Foreign Direct Investment - PowerPoint PPT Presentation

1 / 23
About This Presentation
Title:

Foreign Direct Investment

Description:

0.4 productive units to produce 1 X. 0.5 productive units ... xenophobia. Asian economies. 22. Chapter 16 - Foreign Direct Investment. Assessing Political risk ... – PowerPoint PPT presentation

Number of Views:66
Avg rating:3.0/5.0
Slides: 24
Provided by: apalas
Category:

less

Transcript and Presenter's Notes

Title: Foreign Direct Investment


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

2
Absolute advantage (Smith)
  • Absoluteland
  • 0.2 productive units to produce 1 X
  • 0.3 productive units to produce 1 Y
  • Relativeland
  • 0.4 productive units to produce 1 X
  • 0.5 productive units to produce 1 Y
  • Absoluteland has absolute advantage in the
    production of both X and Y

3
Relative Advantage (Ricardo)
  • Absoluteland
  • The X price of Y is 0.67
  • The Y price of X is 1.5
  • Relativeland
  • The X price of Y is 0.8
  • The Y price of X is 1.25
  • Relative advantage
  • Absoluteland in X
  • Relativeland in Y

4
The world price of X and Y
  • Perfect world
  • Absoluteland specializes in Y
  • World X price of Y is between 0.67 and 0.8
  • Relativeland specializes in X
  • World Y price of X is between 1.25 and 1.5
  • Actual price
  • Evolution of trade will determine a common world
    price

5
Reasons for investment
  • markets
  • raw materials
  • production cost reduction
  • technology transfers
  • reduction of political risk

6
Government interference
  • Full employment policies
  • Tax breaks for automobile manufacturers
  • Economic development
  • Bombadier
  • Essential industries protected
  • Agriculture
  • Defence related industries
  • Boeing, McDonald/Douglas in the U.S.

7
Factors of production mobile
  • Capital
  • Very efficient world-wide capital markets
  • Flows of capital large
  • Multinationals easily transfer production
  • Technology
  • Intellectual property is very hard to protect
  • Labor
  • Illegal immigrants
  • Immigration policy

8
Factors of production substituted
  • Capital for labor (capital investment)
  • Labor for capital (outsourcing)
  • Technology transfers
  • Through subsidiaries
  • Through joint ventures

9
Economies of scale scope
  • scale economies
  • production
  • finance
  • research development
  • transportation
  • purchasing
  • marketing
  • scope economies
  • finance
  • marketing

10
Product factor markets
  • new product markets
  • barriers to entry
  • reduction of barriers
  • factor markets
  • labour
  • money capital
  • technology
  • goods
  • resource

11
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

12
Modes of investment
  • Production at home and exporting
  • joint venture
  • merger
  • licensing agreement
  • management contract

13
Production at home, exporting
  • Advantages
  • Control
  • Less risk
  • Political risk
  • Disadvantages
  • High cost of labor
  • Transaction and operating exposure

14
Joint Venture
  • Advantages
  • partner has country specific knowledge
  • markets, politics, regulation
  • politicians prefer local ownership
  • Less transaction or operating exposure
  • Disadvantages
  • lack of control
  • financing, transfer pricing, strategy
  • valuation is difficult
  • Potential translation exposure

15
Mergers Acquisitions
  • Advantages
  • economies of scale scope
  • reduces operating exposure
  • obtain technology
  • Obtain markets
  • Transaction, operating exposure lower
  • Disadvantages
  • divergent corporate cultures
  • political opposition
  • valuation is difficult
  • Potential translation exposure

16
Strategic alliances
  • Advantages
  • exchanging stock
  • marketing agreements
  • cost sharing agreements
  • Disadvantages
  • Little control

17
Licensing
  • Advantages
  • No investment costs
  • Partner with knowledge of local markets
  • disadvantages
  • cash flow transfer of knowledge
  • may create competitor

18
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

19
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 ??

20
Micro risks - Government Policy Goals
  • employment policies
  • resource reallocation
  • taxes
  • transfers
  • trade policies
  • protectionism
  • balance of payments
  • exchange rate policy
  • economic development

21
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

22
Non-economic goal conflicts
  • economic emperialism
  • African economies
  • national security concerns
  • U.S. concern
  • corruption nepotism
  • South, Central America, Africa, Asia
  • xenophobia
  • Asian economies

23
Assessing Political risk
  • political stability
  • probability of change
  • direction change would take
  • firm specific
  • negotiating terms
  • operating strategies to mitigate risk
Write a Comment
User Comments (0)
About PowerShow.com