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Foreign Direct Investment

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declining N. America, steady-state market in Europe, ... xenophobia. Asian economies. Assessing Political risk. political stability. probability of change ... – PowerPoint PPT presentation

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Title: Foreign Direct Investment


1
Foreign Direct Investment
  • Chapter Thirteen
  • Eitman, Stonehill, Moffett

2
Reasons for investment
  • markets
  • raw materials
  • production cost reduction
  • technology transfers
  • reduction of political risk

3
Economies of scale Scope
  • scale economies
  • production
  • finance
  • research development
  • transportation
  • purchasing
  • marketing
  • scope economies
  • finance
  • marketing

4
Product factor markets
  • new product markets
  • barriers to entry
  • reduction of barriers
  • factor markets
  • labour
  • money capital
  • technology
  • goods
  • resource

5
Defensive investments
  • product cycle - cigarette industry
  • declining N. America, steady-state market in
    Europe, increasing Eastern Europe, Asia
  • follow the leader - China
  • conventional wisdom, huge market
  • horizontal or vertical integration
  • zero-sum game in home markets
  • growth leads to destructive competition
  • knowledge transfers

6
Modes of investment
  • joint venture
  • merger
  • licensing agreement
  • management contract

7
Joint Venture
  • Advantages
  • partner has country specific knowledge
  • markets, politics, regulation
  • politicians prefer local ownership
  • Disadvantages
  • lack of control
  • financing, transfer pricing, strategy
  • valuation is difficult

8
Mergers Acquisitions
  • Advantages
  • economies of scale scope
  • reduces operating exposure
  • obtain technology
  • Disadvantages
  • divergent corporate cultures
  • political opposition
  • valuation is difficult

9
Other strategies
  • strategic alliances - Air Canada, united
  • exchanging stock
  • marketing agreements
  • cost sharing agreements
  • licensing
  • cash flow transfer of knowledge
  • may create competitor

10
Political risk
  • change in rules which lead to reallocation of
    resources
  • tax rules
  • ownership rules/capital controls
  • restrictions of foreign ownership
  • exchange controls
  • change in political structure which portends
    reallocation of resources

11
Macro risks
  • expropriation
  • government seizure of property
  • valuation
  • book?? Market??
  • exchange rates??
  • time value of money
  • civil strife
  • investment in Yugoslavia, Russia??
  • antagonistic governments
  • for US Iran , Cuba ??

12
Micro risks - Government Policy Goals
  • employment policies
  • resource reallocation
  • taxes
  • transfers
  • trade policies
  • protectionism
  • balance of payments
  • exchange rate policy
  • economic development

13
Barriers
  • limitations to trade
  • quotas, embargoes, licensing, domestic content
  • administrative restrictions
  • fees, tariffs, deposit requirements, tax
    adjustments
  • non-economic discrimination
  • quality standards, environmental, health
  • direct government interference
  • procurement, export subsidies, domestic subsidies

14
Non-economic goal conflicts
  • economic emperialism
  • African economies
  • national security concerns
  • U.S. concern
  • corruption nepotism
  • South, Central America, Africa, Asia
  • xenophobia
  • Asian economies

15
Assessing Political risk
  • political stability
  • probability of change
  • direction change would take
  • firm specific
  • negotiating terms
  • operating strategies to mitigate risk
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