FINM8007 Chap.9 International Corporate Investment and Financing
International Corporate Investment and Financing
Investing abroad
Firms become multinational through foreign direct investment.
This chapter compares greenfield investment with cross-border mergers and acquisitions, uses the OLI paradigm of ownership, location and internalisation advantages to explain when investing beats exporting or licensing, and sorts political risk into firm-specific, country-specific and global levels.
Financing it
It then sets out the cost of capital, the weighted average of the costs of equity and debt, explains why the CAPM beta and market premium depend on whether capital markets are segmented or integrated, and surveys the internal and external sources of funds that later chapters take abroad.
How this topic is examined
No marked solutions are released for this week, so use the Week 9 lecture and the Tutorial 9 questions as your guide.
The tutorial asks for the advantages of cross-border acquisitions, the link between comparative advantage, risk analysis and the location of direct investment, how a location decision can act as a natural hedge, and how to classify and manage political risk.
Answer each by naming the concept, applying it to the firm in the question and stating what the firm should do.
How it connects
Choosing where to invest repeats the motives of Chapter 1 and the operating hedges of Chapter 8, while choosing how to finance it leads straight into the next two chapters: bank loans and the Eurocurrency market in Chapter 10, then bonds and equity raised abroad in Chapter 11.
What this chapter covers
- 01
Greenfield investment and acquisitions
- 02
The OLI paradigm
- 03
Firm-specific political risk
- 04
Country-specific and transfer risk
- 05
Weighted average cost of capital
- 06
CAPM and the international CAPM
- 07
Segmented and integrated markets
Worked example · free
Compute a weighted average cost of capital
- 1Cost of equity: 3.5% + 1.10 × 6% = 10.1%.
- 1After-tax cost of debt: 5% × (1 − 0.30) = 3.5%.
- 1WACC: 0.70 × 10.1% + 0.30 × 3.5% = 7.07% + 1.05% = 8.12%.
Key terms
- Foreign Direct Investment
- Investment that gives a firm control of production or assets in another country.
- OLI Paradigm
- The ownership, location and internalisation explanation for foreign direct investment.
- Transfer Risk
- The risk that a host country limits moving funds into or out of it.
- Integrated Capital Markets
- Markets in which investors can hold assets anywhere, so risk is priced against the world portfolio.
International Corporate Investment and Financing FAQ
When is a cross-border acquisition better than a greenfield plant?
When speed and access to proprietary assets such as brands, licences or distribution matter most. Against that, acquisitions are politically sensitive because many countries prefer local control of domestic firms, and they face regulatory and geopolitical uncertainty.
Why does market integration lower the cost of capital?
In integrated markets risk is priced against the world portfolio, where more of it can be diversified away, so the firm’s beta and the required premium are usually lower. A lower cost of capital lets the firm accept more projects that create value.
What is the difference between micro and macro political risk?
Micro risk is firm-specific and depends on whether a firm’s activities clash with host-country goals; macro risk is country-specific, such as transfer restrictions or institutional differences, and affects domestic and foreign firms alike.
How can a plant location decision act as a hedge?
Placing production where the firm also sells matches costs and revenues in the same currency, so a currency move changes both and the net exposure shrinks. This is the natural hedge of Chapter 8 applied to the investment decision itself.
Exam move
Apply the OLI test to two firms you know, naming one advantage of each kind, then compute a WACC twice, once with a domestic and once with a world beta. Then write a short answer to each Tutorial 9 question in your own words, naming the concept in the first sentence.
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