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