Diversification, Exchange Risk and Corporate International Investment
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- Choi, J. J Int Bus Stud (1989) 20: 145. doi:10.1057/palgrave.jibs.8490356
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All international investments inevitably have some diversification consequences. Yet, the literature on foreign direct investment accords only a limited role to diversification or financial variables. This paper develops a theory of corporate international investment from the standpoint of finance in an environment where the segmentation of international capital markets for individuals or the presence of agency costs provide some independence to corporate decisions separate from shareholders. The model does not depend on any particular advantage of multinational firms, and is specifies the stochastic properties of domestic and foreign output and input prices. It is found that real exchange risk and diversification gains affect corporate international investment in a significant way. It is also shown that the model embodies several existing explanations based on behavioral and economic variables.