Beruflich Dokumente
Kultur Dokumente
FINANCIAL
MANAGEMENT
Fourth Edition
EUN / RESNICK
16-1 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Foreign Direct
Investment and Cross-
Border Acquisitions
16
Chapter Sixteen
INTERNATIONAL
Chapter Objective: FINANCIAL
MANAGEMENT
This chapter discusses various issues associated
with foreign direct investments by MNCs, which
Third Edition
play a key role in shaping the nature of the
emerging global economy. EUN / RESNICK
16-2 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Chapter Outline
Global Trends in FDI
Why
Why Do
Do Firms
Firms Invest
Invest Overseas?
Overseas?
Trade Barriers
Cross-Border Mergers and Acquisitions
Imperfect Labor Markets
Political Risk and FDI
Intangible Assets
Vertical Integration
Shareholder Diversification
16-4 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Global Trends in FDI
Several developed nations are the sources of FDI
outflows.
About 90% of total world-wide FDI comes from the
developed world.
Both developing and developed nations are the
recipient of inflows of FDI.
16-5 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
A
16-6
us
100
120
140
160
20
40
60
80
0
tra
l ia
C
an 8.4
ad 7
a
C 29.3
hi 29.2
n
Fr a 46.8
a 2.8
G nce
er
m 47.2
an 99.6
y
64.9
It
al 42.7
y
Ja 13.2
pa 13.4
M n
N ex 8.6
et 30.7
Inflows
he ico
16.4
Outflows
rl
an 1.8
ds
Sp 40.4
ai 50.4
Sw n
S e 28.6
1999-2004
U wi den 36.9
ni tz
te er 22.2
d la 19.4
K nd
U in 11.5
22.9
ni gd
te om
d
St 60.3
at 116.8
es
149.9
148.8
Average Annual FDI (in Billions)
Intangible Assets
Vertical Integration
Shareholder Diversification
16-7 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Trade Barriers
Government action leads to market imperfections.
Tariffs, quotas, and other restrictions on the free
16-8 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Labor Market Imperfections
Among all factor markets, the labor market is the
least perfect.
Recall that the factors of production are land, labor,
capital, and entrepreneurial ability.
If there exist restrictions on the flow of workers
across borders, then labor services can be
underpriced relative to productivity.
The restrictions may be immigration barriers or simply
social preferences.
16-9 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Labour Market Costs Around the World
(2001)
Persistent wage
Cou
differentials across
countries exist.
This is one on the
main reasons
MNCs are making
substantial FDIs in
less developed
nations. U.S. Department of Labor, Bureau of Labor Statistics
16-10 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Intangible Assets
Coca-Cola has a very valuable asset in its closely
guarded “secret formula”.
To protect that proprietary information, Coca-
16-11 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Vertical Integration
MNCs may undertake FDI in countries where
inputs are available in order to secure the supply
of inputs at a stable accounting price.
Vertical integration may be backward or forward:
16-12 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Product Life Cycle
U.S. firms develop new products in the developed
world for the domestic market, and then markets
expand overseas.
FDI takes place when product maturity hits and
16-13 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Product Life Cycle
The U.S. uc tion
pr od
Quantity
exports
imports
n
n su mptio
co
t ion
su mp
con imports
n
d uctio
pro
New product Maturing product Standardized product
16-14 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Product Life Cycle
It should be noted that the Product Life Cycle
theory was developed in the 1960s when the U.S.
was the unquestioned leader in R&D and product
innovation.
Increasingly product innovations are taking place
outside the United States as well, and new
products are being introduced simultaneously in
many advanced countries.
Production facilities may be located in multiple
countries from product inception.
16-15 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Shareholder Diversification
Firms may be able to provide indirect
diversification to their shareholders if there exists
significant barriers to the cross-border flow of
capital.
Capital Market imperfections are of decreasing
importance, however.
Managers can therefore probably not add value by
16-19 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Political Risk and FDI
Unquestionably this is the biggest risk when
investing abroad.
“Does the foreign government uphold the rule of
contracts.
16-20 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Political Risk and FDI
Macro Risk
All foreign operations put at risk due to adverse
political developments.
Micro Risk
Selected foreign operations put at risk due to adverse
political developments.
16-21 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Political Risk
Transfer Risk
Uncertainty regarding cross-border flows of capital.
Operational Risk
Uncertainty regarding host countries policies on firm’s
operations.
Control Risk
Uncertainty regarding expropriation.
16-22 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Measuring Political Risk
The host country’s political and government
system.
A country with too many political parties and frequent
changes of government is risky.
Track records of political parties their relative
strength.
If the socialist party is likely to win the next election,
watch out.
16-23 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Measuring Political Risk
Integration into the world system.
North Korea, Iraq, Libya are examples of isolationist
countries unlikely to observe the rules of the game.
Ethnic and religious stability.
Look at the recent civil war in Bosnia.
Regional security
Kuwait is a nice enough country, but it’s in a rough
neighborhood.
16-24 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Measuring Political Risk
Key economic indicators
Political risk is not entirely independent of economic
risk.
Severe income inequality and deteriorating living
standards can cause major political disruptions.
In 2002, Argentina’s protracted economic recession led
to the freezing of bank deposits, street riots, and three
changes of the country’s presidency in as many months.
16-25 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Hedging Political Risk
Geographic diversification
Simply put, don’t put all of your eggs in one basket.
Minimize exposure
Form joint ventures with local companies.
Localgovernment may be less inclined to expropriate assets
from their own citizens.
Join a consortium of international companies to
undertake FDI.
Localgovernment may be less inclined to expropriate assets
from a variety of countries all at once.
Finance projects with local borrowing.
16-26 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
Hedging Political Risk
Insurance
The Overseas Private Investment Corporation (OPIC)
a U.S. government federally owned organization,
offers insurance against:
1. The inconvertibility of foreign currencies.
2. Expropriation of U.S.-owned assets.
3. Destruction of U.S.-owned physical properties due to war,
revolution, and other violent political events in foreign
countries.
4. Loss of business income due to political violence
16-27 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res
End Chapter Sixteen
16-28 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res