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Chapter 18: Q.18 (page 414)

Suppose that a foreign resident is contemplating buying 5 per cent of the shares of a company based in a developing nation but is experiencing difficulty determining whether the firm is riskier than others in that country. What type of investment is this foreign resident considering, and what type of asymmetric information problem is he or she experiencing?

Short Answer

Expert verified

On account of this financial backer mulling over the acquisition of 5 percent offers in the unfamiliar organization as Foreign Portfolio Investment (FPI), failure to get adequate data on country risk influences his venture choice.

Step by step solution

01

Given Information

A foreign resident has purchased 5percentof the portions of an organization in an emerging country and is a detached financial backer who has contributed with a theoretical intention.

02

Explanation

His goal is to bring in speedy profit from his cash and make a drawn-out revenue source, realizing that the creating economy would have bullish stock examples. Emerging nations with pacing industrialization and higher paces of financial development have a more worthwhile venture environment however inserted with less secure business sectors. Useful data on the political turns of events, likely busts and blasts and monetary essentials are quintessential for sane venture choices through FPI.

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Most popular questions from this chapter

During the past year, several large banks extended 200million in loans to the government and several firms in a developing nation. International investors also purchased 150million in bonds and 350million in stocks issued by domestic firms. Of the stocks that foreign investors purchased, 100million were shares that amounted to less than a 10percent interest in domestic firms. This was the first year this nation had ever permitted inflows of funds from abroad.

a. Based on the investment category definitions discussed in this chapter, what was the amount of portfolio investment in this nation during the past year?

b. What was the amount of foreign direct investment in this nation during the past year?

A developing country has determined that each additional 1billion of net investment in capital goods adds 0.01percentage point to its long-run average annual rate of growth of per capita real GDP.

a. Domestic entrepreneurs recently began to seek official approval to open a range of businesses employing capital resources valued at 20billion. If the entrepreneurs undertake these investments, by what fraction of a percentage point will the nation's long-run average annual rate of growth of per capita real GDP increase, other things being equal?

b. After weeks of effort trying to complete the first of 15stages of bureaucratic red tape necessary to obtain authorization to start their businesses, a number of entrepreneurs decide to drop their investment plans completely, and the amount of official investment that actually takes place turns out to be 10billion. Other things being equal, by what fraction of a percentage point will this decision reduce the nation's long-run average annual rate of growth of per capita real GDP from what it would have been if investment had been 20billion?

Take a look at Table 18-1. Based on the basic arithmetic of economic growth, what were the average annual rates of real GDP growth since 1990 for those nations experiencing negative rates of annual growth of per capita real GDP?

Discuss the sources of international investment funds for developing nations.

Describe the growth shift from advanced nations to developing and emerging countries.
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