Multinational corporations and international project appraisal

Abstract

So far in this book, investment projects have been analysed on the understanding that they were domiciled completely within a single country. This approach has allowed the discussion to proceed in the absence of the extra layer of analysis that is required when investments are located outside a firm's home country. In this chapter, we will relax this assumption and investigate the situation where a firm is considering investing in a project in another country. Multinational corporations (MNC) frequently invest in foreign countries through their subsidiaries established in those foreign countries (also called ‘host countries’). These subsidiaries may be viewed as the MNCs' ‘investment arms’, or ‘business arms’, in host countries. Multinational corporations' foreign investment analysis is complicated by a variety of factors and risks that are not encountered by purely domestic firms or purely national investments. These complicating factors and risks stem from: involvement of more than one company – the existence of parent and subsidiary involvement of more than one country – home (or parent's) country and host (or foreign or subsidiary's) country tax differentials between home and host countries requirement to convert funds from one currency to another currency and the associated risks due to unpredictable exchange rate movements country risk: the host country's political, social, economic and financial risk factors. The basic concepts, principles and techniques of project analysis still apply to multinational corporations' foreign investments.