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  3. Lecture International finance: An analytical approach (3/e): Chapter 16 - Imad A. Moosa

Lecture International finance: An analytical approach (3/e): Chapter 16 - Imad A. Moosa

Chapter 16 - Foreign direct investment and international capital budgeting. In this chapter, the learning objectives are: To discuss the characteristics of FDI; to outline the theories of FDI; to describe the techniques of international capital budgeting; to examine the implications of taxation, country risk and transfer prices for international capital budgeting. Chapter 16 Foreign Direct Investment and International Capital Budgeting Objectives • To discuss the characteristics of FDI • To outl

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  1. Chapter 16 Foreign Direct Investment and International Capital Budgeting
  2. Objectives • To discuss the characteristics of FDI • To outline the theories of FDI • To describe the techniques of international capital budgeting • To examine the implications of taxation, country risk and transfer prices for international capital budgeting Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-2
  3. Definition • An investment project is classified as direct investment if the investor acquires ‘significant control’ over a firm Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-3
  4. What is ‘significant control’? • Ownership of 10-25% • United States, Japan and Australia: 10% • France, Germany and United Kingdom: higher threshold • Belgium and the Netherlands: no specific number Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-4
  5. Reasons for interest in FDI • Rapid growth and changing pattern of FDI • Concern about causes and consequences of foreign ownership • FDI channels resources to developing countries • The role played in transforming ex-communist countries Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-5
  6. Modes of foreign market entry • Export of the goods produced in the source country • Licensing a foreign company to use technology • Foreign distribution of products through a subsidiary • Foreign (international) production Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-6
  7. Choice between exporting and FDI • Profitability • Opportunities for market growth • Production cost levels • Economies of scale Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-7
  8. Licensing • This involves the supply of technology and know- how or the use of a trademark or a patent for a fee • It offers one way to generate revenue from foreign markets that are otherwise inaccessible Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-8
  9. Franchising • Companies with brand-name products move offshore by granting foreigners the exclusive right to sell their products in a designated area Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-9
  10. Types of FDI • Greenfield investment • Brownfield investment • Mergers and acquisitions • Joint ventures Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-10
  11. Choice between greenfield investment and M&As • Firms with lower R&D intensity, more diversified firms and large multinationals are more inclined to indulge in M&As • Inter-country cultural and economic differences reduce the tendency for M&As (cont. Copyright 2010 McGraw-Hill Australia Pty Ltd ) PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-11
  12. Choice between greenfield investment and M&As (cont.) • Multinationals with subsidiaries prefer acquisitions. • The tendency for M&As depends on the supply of target firms • Slow growth in an industry encourages M&As Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-12
  13. Theories of FDI • A number of theories or hypotheses have been put forward to explain FDI Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-13
  14. The differential rates of return hypothesis • Capital flows from countries with low rates of return to countries with high rates of return Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-14
  15. The diversification hypothesis • The choice among various projects is determined by expected return and risk Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-15
  16. The output and market size hypothesis • The volume of direct investment in one host country depends on sales or market size Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-16
  17. The industrial organisation hypothesis • A firm indulges in FDI despite inter-country differences because it has some advantages such as brand name, patent, managerial skills, etc. Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-17
  18. The internalisation hypothesis • FDI arises from efforts by firms to replace market transactions with internal transactions Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-18
  19. The location hypothesis • FDI exists because of the international immobility of some factors of production Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-19
  20. The eclectic theory • Three conditions must be satisfied if a firm is to engage in FDI: (i) It must have comparative advantages (ii) It is better to use rather than lease these advantages (iii) It is more profitable to use these advantages with factor inputs abroad Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 16-20
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