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Foreign Direct investment

The globalization allows the companies to become multinational by conducting foreign direct
investment (FDI). Chapter 12 explains the general idea of foreign direct investment. It explains
that there are five countries that lead sources of FDI outflows, which are the United States,
France, Germany, Spain and the United Kingdom. Among them, the United States is the largest
recipient as well as initiator. In recent years, the United States, United Kingdom, France, China,
Canada and Spain are the major destinations for FDI. Raymond Vernons product life-cycle
theory illustrates that firms tend to produce their firstly introduced products in a domestic
country because it is easier and safer to target domestic customers. However, as the products
become standardized and mature, the companies decide to manufacture in economically
beneficial countries such as developing countries in order to decrease the production cost by
using cheaper labor forces. However, it is very important for companies to consider the political
risk in order to successfully conduct foreign direct investment. The text suggests that the
company may purchase insurance policies against the hazard of political risks.

International Cross-listings

Nowadays, many companies raise its capital overseas to increase their market values. However,
there are some risks when they operate in a segmented capital market. The Chapter 17 suggests
that the negative effects can be reduced by cross-listing its stock on foreign stock market, which
means that make the stock internationally tradable. There are two benefits of international crosslistings: a lower cost of capital and a higher stock price, and access to new sources of capital.

Cash management in the multinational firm

The textbook suggests there are three cash management systems that can be sued by the
international companies. First system is a multilateral netting system. The centre, rather than the
individual subsidiaries, is responsible for effecting payment. As only one payment is made
to/from each subsidiary in their local or preferred currency the number of transfers is reduced,
lowering crossborder transfer charges. Individual subsidiaries no longer pay expensive foreign
currency commissions as the net purchases and sales are effected by the centre or outsource
partner. It is also possible that cross-border payments made by individual subsidiaries, through

local banking arrangements, will lose value dates. This is not the case when the process is
centralised using global banking arrangements. Subsidiaries find it easier to use intercompany
netting arrangements rather than to arrange the foreign currency payment themselves. The group
is able to track intercompany exposures effectively. Another system is a centralized cash
management system with a cash pool. The company can be benefited by reducing the investment
in precautionary cash balances and save the firm money.