Business Case
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Section A – Answer Q1
In many cases, MNCs engage in FD because they are interested in boosting revenues, reducing cost, or both. The five main motives that could drive the decision to initiate FDI are (i) entering markets where superior profits are possible, (ii) fully benefit from economies of scale, (iii) using foreign factors of production, (iv) using foreign technology, and (v) attract new sources of demand.
Section A – Answer Q2
The definition of political risks depends on the perspective in which ones views the political risk and on the importance once attributes to political risks. In general, political risks can be defined as political actions taken by the host government or the public that affect the MNCs cash flows. Classification of political risks are Protectionism, Ownership, Blockage of funds transfer, Corruption and Nepotism, and Religion/heritage (refer to Appendix II for details explanation).
Section A – Answer Q3
Hedging is the practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market or investment. The main reason for a hedging to take place in any MNCs is risk mitigation. By selecting the right hedging tools (such as options, futures, forwards, insurance, and derivatives) with the right strategy, MNCs can effectively eliminate/ diversify risks. While some believed that hedging may increase the risk when competitors do not and hedging may not reduced the non-diversifiable risk of a MNC.
Section A – Answer Q4
Balance of Payments (BOP) is defined as a statement of inflow and outflow payments for a particular country. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative BOP means that more money is flowing out of the country than coming in, and vice versa. BOP is important as it is used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country.