Ch.13 & 14 HW_Part 2 - Shaun [email protected] FIN...

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Shaun Lanshe @00717301 12/01/09 FIN 4613 HW Ch.13: Direct Foreign Investment Questions (15-16) 15. DFI Strategy: a) The primary comparative advantage that J.C. Penney will have over local independent variety stores in the targeted foreign country is its ability to leverage its economies of scale. It is a well established MNC and as sales/production increase, firm and cost efficiency will also likely increase resulting in cost reductions. Another advantage that J.C. Penney will have is a reduced risk due to international diversification. Due to geographic concentration of the foreign stores, their cash flows will be influenced solely by the environmental conditions (political and economic risk) in which they operate. While, J.C. Penney has international operations and thus, changing conditions in one operating location will potentially be offset by others reducing the riskiness of cash flows. b) As mentioned in part A, J.C. Penney can reduce firm risk through an international diversification strategy. The primary determinant of beneficial international diversification is the degree of correlation for performance levels among investments/holdings. The less correlated foreign projects are, the greater the reduction in risk because the cash flows will offset one another. While, highly correlated projects will be more risky because performance will be impacted similarly; this will compound rather than offset the effects.
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