Foreign Direct Investment
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Transcript Foreign Direct Investment
Foreign Direct Investment and
Political Risk
International Financial Management
Dr. A. DeMaskey
1
Learning Objectives
How
do firms become multinational?
Why do firms locate production overseas?
What is country risk? Political risk?
How do we measure political risk?
2
How Do Firms Become
MNCs?
Exporting/Importing
Low Risk/Low Return
Strategy (early phase)
Licensing
(intermediate phase)
Franchising
Joint Ventures
Acquisitions
De
Novo Start Up
High Risk/High Return
Strategy (advanced phase)
Foreign Direct Investment
3
Global Trends in FDI
Total
annual worldwide FDI flows of $830 billion
FDI Outflows
– Strong preference to invest in developed countries
– Biggest targets are U.K. and Germany
– Comparative advantages
FDI
Inflows
– U.S. is an attractive source of FDI
– Other popular destinations include China, Mexico, and
Spain
– Locational advantages
4
Why Do Firms Invest
Overseas?
Market
Imperfections (Kindleberger (1969)
and Hymer (1975))
Imperfections in
– Product Markets
– Factor Markets
– Capital Markets
5
Key Factors in Locating
Production Overseas
Trade
Barriers
Imperfect Labor Markets
Intangible Assets
Market Failure Imperfections
Vertical integration
Product Life Cycle
Capital Market Imperfections
6
Hourly Labor Costs in the
Manufacturing Sector (2001)
Germany
$23.04
U.S.
$20.67
Belgium
$20.25
Japan
$19.52
Sweden
$18.41
France
$16.70
U.K.
$15.75
Canada
$15.70
Korea
$7.53
Hong Kong
$5.47
Mexico
$1.70
China
$0.60
Indondesia
$0.22
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Political Risk and FDI
Risk
of loss to the parent firm due to
adverse political developments in the host
country.
– Outright expropriation
– Unexpected changes in tax laws
8
Types of Political Risk
Depending
on
incidence:
– Macro risk
– Micro risk
Depending
on
manner:
– Transfer risk
– Operational risk
– Control risk
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Examples of Political Risk
China
Cuba
in 1949
in 1960
Egypt
in the early 1950s
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Key Factors in
Political Risk Analysis
Host country’s political and government
system
Track records of political parties and their
relative strength
Integration into the world system
Host country’s ethnic and religious stability
Regional security
Key economic indicators
Capital flight
POR
Index
11
Measuring Political Risk
In-house
experts
Outside experts;
– Morgan Stanley provides in-depth analysis of
country/political risks
– Euromoney provides country ratings by
Political
risk
Credit risk
Economic performance
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Economic and Political Factors
Underlying Country Risk
Fiscal
irresponsibility
Monetary instability
Controlled exchange rate system
Wasteful government spending
Quality of natural, human, and financial resources
Adjustment to external shocks
Market-oriented vs. statist policies
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Useful Web Sites for
Assessing Country Risk
What
are the political and financial outlook
for various countries?
– Consult the Country Commercial Guides
prepared by embassy staff at
http://www.usatrade.gov/website/ccg.nsf/ccgho
mepage?openform.
– Refer to the CIA’s World Factbook at
http://www.odci.gov/.
– Visit http://biz.yahoo.com/ifc/
More …
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Useful Web Sites for
Assessing Country Risk
How
risky is your country? Look up:
– http://www.worldbank.org/data/wdi2001/pdfs/t
ab5_2.pdf
– http://www.prsgroup.com/icrg/icrg.html
– http://www.institutionalinvestoronline.com/
– http://www.euromoney.com/
– http://www.moodys.com/moodys/cust/loadBus
Line.asp?busLine=sovereign
– http://www.standardpoor.com/
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