International Finance

Individual assignments

Section A – short answer questions:

1) Summarize the five main motives that drive the decision to initiate FDI

a) MNC are motivated to initiate FDI in order to attract new sources of demand and enter the market where maximum profits are possible. – increase revenue motivation.

b) Cost efficiency such as making use of local labors , materials and logistic advantage. – cost efficiency motivation ,increase shareholders wealth.

c) International diversification , reduce the exposure to home country economic conditions and market saturation.- spread risk exposure

d) Acquiring of foreign technology in that country . this technology is then use to improve and enhance the technology or operational process in the home country.

e) Political stability in the foreign country.

2) Define political risks. Explain the classification of political risks

a) Political risk are factors that impede the performance of the subsidiary in a foreign country. The extreme example is the possibility of the host country that will take over the subsidiary either by confiscating the assets and no compensation is provided.

b) Classification of political risks:

1) Protectionism – actions where the local government heavily subsidize the local manufacturer or ban foreign enterprises from trading in the local context.

2) Ownership -

3) Blockage of funds transfer – foreign entities initiate FDI to increase the wealth of shareholders, if the risk of blocking funds transfer arises in the foreign country where the subsidiary is , it loses its initial objective of setting up the subsidiary. At the same time , any funds that cannot be transfer may result in business obstacles as funds are needs for operational matters to purchase materials etc.

4) Corruption – corruption may result in inefficient bureaucracy and breach company’s policy .Corruption may also affects a company image and reputation.

5) Religion/heritage – Religion...