Multinational Capital Budgeting: Foreign Investment Ufnder Subsidy

by Sara Gordon, Francis Lees

Fall 1982

Volume 25
Issue 1

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The article focuses on multinational capital budgeting, foreign investment under subsidy. Multinational capital budgeting bases foreign direct investment upon ownership, internalization, and locational advantages. These may be linked to a capital-budgeting analysis of an investment's cash flows and profitability. Foreign direct investment in the United States grew rapidly in the 1970s. A combination of economic factors and government policy was responsible for the growth of the foreign direct investment inflow into the United States. Many states and localities provided financial incentives to encourage such investment. The theory of foreign direct investment has become more eclectic in an effort to relate both fact and theory. The theory draws upon three areas of economics-industrial organization, theory of the firm, and international trade theory. It explains the ability and willingness of firms to exploit markets and the reason they seek to exploit this advantage through foreign direct investment. These three theoretical advantages from foreign direct investment can be linked directly into a capital-budgeting analysis of the investment from the point of view of the parent company, the foreign subsidiary, and the host country.

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