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1 Introduction and Overview 1 What is foreign direct investment? 1 Types of FDI 4 What are multinational corporations? 6 Approaches to international business 11 History of FDI 16 Recent trends 18 2 Theories of Foreign Direct Investment 23 Theories assuming perfect markets 24 Theories assuming imperfect markets 29 Other theories of foreign direct investment 42 Theories based on other factors 50 Theories of entry modes 58 A final remark 62 3 The Effects of Foreign Direct Investment 68 The provision of capital 71 The effect of FDI on output and growth 73 The effect of FDI on employment and wages 77 The balance of payments effect 82 The effect of FDI on trade flows 84 The effect of FDI on productivity 86 FDI and technology 86 FDI and training 90 FDI and inter-industry linkages 91 The effect of FDI on market structure 92 FDI and the environment 93 Modelling the effects of FDI 95 A final remark 98 4 International Capital Budgeting 102 Which perspective? 104 The net present value 106 The adjusted present value (APV) 116 Further extensions of the APV formula 119 Adjusting project assessment for risk 120 Other project evaluation criteria 124 Capital budgeting for international acquisitions and divestitures 128 Where to go from here? 130 5 Country Risk and Political Risk 131 Country risk, sovereign risk and political risk 131 Country risk assessment 134 Quantifying country risk 138 An example of macro-assessment: the Euromoney methodology 142 The use of country risk analysis 145 Political risk: the definition once more 148 Political risk indicators 152 The effects and management of political risk 155 A final remark 160 6 International Taxation 161 The philosophy of national tax systems 162 Types of taxes 165 The avoidance of double taxation 166 Tax havens 168 Tax planning in the international environment 173 Tax incentives and competition 179 Globalization, the Internet and taxation 182 A final remark 187 7 The International Cost of Capital and Capital Structure 188 The cost of capital and investment decisions 190 The weighted average cost of capital 191 Implications of using the cost of capital as a discount rate 193 The cost of capital of MNCs 195 Domestic currency versus foreign currency financing 199 CAPM and the cost of capital 206 The cost of capital across countries 210 Choosing the capital structure 215 More about the choice of capital structure 217 A final remark 220 8 Transfer Pricing 221 The definition and determinants of transfer pricing 221 The techniques of setting transfer prices 229 A formal exposition of the effects of transfer pricing 233 Regulation and the manipulation of transfer prices 238 A final remark 241 9 Control and Performance Evaluation in MNCs 243 Organizational aspects of MNC behaviour 243 Definition of control in MNCs 244 Centralized versus decentralized cash management 247 Empirical studies of the control function 249 Performance evaluation in MNCs 250 Evaluation of domestic and foreign operations 252 Measures of performance 258 Budgeting for global operations 262 A final remark 264 10 Summary and Conclusions 265 Recapitulation 265 What motivates FDI? 267 FDI and MNCs: the arguments for and against 270 The verdict 273