Question

1. What are the benefits and incentives for Direct Foreign Investment? Find some real-world examples and discuss.

2. Discuss (multinational capital budgeting) MNC capital budgeting decisions from the subsidiary versus the parent perspective.

Answer 1

1) Foreign direct investment refers to where a home company invests in another country. Foreign Direct investment benefits the international economy. It creates competitive advantage in the country. The recipient countries have their standard of living raising. It creates new job opportunities in the recipient country. The recipient country benefits with higher cash inflow by way of higher tax rate. The country also received foreign currency which helps to reduce the exchange rate. FDI helps in diversification which increases return without any increase in risk. With their best practices in management, accounting or legal guidance helps the home country. There could be better infrastructure and technology develop by foreign company.

2) Capital Budgeting is the process of decision making to either accept or reject the project. It is necessary to be undertaken for all long term projects. One of the method of capital budgeting is the calculation of Net Present Value.in which the cash flows are estimated and the salvage value to be received at the end of the project to the parent. The multinational companies evaluates international projects by using multinational capital budgeting process. Certain special circumstances of international projects affect the cash flow or the discount rate which makes the capital budgeting complex. There is always a confusion whether the capital budgeting should be done from the prespective of the parent or from the prespective of subsidiary. Based on the prespective taken the net cash flow to the parent can differ from that of subsidiary. There could be difference in the cash flows due to Tax differentials, various regulations and exchange rate movements. The factors to be considered in the MNC capital budgeting decisions are Inflation, Exchange rate fluctuations, government incentives, funds which are blocked for the project and financing arrangement.