I

Value of firm

Financial package;_^

plan and analysis

Figure 1.1 An integrated decision-making model in global finance

1.4.2 Market imperfections

Perfect competition exists when sellers of goods and services have complete freedom of entry into and exit out of any national market. Under such a condition, goods and services would be mobile and freely transferable. The unrestricted mobility of goods and services creates equality in costs and returns across countries. This cost—return uniformity everywhere in the world would remove the incentive for foreign trade and investment.

Factors of production, such as land, capital, and technology, are unequally distributed among nations. Even with such comparative advantages, however, the volume of international business would be limited if all factors of production could be easily transferred among countries. The real world has imperfect market conditions, where the resources available for the production of goods are somewhat immobile.

The trend toward a global economy through the World Trade Organization and the European Union will undoubtedly remove market imperfections that restrict the international

Return

Opportunity set: international business

Opportunity set: domestic business

Opportunity set: international business

Opportunity set: domestic business

Relative to project A:

1. Project B has the same return but less risk.

2. Project C has the same risk but higher return.

3. Project D has higher return and less risk.

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