Foreign Investment Analysis

Global corporations evaluating foreign investments find their analysis complicated by a variety of problems that are rarely, if ever, faced by domestic firms. Recent times have seen a massive surge in cross-border direct investments. With direct (as distinct from Portfolio) investments, range from purchase of new equipment to replace existing equipment, to an investment in an entirely new business venture in a country where, typically, manufacturing or assembly has not previously been done.  The technique is also useful for decisions to disinvest, that is, liquidate or simply walk away from an existing for investment.  The overall financial investment decision has two components like the quantitative analysis of available data and the decision to invest abroad as part of the firm’s strategic plans.  Investments of sufficient size as to be important are usually conceived initially because they fit into a firm’s strategic plan.  The quantitative analysis which follows is usually done to determine if implementation of the strategic plan is financially feasible or desirable.  Foreign investment deals with the quantitative aspects of foreign investment analysis.  It treats, first, the general methodology of capital budgeting, second, the international complexities of that procedure, and third, the implications of international accounting for conclusions reached by that methodology.  For convenience, the United States will be regarded as “home”.  However, the principles discussed have relevance for any home company investing in a foreign language.   In recent years, abundance of new research has been conducted in one area of international corporate finance.  The major thrust of this work has been to apply the methodology and logic of financial economics to the study of key international financial decisions.  Critical problem areas, such as foreign exchange risk management and foreign investment analysis, have benefited from the insights provided by financial economics – a discipline that emphasizes the use of economic analysis to understand basic working of financial markets, particularly the measurement and pricing of risk and the international allocation of funds.