1 / 22

Foreign Direct Investment

Foreign Direct Investment. Chapter 7 Instructor Shan A. Garib, Winter 2013. Foreign Direct Investment. Objectives FDI creates a new company by two or more existing companies One company gives up a lot of control

beate
Download Presentation

Foreign Direct Investment

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Foreign Direct Investment Chapter 7 Instructor Shan A. Garib, Winter 2013

  2. Foreign Direct Investment Objectives • FDI creates a new company by two or more existing companies • One company gives up a lot of control • Companies can ALSO invest directly in a foreign market without partnering with a local company • Greenfield – riskiest but avoid entry barriers, retain control and make substantial profits • Acquisitions - This chapter is about the rationale behind FDI and why it might be risky! M&A’s are discussed and considerations before any choice to enter Types of JV are discussed and why use them

  3. Foreign Direct Investment Foreign Direct Investment • Involves investing in company or building in another country • Involved acquisition of controlling interest in foreign market • Ways to invest: • Construction of facilitates eg Greenfield • M&A • Investment in JV Reasons for FDI • Prohibition or limits of imports produced in other countries but can build a production in that country • Producing goods in target market eliminates import duties and taxes or permits • Can get skilled local labour in target market often cheaper cost • Can become more competitive

  4. Foreign Direct Investment Foreign Direct Investment Reasons for FDI Investment to gain access to closed markets • Key issues to consider: • How important is the market? • How much and what type must be made to gain access • What are the ownership requirements for competing successfully Investment for Intelligence • Mostly high-tech companies • Ask these questions: • Where are the new areas of opportunity • How is business done? • Who should the company get to know? • What is the competition doing?

  5. Foreign Direct Investment Foreign Direct Investment Reasons for FDI Taking advantage of lower costs • Low cost labour and raw materials • Seek expertise and innovation for competitive advantage • Key questions to consider: • How important are factor costs • How important is an educated work force • Can company get cost advantages through automation? Investment to enhance competitiveness • Eg first to develop a market • Key issues to consider: • Will the company be first in the market and get comp advantage? • Will entering the market force competitiors to react? • Can company capture market share? • Will your actions to enter take profits away from competition • Can company get preferred distribution?

  6. Foreign Direct Investment Common Investment Vehicles • The reason to enter will determine Investment vehicles

  7. Foreign Direct Investment Greenfield Investments • Investing in the development of manufacturing facility, office or retail site in foreign markets • Ownership is usually held by parent company as wholly owned subsidies Reasons for making greenfield Investment • Need to construct a specific plant to meet business requirements • Need to avoid environmental liability of an existing plant\ • Avoid expensive retro-fitting of existing plant • Absence of suitable and available partners in a target market • Presence of legal impediments Advantages of Greenfield Investment

  8. Foreign Direct Investment Greenfield Investments Advantages of Greenfield Investment • Built to meet exact needs and can accommodate latest tech • Can build corp culture by hiring right ppl and training them • Have 100% control over what it does • Reduced risk of liabilities • Adjust strategies easily Drawbacks of Greenfield Investments • Strategy is complex, expensive and risky • A lot to invest in, plant and equip, dist, hiring etc… • Accusations of being controlled from abroad • Takes time to establish plant and equipment/office, hire • Hard to leave, lots of commitment

  9. Foreign Direct Investment Greenfield Investments

  10. Foreign Direct Investment Greenfield Investments

  11. Foreign Direct Investment Mergers and Acquisitions • Purchase assets and majority ownership of another country • Two businesses are combined • Most successful when two businesses have developed a business relationship- mutual trust and respect • Without this, its is called a hostile takeover • 60-70% acquisitions fail and 90% lose market share Acquisition Considerations • Foreign acquisitions or difficult b/c: Capital • Usually done in cash • Accounting practices may vary • Hard to get valuation info

  12. Foreign Direct Investment Mergers and Acquisitions Acquisition Considerations • Foreign acquisitions or difficult b/c: Time • Slow to set up b/c have to find the right company • Locating an acquisition can take 2-5 years • Too long to take advantage of evolving market Legal Restrictions Cultural Considerations • Understand differences Company Background • Know it through research (history, financial situation, reputation, competitiveness) Environmental risks • Make sure there are unknown enviro risks or liabilities

  13. Foreign Direct Investment Mergers and Acquisitions Acquisition Considerations • Foreign acquisitions or difficult b/c: Fact Checking • Ensure all facts/figures are correct Developing a relationship • Develop joint objectives Pricing • Rational for pricing must be understood Taxation • Tax planning can max value of an acquisition • Foreign companies not treated the same, not have tax-free offers

  14. Foreign Direct Investment Mergers and Acquisitions

  15. Foreign Direct Investment Joint Ventures • Tightly coupled form of SA • Two companies make a legal agreement to design. Mfg, manage, market, distribute Reasons for JV: • Get local experts • Access new tech • Get reciprocal access • Fulfil a legal requirement for foreing owned corporations • Share skills Forms of JV: • Unincorporated – legal partnership only, no separate entity, partners maintain ownership in own assests • Incorporated – creation of separate business, shareholders are partners • -no rights to assets but share profits

  16. Foreign Direct Investment Joint Ventures

  17. Foreign Direct Investment Joint Ventures • Difference between unincorporated JV and standard partnership: • Partners in JV put in financial or skill based assets • Have separate interests in the assists • Operate separate businesses • In partnership, businesses of partners are run together with common goal • Partners in an unincorporated VJ share in profits but not liable for other party losses Deciding what to chose: • Level of risk – with an Incorporate JV a partner is liable for venture company's losses limited to amount of invested in shares • Level of privacy – b/c unincorporated JV is a private agreement it is protected form public scrutiny

  18. Foreign Direct Investment Joint Ventures Deciding what to chose: • Accounting – with UNINC. JV partners can retain separate accounts • Legislation – UNINC JV allow flexibility in company legislation • Financing – getting loans is easier with INCORP. JV JV Considerations • Control • Majority control advantages avoid decision deadlocks, prevent leaks of proprietary info • Foreign partner might resent partner • Hard to find local ppl for venture

  19. Foreign Direct Investment Joint Ventures JV Considerations • Valuations • Each partner contributes to JV • Value assessed at beginning • Autonomy • JV be independent of two founding partners, with own staff etc • Flexibility and compromise • Common goals make things easy • Continuity • Changes in personnel, policies and boards should be minimized • Exit Strategy • Must set terms for separation

  20. Foreign Direct Investment Joint Ventures JV Considerations • Record Keeping • Have a detailed legal agreement • Policies and procedures should cover: • Accounting practices • Budgeting approvals • Capital investment guidelines and restrictions • Sourcing of raw materials • Transfer pricing • Reinvestment or dividend payout • Legal counsel • Partners’ liability insurance • Roles of BOD

  21. Foreign Direct Investment Joint Ventures JV Considerations • Record Keeping • Have a detailed legal agreement • Policies and procedures should cover: • Health and safety • Environmental guidelines • HR practices • PR • Conflict resolutions • Confidentiality • Non compete • Exit provisions eg buy-sell agreements

  22. Foreign Direct Investment Joint Ventures Advantages of JV • Tap into partners knowledge • Use pre-existing distribution networks • Permit greater flexibility in market entry • Extend knowledge of both partners • Foster complimentary skills Disadvantages of a JV • Choice of personnel from partner might follow how important the JV is to the partner • Local partner often hires local staff • Reputations are tied • JV carries more legal and financial obligations • Exit costs maybe high

More Related