Strategic Corporate Finance: Applications in Valuation and Capital Structure

GLOBAL CAPITAL COSTS

Under the pressure of a prolonged weakness and uncertainty in the equity market, many companies face unprecedented demand for profitable, long-term sustainable growth. Corporate expansion through foreign direct investment continues to offer investors the prospect of valuable growth opportunities.

Global growth remains an essential part of the strategy of most large companies today. Companies pursuing global growth accomplish something their investors appear unwilling or unable to do themselves.11 Global diversification is a strategy to cope with economic exposures that market integration and risk management were supposed to eliminate but did not. Despite the development and integration of world financial markets, investors continue to behave as if there are substantial costs to foreign portfolio investment.

But today’s corporate financial management practices are decidedly at odds with the strategic benefits of foreign direct investment. There may be no other area where corporate practice diverges so far from finance theory. Many still cling to standard practices and ad hoc rules of thumb where excessive hurdle rates for overseas operations and investments often impede value-enhancing growth.

Though the investment returns in emerging economies are often more volatile than the returns on domestic operations, emerging market investments do not contribute as significantly as one might expect to the net risk of a multinational corporation’s (MNC) portfolio.12