International Capital Budgeting? Importance

International capital budgeting is more complicated than domestic capital budgeting because MNC’s are typically large and capital intensive, and because the process involves a larger number of parameters and decision variables. In general, international capital budgeting involves a consideration of more risk than domestic capital budgeting. But international capital budgeting involves the the estimation of some measures or criteria that indicate the feasibility or otherwise of a project such as the Net Present Value (NPV). However, certain factors that are not considered in domestic capital budgeting should be taken into account in international capital budgeting because of the special nature of FDI projects.

International capital budgeting involves substantial spending capital investment in projects that are located in foreign countries, rather than in the home country of the MNC. Foreign projects differ from purely domestic projects with respect to a number of factors- the foreign currency dimension, different economic indicators in different countries, and different risk characteristics with which the MNC is not as familiar with as those pertaining to domestic projects. All these differences leads to a higher level of risk in international capital budgeting than in domestic capital budgeting.

Importance of International capital budgeting

  1. Develop and Formulate Long-term Strategic Goals: The ability to set long-term goals is essential to the growth and prosperity of any business. The ability to appraisal investment projects via capital budgeting creates a frame work for business to plan out future long-term direction.
  2. Seek out New Investment Projects: Knowing how to evaluate investment projects gives a business the model to seek and evaluate new projects, an important function for all business as they seek to compete and profit in their industry.
  3. Estimate and Forecast Future Cash Flows: Future cash flows are what create value for business overtime. Capital budgeting enables executives to take a potential project and estimate its future cash flows, which then helps determine if such a project should be accepted.
  4. Facilitate the Transfer of Information: From the time that a project starts off as an idea to the time it is accepted or rejected, numerous decisions have to be made at various levels of authority. The capital budgeting process facilitates the transfer of information to the appropriate decision makers within a company.
  5. Monitoring and Control of Expenditures: Since a good project can turn bad if expenditures aren’t carefully controlled or monitored, this step is a crucial benefit of the capital budgeting process.
  6. Creation of Decision:

Factors Affecting International Capital Budgeting

  1. Blocked Funds.
  2. Amenities and Concessions Granted by Host Countries..
  3. Differing Rates of National Inflation.
  4. Political Risk involved in Foreign Investment.
  5. Exchange Rate Fluctuations.
  6. Subsidized Financing.
  7. Lost Exports.
  8. International Diversification Benefits.
  9. Host Government Incentives.