Foreign Investments (Lecture #3)

Question 1

def. Foreign Portfolio investments

Answer 1

• passive holdings of securities
• modern finance theory suggests FPI will be motivated by attempts to seek an attractive rate of return while reducing risk by geographically diversifying their portfolio

Question 2

def. foreign direct investments (FDI)

Answer 2

• acquisition of foreign assets for the purpose of controlling them
• FDI may take many forms including the purchase of existing assets in a foreign country; new investment in property, plant, equipment, and participation in a joint venture with a local partner

Question 3

What are the two main political factors affecting the FDI decision?

Answer 3

1. Avoidance of Trade Barriers

2. Economic Development incentives

Question 4

Describe the avoidance of trade barriers as a factor affecting the FDI decision

Answer 4

• firms often build foreign facilities to avoid trade barriers, such as high tariffs on imported electronic goods
• ex. will make goods in the US to avoid threat of or concrete tariffs

Question 5

describe the conomic development incentives

Answer 5

• most democratically elected governments intend to promote the economic welfare of their citizens
• those govs. offer incentives to firms to induce them to locate new facilities and provide jobs in their jurisdiction