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Learning Objectives

1. Identify reasons for a foreign investment decision (later analyze). (LO1)

2. Examine the effects of exchange and political risk on the foreign investment decision. (LO2)

3. Assess the effects of exchange rates on the firm’s profitability and cash flow. (LO3)

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Figure 21-1World’s leading merchandise exporters, 2009

LO1

Source: www.wto.org Top twelve: 57% of world total of $12.5 trillion. US: commercial services adds $3.4 trillion.

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Figure 21-2World’s leading merchandise importers, 2009

LO1

Source: www.wto.org Top twelve: 58% of world total of $12.7 trillion. US: commercial services adds $3.1 trillion.

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Figure 21-3Canada’s 2010 merchandise exports and imports by region

LO1

Note: Merchandise: Exports $404 billion, imports $413 billion, GDP $1,653 billion.Source: Reprinted with permission of Bank of Canada, Banking and Financial Statistics, July 2011, series J3.

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Figure 21-4Canada’s international balance of payments, current account, 2010

LO1

Source: Reprinted with permission of Bank of Canada, Banking and Financial Statistics, July 2011, series J1.

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Figure 21-5Canada’s international investment position, 2010

LO1

Source: Statistics Canada, Catalogue No. 67-202, Table 1.

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Figure 21-6Canada’s investment abroad by region, 2010 (assets)

LO1

Source: Statistics Canada, Catalogue No. 67-202, Tables 1, 21-27. (Other includes loans and deposits.)

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Figure 21-7Foreign investment in Canada by region, 2010 (liabilities)

LO1

Source: Statistics Canada, Catalogue No. 67-202, Tables 1, 21-27. (Other includes loans and deposits.)

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Reasons for a Capital Investment Decision

• Higher potential returns- Lower production costs due to:

• resource availability and ease of exploitation

• significantly lower wages

- Better revenues due to: • Larger and more concentrated markets

- Lower corporate income tax rates- Delayed Canadian taxes on income

• Strategic advantages• Broader diversification possibilities

LO1

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Multinational Corporations (MNCs)

• Firm doing business in more than one country• Often 30% or more of a firm’s business

activities are carried out outside its national borders

• 4 basic forms of multinational corporations:1. Exporter

2. Licensing Agreement

3. Joint Venture

4. Fully Owned Foreign Subsidiary

LO1