Question

(a)Identify and the briefly explain the motivation for direct foreign investment.

    (b)A US based MNC plans to invest in a new project either in the U.S. or in
    Mexico. Currently 75% of its investment is in the U.S. Historical records show
    that the variability of returns on this existing investment measured by the
    standard deviation is 0.08. A four year forecast of the strategic features of the
    proposed new project are summarized below as follows:
                                                                 If located in U.S. If located in Mexico
Mean of expected annual rate of return       10% 10%
Standard deviation of returns                        0.06 0.08
Correlation of returns with existing project  0.90 0.30
Based on quantitative evidence on RISK and RETURN, determine the
location that will produce more stable return for this firm.  

Answer 1