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Foreign Direct Investment and Political Risk. International Financial Management. Dr. A. DeMaskey. 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?. Exporting/Importing

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foreign direct investment and political risk

Foreign Direct Investment and Political Risk

International Financial Management

Dr. A. DeMaskey

learning objectives
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?
how do firms become mncs
Exporting/Importing

Licensing

Franchising

Joint Ventures

Acquisitions

De Novo Start Up

Low Risk/Low Return Strategy (early phase)(intermediate phase)

High Risk/High Return Strategy (advanced phase)

Foreign Direct Investment

How Do Firms Become MNCs?
global trends in fdi
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
why do firms invest overseas
Why Do Firms Invest Overseas?
  • Market Imperfections (Kindleberger (1969) and Hymer (1975))
  • Imperfections in
    • Product Markets
    • Factor Markets
    • Capital Markets
key factors in locating production overseas
Key Factors in Locating Production Overseas
  • Trade Barriers
  • Imperfect Labor Markets
  • Intangible Assets
  • Vertical integration
  • Product Life Cycle
  • Capital Market Imperfections

Market Failure Imperfections

political risk and fdi
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
types of political risk
Depending on incidence:

Macro risk

Micro risk

Depending on manner:

Transfer risk

Operational risk

Control risk

Types of Political Risk
examples of political risk
Examples of Political Risk
  • China in 1949
  • Cuba in 1960
  • Egypt in the early 1950s
key factors in political risk analysis

POR

Index

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
measuring political risk
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
economic and political factors underlying country risk
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
useful web sites for assessing country risk
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/ccghomepage?openform.
    • Refer to the CIA’s World Factbook at http://www.odci.gov/.
    • Visit http://biz.yahoo.com/ifc/

More …

useful web sites for assessing country risk15
Useful Web Sites for Assessing Country Risk
  • How risky is your country? Look up:
    • http://www.worldbank.org/data/wdi2001/pdfs/tab5_2.pdf
    • http://www.prsgroup.com/icrg/icrg.html
    • http://www.institutionalinvestoronline.com/
    • http://www.euromoney.com/
    • http://www.moodys.com/moodys/cust/loadBusLine.asp?busLine=sovereign
    • http://www.standardpoor.com/