• FIRM = PORTFOLIO OF PROJECTS
• FDI analysis as portfolio investment
• PROJECT RISK = VARIANCE-COVARIANCE MATRIX
• SIMPLE CASE = EXISTING FIRM + NEW PROJECT
• Rnew = (1-w)Rfirm + wRproj
• Vnew = (1-w)Vfirm + wVproj + (1-w)wCOVfp
• CAPM APPROACH: firm is the market portfolio:
• Unanswered question: How does project affect firm beta?
• Can a change in capital structure at fixed operating conditions change firm value?
• [borrow money and repurchase shares: new stock issue to retire debt]
• Miller Irrelevancy: NO
• Hamada equation: YES
• Domestic diversification: no shareholder value since shareholders can diversify by purchasing shares. International diversification: capital market imperfections -: costly information and transacting -: shareholder wealth to FDI diversification
• changing?
• Value of international FDI:financing diversification
• covariance effect argument
• technology transfer argument (wealth=licensing fee)
• transaction cost argument
• underinvestment argument (IOS should contain all projects)
• value of international financing:
• capital market imperfections
• structural
• informational
• regulatory

• old argument: japanese investment in capital intensive long term projects is cost of capital issue not myopia issue. more debt -: lower cost of capital -: more investment -: higher firm value
• problem with this argument: capital structures have equalized
• japanese raised $125b overseas: inexplicable if lower cost of capital at home: what about currency issues? also 125 is not a large sum
• problems with comparing capital structure across countries:
• what is debt? look at contractual details and organization of businesses: is japanese debt really debt?
• effect of japanese crossholdings -: japanese firms start out in chapter 13 bankruptcy. mutual hostage taking. direct managerial role of banks: crossholdings: reduces total tse capitalization by half

• bank financing vs development of capital markets: japan and germany catching up.
• coping with cost of capital disadvantage
• big question: is there one? if so what is the source of the disadvantage? where is the wealth coming from? one possibility: agency costs
• ways to compensate: "reduce capital intensity" is wrong -: productivity issues. increase asset utilization. how? working capital mgt, capital equip quality and maintenance, worker knowledge and skill -: education education education
• p:e ratio comparison
• japan:usa
• per -: growth + beta risk: confounded: a lousy measure
• analysis based on no growth: problems with this assumption
• another problem with per analysis: japanese crossholdings
• crossholdings estimated to acct for 50% of market capitaliztion
• comparison of us and japanese unlevered beta returns (3.44 and 3.450 based on hamada eqn
• another approach: japanese market risk premium is lower for social and cultural reasons: agency costs:
• empirical literature on the topic is confusing because no clear theory for dealing with market integration issues.

• international financing to lower cost of capital and increase firm value
• imperfections in global capital markets
• danish regulations
• adr
• nyse listing
• sec disclosure
• us accounting
• costly information:transacting

rise in novo share priceswhere did this wealth come from?