IF Topic 4

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Anonymous
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79585
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IF Topic 4
Updated:
2011-04-14 07:30:01
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Foreign Direct Investment Cross Border
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Foreign Direct Investment and Cross Border Investment
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  1. Multinational Corporations
    Firms incorporated in ONE country but has production and sales in several other countries.

    to maximise share holder wealth with greater cost effectiveness and profitability resulting from firm specific advantages and location specific advantages
  2. Methods of Expansion
    • Exporting (and Importing)
    • Licensing: Give official or legal permission to do or own a specified thing.
    • Franchising: Arrangement where one party (the franchiser) grantsanother party (the franchisee) the right to use itstrademark or trade-name as well as certain business systems and processes,to produce and market a good orservice according to certain specifications.
    • Joint Ventures: New firm formed to achieve specific objectives of apartnership like temporary arrangement between two or more firms.
    • Producing Abroad (Acquisition of existing Operations, New - Greenfield)
  3. Motives for Foreign Direct Investment
    Market Imperfections: Kindleberger (1969) - for foreign direct investment to thrive there must be some imperfection in markets for goods and factors including among the latter technology, or some interference in competition by government or by firms within separate markets. (firm can't make profit in perfect competition)

    • Revenue related:
    • Attract new sources of demand (since there is no new demand in domestic market => find new customer)
    • Enter profitable markts
    • Exploit monopolistic advantages (already had protected market share and economies of scale)
    • React to trade restrictions
    • Diversify international (scase flow will be less volatile to economic condition)

    • Cost related
    • Fully benefit from economies of scale (free capicity so we can ultilize it to new customer)
    • Use foreign factors of productions (low wage from asia, infrastructure)
    • Use foreign raw materials
    • Use foreign techonology
    • React to exchangee rate movement (cheaper to engage to foreighn investment)
  4. Internalisation theory
    Firm internalises a transaction whenver the cost of using the marekts or contractual agreements is hger than that of organising it internally
  5. Eclectic Theory
    Dunning (2001)

    Brings together the theories of the "OLI" paradigm with Ownership, Location, Internalization
  6. Product Life Theory
    Most products go through a number of clearly defined stages from birth to old age

    Assumptions:tastes differ, economies of scales, info flows restricted, predictable changes in production/marketing through time

    • Four stages:
    • Innovating firm produces and marets solely in the home market
    • Bigger markets and greater econoies available through exporting
    • Overseas producers gain substaintial market share
    • Original firm crease production
  7. Designing a global expansion Strategy
    • Awareness of profitable investments
    • Selecting a mode of entry
    • Auditing effectivess of entry modes
    • Using appropriate evaluation criteria
    • Extimateing the longevity of a competitive advantage

    e.g: Procter & Gamble

    1988 teamed up with Hutchinson Whampoa

    Researched market thoroughly, chose Guangdong Province and to launch skin/hair care products rather than laundry.

    By 1989 P&G had invested only $4.5m in the start up. In 1991, sales exceed $50m and approached $100m in 1992-93.
  8. Coutry risk
    • Political risk (from government action)
    • Exposure to a change in the value of an
    • investment resultant upon government actions
    • -Macro risk: adverse government actions affect all firms
    • -Micro risk: ... affect selected area

    • Tranfer risk:
    • -uncertainty about cross-border flows of capital, payments, know-how
    • -Unexpected impositionof capital controls, withholding taxes on dividends and interest payments

    • Operation risk
    • -Uncertainty about the host country’s policies affecting the local operations of MNCs
    • -Unexpected changes in environmental policies, sourcing/local content requirements, minimum wage law, restrictions on access to local credit facilities

    • Control Risk
    • -Uncertainty about the host country’s policy regarding ownership and control of local operations
    • -Restrictions imposed on maximum ownership by foreigners, mandatory transfer of control (fade out),
    • nationalization.

    • Measurement: Country-specific, Firm-Specific (Euromoney, Institutional Investor)
    • Management
    • Avoidance
    • Insurance
    • Agreements
    • Post-expropriation policies
  9. Erb, Harvey and Viskanta
    (1996)

    Explore 5 measures of country risk
    Political risk
    Economic risk
    Financial risk
    Composite risk (ICRG -Political
    risk services’ International Country Risk Guide )
    Country Credit Ratings (Institutional Investor)
    • Measures (especially financial risk) contain
    • info about future expected returns

    Risk ratings are correlated with fundamentals
  10. Transparency International
    Corruption Perceptions Index

    Bribe payers index

    http://www.transparency.org

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