Question

Can MNCs provide international diversification benefits for investors?

Can MNCs be used as a substitute for investing directly in companies in foreign countries?

Answer 1

Q1)

Answer: yes

A MNC has setup of business in various countries; since there are so many countries involved, many countries exchange rates, stock market uncertainties, and political fluctuations are adjusted mutually – means, if one exchange rate is high the other exchange rate should be low. In this way the international diversification could be done, which benefits the investors.

Investing in MNC is just like investing in international mutual funds – both have diversification benefits.

Q2)

Answer: no

Direct investment doesn’t have diversification benefit, since there is only one company, one country, and one exchange rate. Investment in MNC has diversification benefits (as discussed above). Therefore, these two are not substitutes to each other.