Problem:
Foreign investments are conventionally assumed to involve additional costs of distance and costs due to unfamiliarity with foreign governments, languages, legal systems, and distribution channels. In a domestic context, positive net present value (NPV) typically originates from economic rents on a firm's competitive advantages, including technological information, marketing expertise, and managerial talent. How do these advantages explain why direct foreign investment occurs? Explain why the NPV might be higher on the foreign project than on a competing domestic project, and explain why the NPV might be higher when undertaken by the foreign (multinational) firm than a competing local firm.