Question

Firms that make direct foreign investments must evaluate such opportunities requiring capital investment very differently from the methods used to evaluate domestic investments. Describe these differences from both a capital budgeting and country risk perspective.

Answer 1

Introduction

Over the years, globalization has turned out to be an effective tool, to manage the interests of most Multinational organizations across the globe.

While companies have found the local markets declining or being stagnant due to economic cycles prevailing in the domestic country, the ability to sell its products and services in foreign lands, allows for most companies to become exposed to capital investment techniques that are previously not thought off.

However, each country is different and therefore requires extensive research before the company can engage in long term profits for itself. It is therefore, not recommended for small developing companies to engage in foreign direct investment as the mode of entry into foreign trade.

Each country is different in its origin and how the product will perform in the market type. While it may be easier to sell similar products in similar territory, the same is not true for other areas, which require extensive expenditure and may not turn out to be true respectively.

Capital Budgeting and Country Risk Perspective:-

Capital budgeting helps a company in deciding the sources of investment into long term capital assets or otherwise, to meet the needs of the organization in the medium to long run. In foreign countries, the company must take into consideration various factors which may not take place domestically. Therefore this decision making requires extensive research.

The areas of capital budgeting are important for a firm that aims to go global, because most currency rates differ and the mode of capital investment is restricted in most countries today in which you aim to enter via foreign direct investment.

The fluctuations in currency along with local restrictions in the country one wants to invest in are one of the key factors affecting capital budgeting decisions and are the key reasons for the difference between the home country and abroad.

In the home country these decisions need not take exchange rate and restrictions into account, while in the other counterparts, these considerations are equally important in coming to a logical conclusion respectively.

Country Risk on the other hand presents a similar picture, wherein the fact that the dynamics of operating in different countries is different impact the decision making on foreign direct investment. Not all countries embrace the change effectively and clashes are a routine with locals over various reasons.

Further, demographics and cultural changes are an equally big challenge which companies must embrace to enable themselves to be successful in the long run.

Conclusion:-

Thus, the risk arising out of ones, daily operations are big and disallow for companies to prosper unless they are aware of the same and can make necessary adjustments which allow for easier transition of a company from being domestic oriented to changing and becoming a global giant respectively.

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