Explaining NPV on Projects
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Foreign investments are conventionally assumed to involve additional costs of distance and costs due to unfamiliarity with foreign governments, languages, legal systems, and distribution channels. In a domestic context, positive net present value (NPV) typically originates from economic rents on a firm's competitive advantages, including technological information, marketing expertise, and managerial talent. How do these advantages explain why direct foreign investment occurs? Explain why the NPV might be higher on the foreign project than on a competing domestic project, and explain why the NPV might be higher when undertaken by the foreign (multinational) firm than a competing local firm.
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NPV MIGHT BE HIGHER ON THE FOREIGN PROJECT THAN ON A DOMESTIC PROJECT
Net present value might be higher on foreign projects because the extra cost incurred because of unfamiliarity with foreign governments, languages, legal system and distribution system is lower than the benefits derived from the company's competitive advantage.
On a foreign project the competitive advantage derived from marketing expertise, technological information, and managerial talent is far greater than the cost from unfamiliarity with the local government, languages, legal system and distribution network.
NPV will be higher on the foreign project than on a domestic project ...
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