I.

Vocabulary
1. Define foreign portfolio investment. How does it differ from foreign direct
investment?
Foreign Portfolio Investment (FPI): FPI refers to the investment in financial
assets, such as stocks and bonds, of a foreign country without obtaining a
significant degree of control or influence over the management of the invested
entity.
Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) are two
different forms of international investment, and they differ primarily in terms of
the degree of control and ownership that investors have over the assets in the
foreign country.
2. Foreign direct investment decisions are normally based on clear business
strategies. Name at least three categories that companies are looking for.
Foreign direct investment (FDI) decisions are typically based on clear business
strategies that align with a company's objectives and goals. Companies consider
various factors when making FDI decisions, and these factors can be broadly
categorized into three main groups:
- Market-Seeking Strategies
- Resource-Seeking Strategies
- Efficiency-Seeking Strategies
3. Give some examples of investment incentives.What are they supposed to achieve?
Investment incentives are policies or benefits offered by governments to
encourage businesses to invest in a particular region or industry. These incentives
are designed to attract and retain investments, stimulate economic growth, create
jobs, and enhance overall competitiveness. Here are some examples of investment
incentives and their intended objectives:
- Tax Incentives
- Financial Incentives
- Infrastructure Incentives
- Research and Development (R&D) Incentives
4. What is non-exclusive distributor called? What does this mean?
A non-exclusive distributor is known as a distributor with non-exclusive rights.
This means they have permission to distribute and sell a product, but the
agreement doesn't prohibit the supplier from engaging other distributors or selling
directly. It allows for multiple distribution channels but lacks exclusivity in a
particular market or territory.
5. What are royalty payments?
Royalty payments are compensation or fees paid to the owner of intellectual
property, such as patents, copyrights, trademarks, or other rights, in exchange for
the use or exploitation of that property. These payments are typically a percentage
of the revenue generated from the use of the intellectual property, and they are
 often paid at regular intervals as specified in a licensing or royalty agreement.
Royalty arrangements are common in various industries, including music,
literature, technology, and franchising, where one party pays another for the right
to use a specific asset or intellectual property.
6. Define joint venture.
A joint venture (JV) is a business arrangement where two or more independent
entities come together to collaborate and undertake a specific business project or
venture. In a joint venture, the participating entities pool their resources,
expertise, and capital to achieve a common goal. Each participant retains its
separate legal status and ownership structure, but they work together to pursue
shared objectives. Joint ventures can be formed for various purposes, including
market entry, product development, or cost-sharing initiatives. The terms and
conditions of the joint venture are typically outlined in a contractual agreement
that specifies the rights, responsibilities, and contributions of each party.

II.
1. When foreign direct investors acquire a company, they normally seek to
control production, research and development, and sales, with the
objective of influencing or sharing control over these aspects.

2. In considering foreign investment, an MNC's first strategic objective is

typically to locate or create markets for its present and future products.

3. Some financial considerations in making a foreign direct investment

include the expected return on investment, sources of working capital,
interest rates, and cash flow projections.

4. A foreign project is said to be viable when the expected rate of return or

profits realized on assets employed is likely to be higher than from a
comparable investment in the host country. A nonviable project is one
where the expected returns are lower.

5. Two kinds of legislation that foreign investors study closely prior to

making an investment are antitrust laws and labor laws.

6. Investment incentives are highest in a depressed area to attract foreign

investors and stimulate economic activity, helping regions facing long
periods of unemployment.
 7. When a corporation starts to export for the first time, it will usually
organize its sales through distributors, who may be exclusive (selling only
the exporter's products) or multiple (representing other manufacturers as
well).
D. Exercise
Exercise 1: Fill in the blanks in the sentences below with the correct word or phrase.
1. When investors establish a plant overseas, this is called foreign direct investment. If they
buy shares or long-term debt obligations, this is called portfolio investment.

2. The amount of cash that remains after a company has paid taxes and other cash expenses
is cash flow.

3. Rate of return is often measured in terms of profits realized on assets employed.

4. A cash grant is called an incentive, whose purpose is to encourage or stimulate.

5. Prior to making a foreign direct investment, exporters can make a contract with an
exclusive distributor or with a foreign manufacturer, who will be authorized to
manufacture their products. For this, the foreign manufacturer pays royalty payments.

Exercise 2: Complete this passage by using the word in italics.

Countries in the Third World have different approaches to foreign investment. Some welcome
foreign firms, encouraging them to (1) set up subsidiaries by offering them tax (2) incentives or
cheap loans. These countries believe that the foreign firms will provide jobs, pay good wages, (3)
employ local workers, bring new technology, and contribute to their (4) prosperity. Other
countries have a different (5) attitude to foreign investment. They know that they need the
multinationals, but they do not want these firms (6) to dominate important sectors of their
economies. Therefore, they (7) enact laws which force foreign companies to sell shares to local
(8) investors. They insist that local businessmen own a certain percentage of the foreign firm’s
(9) equity. Some governments also make the foreign firm (10) train a certain percentage of local
workers at all (11) levels in the company.

Exercise3: Find an appropriate word for each blank space. In all sections the initial letter
of each word is provided.

a) Most multinational companies are vast enterprises with networks of (1) subsidiaries or (2)
affiliates throughout the world. Originally, they expanded overseas because trade barriers such as
(3) tariffs and (4) quotas had been set up against their goods.
b) When incomes are rising and business is thriving, in other words, when there is an (5)
economic (6) boom in a country, a multinational may decide to establish a subsidiary there.
Later, however, the government of the country may only allow the company to operate on a (7)
joint (8) venture basis, in which case it will compel the company to reduce its (9) stake to a fixed
percentage. It could even restrict the subsidiary by allowing only a fixed proportion of profits to
be (10) repatriated.

c) The OECD code gave (11) guidelines on how multinationals should behave. None of its
provisions were (12) legally (13) enforceable, and therefore some say it lacked legal teeth.

d) A factory whose production resources are not being fully utilized is said to be suffered from
(14) overcapacity.

Exercise 4: Picture yourself as a corporation president who is about to decide on making a

foreign direct investment. What questions would you ask yourself?

As the president of a corporation contemplating foreign direct investment (FDI), several critical
questions would guide my decision-making process. First and foremost, I would assess the
strategic alignment of the investment with our company's overall objectives. What specific goals
does this FDI serve? Does it enhance our global market presence, provide access to new
technologies, or diversify our product portfolio?

Financial considerations would be paramount. What is the expected return on investment? How
will the investment impact our cash flow? Assessing the availability of outside financing is
crucial—reliable access to capital is essential for the viability of the project. Additionally, I
would scrutinize the economic and political stability of the host country, evaluating potential
risks and the regulatory environment.

Understanding the cultural and legal landscape is pivotal. How well do we comprehend the local
culture and business practices? What are the legal and regulatory requirements for foreign
businesses? Assessing labor laws, potential government interference, and adherence to ethical
business practices are vital aspects.

Considering potential local partnerships or joint ventures is another crucial dimension. What is
the feasibility of collaboration with local entities? Are there restrictions on foreign ownership?
Balancing the benefits of collaboration with control over key aspects of the business is a nuanced
decision.
In essence, the decision-making process involves a comprehensive evaluation of financial,
strategic, cultural, and regulatory factors to ensure that the foreign direct investment aligns with
the long-term success and sustainability of the corporation.