Chapter 20.2, Problem 4R

To determine

To evaluate: The reasons that attract foreign countries to buy US securities.

Explanation of Solution

The reasons that might encourage a foreign country to buy US securities are:

1. Transport and infrastructure: The cost of transport and service levels is an important element for a project. A nation may have labor costs that are low, but it is not an advantage if there are high transport costs to get the products into the world market. Countries with exposure to the sea benefit more than landlocked countries which have higher shipping costs for products.

2. Size of economy: Often, Direct Foreign investment is geared towards sale of goods directly to the nation associated in luring the investment. The population size and the scope for growth of economy is therefore be critical in attracting investment.
3. Exchange rate: A weak exchange rate in the host nation will draw more FDI as buying assets would be cheap for the multinational. But volatility in the rate of exchange may prevent investment.

Economics Concept Introduction

Introduction: A Direct Foreign Investment (DFI) is an investment in business opportunities situated in some other nation made by a company or person in one nation. In general, DFI occurs when foreign business operations are developed by an investor or an investor takes foreign business assets in a foreign country.