A number of influential commentators have questioned why any enterprise would engage in foreign direct investment given the level of relevant risk. The high level of risk explains a significant level of home country bias in investment. Yet there are opportunities to make such investment and earn a good return. A clear and sensible decision rule is necessary which avoids both mistakes of poor selection and mistakes of omission. It is very important for decision makers to incorporate an accurate measure of such risk in their investment appraisal. This is not as easy as it seems. This book examines the various approaches to the incorporation of such risk, such as the capital assets pricing model and the real options approach, pointing out their shortcomings. It puts together recommendations which try to limit the complexity of the rule while at the same time suggesting a rule which has a theoretical justification.

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