A MCDA-based Approach on Corporate’s Investment Decision Process: A case study of a Small-sized Firm’s decision on Foreign Direct Investment

Abstract

Small and medium-sized enterprises have frequently been facing great troubles in capital budgeting and investment decisions. Part of these troubles comes from the very nature of the modern financial decision problems. While well-known classic optimization methods can properly solve traditional financial decision problems with a single objective, they fail at solving real-world complex problems, which involves the interplay of multiple concurrent decision factors, against a backdrop of financial constraints. As a result, the corporate finance field has been demanding more sophisticated approaches, which integrate traditional quantitative methods with Multi-Criteria Decision Analysis techniques (MCDA), probabilistic models, simulations and optimization methods. This paper combines Corporate Finance theory with a MCDA approach based on the von Neumann-Morgenstern’s Utility Theory and presents a case study within a small-sized firm that needs to decide whether or not to expand into international operations, given a set of decision factors and financing constraints. The results deliver a structured decision framework to assist the firm’s managers, increasing impartiality in the investment decision process and help the decision makers (DM) reach a rightful, well-substantiated decision to their investment decision problem.