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INVESTMENT
SOUMENDRA ROY
INTRODUCTION
Foreign Direct Investment is any form of
investment that earns interest in enterprises
which function outside of the domestic
territory of the investor
FDIs require a business relationship between a
parent company and its foreign subsidiary
FDI stocks now constituting 28% of the
global GDP
3
FOREIGN DIRECT
INVESTMENT
Foreign direct
investment (FDI):
a firm
invests directly in foreign facilities
more
than
one
FOREIGN DIRECT
INVESTMENT
Involves ownership
of entity abroad for
production
Marketing/service
R&D
Access of raw materials or other resource
Parent has direct managerial control
Depending on its extent of ownership and
On other contractual terms of the FDI
No managerial involvement = portfolio
investment
TYPES OF FDI
Inward FDI and Outward FDI
Vertical FDI and Horizontal FDI
Market seeking FDI and Resource seeking
FDI
Greenfield investments and mergers and
acquisitions
TRENDS IN FDI
Flow and stock increased in the last 20 years
In spite of decline of trade barriers, FDI has
grown more rapidly than world trade
because
Businesses fear protectionist pressures
FDI is seen a a way of circumventing
trade barriers
Dramatic
political
and
economic
changes in many parts of the world
Globalization of the world economy has
raised the vision of firms who now see the
entire world as their market
Conclusion
FORMS OF FDI
FDI forms
Purchase of assets: why? why not?
Quick entry, local market know-how, local
financing may be possible, eliminate
competitor, buying problems
New investment: why? why not?
No local entity is available for sale, local
financial incentives, no inherited problems,
long lead time to generation of sales
International joint-venture
Shared ownership with local and/or other
non-local partner
Shared risk
ALTERNATIVE
MODES
MARKET ENTRY
FDI
FDI - 100% ownership
FDI < 100% ownership,
International Joint Venture
Strategic Alliances (non-equity)
Franchising
Licensing
Exports: Direct vs Indirect
OF
WHY FDI?
FDI over exporting
High transportation costs, trade
barriers
FDI over licensing or franchising
Need to retain strategic control
Need to protect technological knowhow
Capabilities
not
suitable
for
licensing/franchising
Follow few main competitors
Immediate strategic responses
PATTERN OF FDI
EXPLANATIONS
International product life-cycle
(Ray
Vernon)
Trade theory similarity
Eclectic paradigm of FDI (John Dunning)
Combines ownership specific, location
specific, and internalization specific
advantages
Explains FDI decision over a decision
to enter through licensing or exports
No
Yes
Is know-how easy to
license?
Barriers?
No
Yes
No
FDI
Yes
FDI
Yes
FDI
No
License
Yes
Export
BENEFITS OF FDI
Economic development of the host
Transfer of technology
Development of human capital resources
Creation of jobs
Opening export window
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DISADVANTAGES OF FDI
Company may lose ownership
Difference in language and culture
Country secrets may be disclosed
Policies adapted may not be appreciated
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20000
15000
10000
5000
24
2008-09
(April-May)
Cumulative
(Apr.2000May 2008)
% of total
inflows*
2005-06
2006-07
2007-08
2399
(543)
21047
(4664)
26589
(6615)
4955
(1198)
60652
(14256)
21.85
6172
(1375)
11786
(2614)
(1410)
817
(199)
32984
(7477)
11.88%
Telecommunications
2776
(624)
2155
(478)
5103
(1261)
939
(232)
17687
(4074)
6.37
Construction
667
(151)
4424
(985)
6989
(1743)
4846
(1162)
18313
(4325)
6.57
Automobile
630
(143)
1254
(276)
2697
(675)
1385
(346)
11241
(2582)
4.05
171
(38)
2121
(467)
8749
(2179)
4277
(1034)
15439
(3745)
5.56
Power
386
(87)
713
(157)
3875
(967)
1771
(438)
11401
(2643)
4.11
Metallurgical
6540
(147)
7866
(173)
4686
(1177)
2563
(615)
9911
(2377)
3.57
1731
(390)
930
(205)
920
(229)
544
(134)
6684
(1519)
2.41
64
(14)
401
(89)
5729
(1427)
106
(26)
8352
(2007)
3.01
25
FDI Vs FII
Till 2006 more FII investment than FDI in India.
Reverse in China
FDI was more than ten times of ours earlier
More FDI helpful than FII
27
EVOLUTION OF THE
MONETARY SYSTEM
INTERNATIONAL
Gold Standard
Currencies pegged to the value of gold;
convertibility guaranteed
By 1880 most countries were on the gold
standard
Achieves balance of trade equilibrium for
all countries (value of exports equals
value of imports); flow of gold was used
to make up differences
Abandoned in 1914; attempt to resume
after WWI failed with Great Depression
Bretton Woods (1944)
1944
Established International Monetary Fund
(IMF) and World Bank
IMF maintained order in monetary system
World Bank promoted general economic
development
Fixed exchange rates pegged to the US
Dollar
US Dollar pegged to gold at $35 per ounce
Countries maintained their currencies
1% of the fixed rate; government had to
buy/sell their currency to maintain level
Currency management
The monetary system is not perfect
Both speculative activity and government
intervention affect the system
Companies must use risk management
instruments
Business strategy
Minimize risk by placing assets in different
parts of the world, e.g., production
Contract manufacturing
Manage company-government relations
FUNCTIONS OF FX MARKET
The foreign exchange market is the
mechanism by which participants:
transfer purchasing power between
countries;
obtain or provide credit for international trade
transactions, and
minimize exposure to the risks of exchange
rate changes.
38
CHARACTERISTICS OF FX MARKET
Largest of all financial markets with average
daily turnover of over $2 trillion!
66% of all foreign exchange transactions
involve cross-border counterparties.
Only 11% of daily spot transactions involve
non-financial customers.
London is the largest FX market.
US dollar involved in 87% of all
transactions.
39
40
Increasing Turnover
IMPORTANT CURRENCIES
42
TYPES OF TRANSACTIONS
A Spot transaction in the
interbank market is the purchase
of foreign exchange, with delivery
and payment between banks to
take place, normally, on the
second following business day.
TYPES OF TRANSACTIONS
An outright forward transaction (usually
called just forward) requires delivery at
a future value date of a specified amount
of one currency for a specified amount of
another currency.
The exchange rate is established at the
time of the agreement, but payment and
delivery are not required until maturity.
Forward exchange rates are usually
quoted for value dates of one, two, three,
six and twelve months.
Buying Forward and Selling Forward
describe the same transaction (the only
44
TYPES OF TRANSACTIONS
A swap transaction in the interbank
market is the simultaneous purchase and
sale of a given amount of foreign
exchange for two different value dates.
Both purchase and sale are conducted
with the same counterparty.
Some different types of swaps are:
spot against forward,
forward-forward,
nondeliverable forwards (NDF).
45
TYPES OF TRANSACTIONS
46
MARKET PARTICIPANTS
The foreign exchange market consists of
two tiers:
the interbank or wholesale market
(multiples of $1M US or equivalent in
transaction size), and
the client or retail market (specific,
smaller amounts).
Five broad categories of participants
operate within these two tiers: bank and
nonbank foreign exchange dealers,
individuals and firms, speculators and
arbitragers, central banks and treasuries,
47
MARKET PARTICIPANTS
Banks and a few nonbank foreign
exchange dealers operate in both the
interbank and client markets.
They profit from buying foreign exchange
at a bid price and reselling it at a
slightly higher offer or ask price.
Dealers
in
the
foreign
exchange
department of large international banks
often function as market makers.
These dealers stand willing at all times to
buy and sell those currencies in which
they specialize and thus maintain an
48
MARKET PARTICIPANTS
Individuals (such as tourists) and firms (such
as importers, exporters and MNEs) conduct
commercial and investment transactions in
the foreign exchange market.
Their use of the foreign exchange market is
necessary but nevertheless incidental to
their underlying commercial or investment
purpose.
Some of the participants use the market to
hedge their foreign exchange risk.
49
MARKET PARTICIPANTS
Speculators and arbitragers seek to profit
from trading in the market itself.
They operate in their own interest,
without a need or obligation to serve
clients or ensure a continuous market.
While dealers seek the bid/ask spread,
speculators seek all the profit from
exchange rate changes and arbitragers try
to profit from simultaneous exchange rate
differences in different markets.
50
MARKET PARTICIPANTS
Central banks and treasuries use the market to
acquire or spend their countrys foreign exchange
reserves as well as to influence the price at which
their own currency is traded.
They may act to support the value of their own
currency because of policies adopted at the national
level or because of commitments entered into
through membership in joint agreements such as the
European Monetary System.
The motive is not to earn a profit as such, but rather
to influence the foreign exchange value of their
currency in a manner that will benefit the interests of
their citizens.
As willing loss takers, central banks and treasuries
differ in motive from all other market participants.
51
TYPES OF ACTIVITIES
Speculation
An activity that leaves one open to
exchange rate fluctuations where one
aims to make a profit.
Hedging
Allows the firm to transfer exchange
rate risk inherent in foreign currency
transactions or positions.
Arbitrage
take
advantage
of
inconsistent prices to make risk-free
profits. These profits are unlikely to last
long
52
FOREIGN EXCHANGE
QUOTATIONS
RATES
&
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