
high returns.

Some of the most important factors which foreign investors take into consideration when
entering a country are – stability of political and business environment, access to economic
information, level of corruption, quality of infrastructure and the extent to which
international standards are met.
India will need to accelerate the reform process which was initiated by the government in
1991 and transform its weaknesses into strength. It will need to more clearly study and
gain insights into the reform process of nations like US, UK and China. India can learn
crucial lessons from the Chinese reforms process though the political environments of
both countries are significantly different.

14.6 Keywords

Foreign Direct Investment (FDI): Foreign Direct Investment (FDI) is investment made by a
transnational corporation to increase its international business.
Franchising: The firm allows an individual to sell its product in a specific territory.
Input Mix Options: An input mix option – process flexibility – allows management to use
different inputs to produce the same output as appropriate.
Licensing: Licensing is a popular method used by MNCs to profit from foreign markets without
the need to commit sizeable funds.
Option Term: The time during which management may decide to act, or not act, corresponds to
the life of the option.
Real Options: Real options a tool that can be employed in capital budgeting analysis to help
companies make better critical strategic decisions.

Sequencing Options: This option is related to the initiation option above, although entails
flexibility as to the timing of more than one interrelated projects:
Strike Price: This corresponds to any (non-recoverable) investment outlays, typically the
prospective costs of the project.

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