Chapter 15 • International aspects of business finance
not affect foreign markets. We shall pick up the arguments about risk and interna-
tional diversification later in the chapter.Internationalisation and shareholders’ wealth
It seems then that refusing to be constrained by national boundaries can offer an
increased number of investment opportunities. It can also provide the possibility
of lowering the cost of capital. This is illustrated in Figure 15.1. The red curved line
shows the investment opportunities available to a business, assuming that it buys its
supplies in the home country and sells only in the home market. To the left are the
most profitable opportunities, which the business will take first. As these are exploited,
the business moves to the right, to the less advantageous ones. The red straight, hor-
izontal line is the cost of finance, assuming that the business uses only home country
sources of finance. It would choose to invest in all of the projects up to point A, where
the return on the investment just equals the cost of financing it.Figure 15.1
The investment
opportunities and
cost of finance for a
business assuming
(A) a strictly home
country outlook and
(B) an international
one
When the business looks only to the home market, a home country productive base, and
exclusively home country sources of finance, it will invest in all opportunities to the left
of point A. It will earn returns equal to the vertical distance between the two red lines for
each investment. If the business embraces internationalisation, the number of profitable
opportunities expands and the cost of finance (the blue lines) reduces, leading to larger
returns and greater wealth generation.The two blue lines represent the investment opportunities and the financing cost
where the business exploits overseas opportunities. There are higher-yielding invest-
ment projects, and the average cost of finance is less. This now means that the business
would invest in all projects up to point B, and the return on the various investments
is the vertical distance between the blue lines. Thus it will be more effective at gener-
ating wealth for its shareholders, both because it is confronted by a higher number of
profitable opportunities and because the cost of finance is less.
Figure 15.1 is obviously very simplified and theoretical. In real life, at any particu-
lar point in time, the best investment opportunities may lie in the home country.
Similarly, at the particular time that the business is looking for new finance, the home
country capital market may be the cheapest source. In the long run, however, busi-
nesses that widen their commercial horizons are likely to generate more wealth.