Book excerpt: Evidence suggests that interntaional capital markets are neither fully integrated nor completely semented. There is, however, currently no general method available for computing the required return on corporate investments in such capital markets. This paper uses a model of partially integrated international capital markets to derive optimal international capital budgeting rules. We show how capital budgeting rules depend on the level of investor costs to cross-border investment, both directly and also indirectly through the portfolio specialization they induce. We explain how required returns differ for different companies raising capital in such markets and how these costs of capital may be estimated. We also explain how these differences in required return can be consistent with general equilibrium and the effects they have on incentives for foreign direct investment.