Question

Discuss the issues that the international financial manager needs to take into account when evaluating foreign direct investments and set out how you believe they should be managed.

Answer 1

Various issues that the International Financial manager needs to undertake when he is evaluating a foreign direct investment are as follows-

A. Wage rate of other country-it is one of the major incentive of financial manager to invest outside the domestic country because he will have to to face a lower wage rate and it will substantially lower his overall cost of capital

B. Skill factor of labour resources-financial manager would always look for higher level of skilled resources of labour in order to efficiently maximize profit and optimises it's resources. Certsin business like pharmaceuticals will always require a high level of skill from the labour resources so these factors are needed to be incorporated adequately into decision making process

C. Exchange rate of other country is also a part of macro financial concern because those countries are preferred while investment whose domestic currency are less subject to fluctuation and are more stable in nature and have strength in regard to foreign currency.

D. Political stability in other country is also to be considered while investment into foreign country as a stable political government will always help in maximizing the overall rate of return and it will also offer stability in taking major decisions.

E. Tax rate is one of the most important concerns for a financial manager for investment into other countries because he would always look for foreign direct investment into such companies, where the taxation regime is highly flexible and tax rates are comparatively lower so that cost advantage would be higher.

F. Better infrastructure and transport facilities, so that the investment could maximise itself through better supply chain and better infrastructure facility as it will always provide the additional support to the business.

G. Size of the economy and the nature of market is also to be considered because generally emerging market will have a higher growth rate than developed markets, and financial manager would choose such markets where I can rely upon a higher growth rate to maximize his overall investment

H. Financial manager will always assess the interest rate risk and the inflation related risk in order to have a better idea about the macro functioning of the economy so that he can prepare accordingly in order to maximize is overall rate of return from the business.

I. Government incentives and subsidies are also a major reason for a business to invest outside because it will help in gaining a lot of cost advantage.

These factors should be properly analysed and the risk associated with the foreign direct investment should be properly assessed in order to maximize the overall rate of return through minimization of the risk, so that the portfolio of the foreign managers should always be hedged and it will not be exposed to higher risk.