FDI.ppt
- 1. Excel Books 14– 1 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij Chapter Foreign Direct Investment
- 2. Excel Books 14– 2 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij Foreign Direct Investment (FDI) is investment made by a transnational corporation to increase its international business. When firms become multinational, they undertake FDI. It generally involves the establishment of new production facilities in foreign countries to earn extra returns. The foreign investment decision results from a complex interaction of factors that differ in many ways from that governing the domestic investment decision. Foreign investment is generally motivated by a complex set of strategic, behavioural and economic and financial considerations. The evaluation process of foreign investments is generally longer, more costly, less accurate and involves more political and foreign exchange risks. Businesses and governments are motivated to engage in FDI to (1) expand markets by selling abroad; and (2) acquire foreign resources (e.g., raw materials, knowledge, production efficiency, etc). In addition, governments may also be motivated to gain political advantage.
- 3. Excel Books 14– 3 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij Why do Firms Invest Abroad 1. New sources of demand 2. Existence of various market imperfections 3. Economies of scale 4. Use foreign raw material and foreign technology 5. Exploit monopolistic advantage 6. Diversify internationally 7. Political safety seekers 8. Knowledge seeking:
- 4. Excel Books 14– 4 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij Internationalisation Though the decision to invest abroad is motivated by some of the factors identified earlier, the mere existence of some of the factors like competitive advantage and market imperfections is not enough to guarantee foreign direct investment. Firms exploit their advantages through traditional exports, licensed production, joint ventures or strategic alliances. For foreign direct investment to take place, competitive advantages must be firm specific and not easily copied. Similarly, certain kinds of technology can be bought or sometimes even copied. Thus, for internationalisation to take place, the key factors are the control of human capital and possession of proprietary information that can generate new information through research in management, marketing and technology. However, the theory lacks empirical verification.
- 5. Excel Books 14– 5 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij How to Invest Abroad: Methods to Increase International Business Direct Foreign Investment (DFI) is a common method of engaging in international business. But this method is generally expensive and if, for some reason, the project fails, the firms face a lot of difficulty in selling the plant. If a firm is confident that it will survive the foreign market and competition then DFI is the right way of investing abroad. However, there are several alternative methods of entering foreign markets that are less risky and also involve a smaller initial outlay than DFI. The various alternatives are i. A joint venture ii. Mergers and acquisitions/Cross border acquisitions iii. Licensing iv. Franchising
- 6. Excel Books 14– 6 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij The Indian Perspective FDI is imperative to economic development of a country and has a direct impact on its growth and prosperity. The presence of FDI is of definite help to a country because it brings in new technology and management concepts that help in optimum utilisation of resources. In addition, it also gives a better access to information and monitoring capabilities. FDI links the host economy with the global markets and factors economic growth. FDI has been widely observed as one of the most positive forces in recent economic globalisation, with the potential to transform the work by bringing more capital to capital scarce economies and causing great changes in the productive structure of developing economies. Cont….
- 7. Excel Books 14– 7 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij What FDI Requires It has been observed that countries that attract FDI of large magnitude do not treat money as a commodity. They regard FDI as an outcome of favourable perceptions and as an outcome of unshakable confidence in the host country. Some of the important factors which foreign investors take into consideration when entering a country are: a. Reliable access to economic information. b. The level of corruption. c. Stability of political and business environment. d. Character of local market (size, growth potential) or the distance and the access to neighbouring markets. Many foreign investors, mainly MNCs, often invest in one country and use it as a stepping stone before penetrating the neighbouring states. e. The existence of good and quality infrastructure consisting of, among others, advanced telecommunication and energetic network is an advantage that may decide in the selection of a country. f. Ability to meet and comply with internationally acceptable standards and norms. Cont….
- 8. Excel Books 14– 8 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij FDI is permitted under the following forms of investments Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via euro issues. Through private placements or preferential allotment. FDI is not permitted in the following industrial sectors Areas and ammunition. Atomic Energy Railway Transport Coal and lignite Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper and zinc. Cont….
- 9. Excel Books 14– 9 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij Cont…. Portfolio Investment Foreign Portfolio Investment is subject to greater volatility due to shorter-term commitments. An important point here is that private portfolio investment inflows in emerging markets dropped sharply after the East Asian crisis. Country-wise Analysis Foreign direct investment (FDI) is an important avenue through which investment takes place in India. The importance of FDI extends beyond the financial capital that flows into the country. In addition, FDI can be a tool for bringing knowledge and integration into global production chains which are the foundation of a successful exports strategy.
- 10. Excel Books 14– 10 International Financial Management (2nd Edition) Madhu Vij Part IV: Financial Management of the Multinational Firm Foreign Direct Investment C14 Copyright © 2003, Madhu Vij Measures to attract more FDI inflows into the country Consider enactment of Foreign Investment Promotion Law that incorporates and integrates aspects relevant to promotion of FDI. Urge States to enact special law relating to infrastructure. Empower FIP to give initial central level registrations and approvals. Sectoral FDI caps to be reduced to minimum and entry barriers eliminated. Existing strategy for attracting FDI should be overhauled. Informational aspects of strategy should be defined in light of perceived advantages and dis-advantages. Domestic policy reforms in power sector, urban infrastructure and real estate development