How can you evaluate foreign investment opportunities?

Robert Solow’s growth model is basic and rigorous enough to evaluate outward FDI opportunities. Y = A* f(K,L), where Y is yield, and A is a relevant technology factor applied to the function for capital and labor for the investment. When combined with fundamental project budgeting and accounting, the growth model informs the standard net present value calculation from a conservative set of premises developed during budgeting. The premises can be adjusted, using sensitivity analysis for initial capital outlay and project risk exposure, to identify whether a suitable IRR and value-at-risk threshold exists for the investment.

In order to evaluate foreign investment you should have a framework of criteria and methodology in place to do so. You should have objectives ahead of time that will become more fully formed once you have gathered information and data. You definitely need an understanding of the regulatory environment and the macro economics.

U.S. State Department and CIA both offer superficial surveys of individual country socio-economic status and level of corruption. In fact, they are often out of date, and as I stated: **superficial**. The best way to gauge country risk and perception of country corruption and ethics is to live in situ for several months - and to communicate with the locals from different class levels. I lived and worked abroad in central Asia for 20 years. Everyone complained about the level of corruption. I would tell them that the U.S. is also corrupt. Except, in the U.S. **money is speech** so the corruption is legal.

Obviously, for every business investment you need to estimate the Free Cashflows to Equity, debt levels, contractual waivers, applicability of insurance to risks to property and liability, and esoteric environmental liabilities - among other things. Ultimately, though, one needs to project out foreign exchange translate rates using Purchasing Power Parity and/or Interest Rate Parity formulae. Having experienced country currency exchange rate depreciation and devalue firsthand, I also grew an appreciation for converting foreign currency to gold or silver between earnings and repatriation. Finally, be aware that U.S. taxation policy or posture in general might change to your detriment, potentially blocking earnings repatriation.

This is problematic because the investor: 1) forecasts revenue and costs to derive earnings; and 2) likely aims to repatriate those earnings from local currency to USD or other valuable commodity (gold, for one). Hence, discounting potential/estimated local cashflow by the discount rate and then converting that number to USD is useless - because future FX rates would nullify your chosen discount rate. Include per period projection of FX translation (interest rate parity or other) and then discount adjusted/translated cashflows. Ultimately, real FX volatility may eat up that local currency, or improve translation. Still, interest rate parity is the accepted method to project future cross-border FX repatriation. Try forward contracts, too.

And do not include these risk factors in the discount rate. You could augment your projected FX translation rates with Monte Carlo volatility models or more simple scenario analysis. But keep your discount rate clean of such risk factors.