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Lecture International finance: An analytical approach (2/e) – Chapter 18: Foreign direct investment and international capital budgeting

The goals of this chapter are: To discuss the characteristics and development of FDI, to outline the theories of FDI, to describe the techniques of international capital budgeting, to examine the implications of taxation, country risk and transfer prices for international capital budgeting. | Chapter 18 Foreign Direct Investment and International Capital Budgeting Objectives To discuss the characteristics and development of FDI. To outline the theories of FDI. To describe the techniques of international capital budgeting. To examine the implications of taxation, country risk and transfer prices for international capital budgeting. Definition An investment project is classified as direct investment if the investor acquires ‘significant control’ over a firm. What is ‘Significant Control’ ? Ownership of 10-25% United States, Japan and Australia: 10% France, Germany and United Kingdom: higher threshold Belgium and the Netherlands: no specific number Reasons for Interest in FDI Rapid growth and changing pattern of FDI Concern about causes and consequences of foreign ownership FDI channels resources to developing countries The role played in transforming ex-communist countries FDI in the Nineteenth Century FDI was prominent, but it mostly took the form of lending by Britain to other countries. FDI in the Interwar Period Foreign investment declined, but direct investment rose. Britain lost its status as the major creditor. FDI in the Post-World War II Period FDI started to grow for two reasons: Improvements in transport and telecommunications Need of European countries and Japan for US assistance FDI in the 1960s Reversal of trend: Host countries started to show resistance to US ownership of enterprises Host countries started to recover, initiating FDI in the United States FDI in the 1970s Lower FDI flows The United Kingdom appeared as a major player FDI in the 1980s The United States became a net debtor. Japan emerged as a major source of FDI. The surge in FDI was due to the globalisation of business. FDI in the 1990s FDI declined in 1990-1992 but rebounded subsequently because: FDI is no longer confined to large firms The sectoral diversity of FDI has broadened The number of countries involved has risen FDI in the 1990s (cont.) The decline in the importance | Chapter 18 Foreign Direct Investment and International Capital Budgeting Objectives To discuss the characteristics and development of FDI. To outline the theories of FDI. To describe the techniques of international capital budgeting. To examine the implications of taxation, country risk and transfer prices for international capital budgeting. Definition An investment project is classified as direct investment if the investor acquires ‘significant control’ over a firm. What is ‘Significant Control’ ? Ownership of 10-25% United States, Japan and Australia: 10% France, Germany and United Kingdom: higher threshold Belgium and the Netherlands: no specific number Reasons for Interest in FDI Rapid growth and changing pattern of FDI Concern about causes and consequences of foreign ownership FDI channels resources to developing countries The role played in transforming ex-communist countries FDI in the Nineteenth Century FDI was prominent, but it mostly took the form of lending by Britain to .