Chapter 13
Direct Foreign Investment
Lecture Outline
Motives for Direct Foreign Investment (DFI)
Revenue-Related Motives
Cost-Related Motives
Comparing Benefits of DFI Among Countries
Measuring an MNC’s Benefits of DFI
Benefits of International Diversification
Diversification Analysis of International Projects
Diversification Among Countries
Host Government Views of DFI
Incentives to Encourage DFI
Barriers to DFI
Government-Imposed Conditions to Engage in DFI
Chapter Theme
The main purpose of this chapter is to illustrate why MNCs often use DFI and to suggest the various
factors involved in the DFI decision. The specifics involved in quantifying costs and benefits of DFI are
discussed in the following chapter. Thus, this chapter should be covered in general terms as to the costs
and benefits of DFI. The chapter implicitly suggests that each firm may benefit from DFI by capitalizing
on some unique perceived advantages of the foreign market. Yet, all DFI decisions relate to the MNC’s
overall risk and return objectives.
Topics to Stimulate Class Discussions
1. Why would a large advanced MNC consider DFI in some less developed country?
2. Assume that you produce plastic computer pieces for computer companies. The pieces require very
little technology. Where would you like to establish DFI? (The point of this question is to force
consideration of various characteristics that are incorporated in a DFI decision.)
3. What factors would be considered when deciding whether a subsidiary should reinvest earnings or
remit them to the parent?
4. The DFI decision is related to marketing, finance, and management. What is the role of each area in
the DFI decision? (This question is not explicitly covered in the text but allows students to consider
the differences in disciplines as related to the broad corporate function of DFI.)
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Direct Foreign Investment 2
5. Do you think DFI is primarily intended to reduce production costs or increase sales? Discuss.
POINT/COUNTER-POINT:
Should MNCs Avoid DFI in Countries with Liberal Child Labor Laws?
POINT: Yes. An MNC should maintain its hiring standards, regardless of what country it is in. Even if a
foreign country allows children to work, an MNC should not lower its standards. Although the MNC
forgoes the use of low-cost labor, it maintains its global credibility.
COUNTER-POINT: No. An MNC will not only benefit its shareholders, but will create employment for
some children who need support. The MNC can provide reasonable working conditions and perhaps may
even offer educational programs for its employees.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: This is a well-documented controversy which generates interesting discussion. Some students
will likely support the point while others will support the counter-point. There are some obvious issues
that an MNC would need to consider, such as:
How old does an employee have to be?
Should it attempt to hire older workers first?
What wage is reasonable for a child?
Are there any child labor laws enforced by the country?
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.