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BMU5013INTERNATIONALMANAGEMENT STRATEGIES (PARTA)

SINGAPORE

MAY2013

POST-MODULEPROJECT

MINYUANZHAO

myzhao@umich.edu

Instruction:

You may refer to your notes, dictionaries, newspapers, etc., both online and offline. However, noconsultation with anyone else, online or offline, is permitted.

Type your answers in the answer file provided separately. Do NOT copy the questions to youranswer file. Instead, label your answers with the question numbers (e.g. 1.1, 2.1, etc.).

Please do not type beyond TWO (2) pages (including answers to ALL the questions combined, aswell as the honor code at the top of the answer file; single-spaced, 11-point font, and 1-inch

margins).

Your employer, an auto part producer based in the U.S., is investigating the possibility of setting up a

production center in Brazil, the companys very first step of foreign direct investment. You are put in

charge of the investigation. Therefore, you are reading many articles about Brazil.

Question 1. Balance of Payments

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BRASILIA, Nov 22, 2011 (Reuters) - Brazil's current account deficit for October widened from September

as the global slowdown started to hit trade, with foreign direct investment in Latin America's largest

economy also slipping.

Brazil posted a current account deficit of $3.1 billion in October, the central bank said on Tuesday, larger

than the $2.2 billion current account deficit in September.

The global slowdown is expected to widen Brazil's current account deficits in coming months by

reducing its trade surplus, with investments by foreigners also sliding. The trade surplus of the world's

No 2 exporter of soy and iron ore shrank by nearly $750 million to $2.35 billion in October from the

previous month. Foreign direct investment fell over 12 percent to $5.6 billion in October from

September.

The central bank expects the current account deficit to widen further to $5.5 billion in November.

Foreign direct investment is expected to fall to $4 billion that month, central bank official Fernando

Rocha told reporters.

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mailto:myzhao@umich.edumailto:myzhao@umich.edumailto:myzhao@umich.edu

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a. According to the article, Brazil is experiencing $3.1 billion current account deficit but $2.35 billiontrade surplus in October. What might explain the difference between the two numbers? [3

points]

b. As shown in the following figure, the Brazilian realdepreciated sharply against the US dollararound the 2008 financial crisis and then around the recent euro crisis. Given that the realoffers

a much higher interest rate than the US dollar, what might explain the two episodes of sharp

depreciation? [5 points]

c. What might have happened to Octobers trade balance if the realhad not depreciated so much[2 points]?

d. Your company is currently exporting to Brazil and mainly supplying to the local Braziliancarmakers. If it decides to invest in Brazil and produce locally (still serving the local carmakers),

how would your investment affects Brazils current account and financial account? [4 points]

Question 2. Trade Policies

=====================

China has replaced the U.S. as the No.1 trade partner of Brazil. However, trade conflicts between the

two countries have become more frequent. China is a major importer of Brazilian soybeans but on

occasion has blocked their sale, citing disease. It is the world's No. 1 importer of iron ore for making

steel, but the Brazilian producer Vale SA has been criticized by Beijing authorities over its pricing

strategy. Most recently, Brazil has challenged China's exchange-rate policy at the World Trade

Organization, arguing the yuan is artificially undervalued.

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a. Suppose the trade conflicts with China lead to higher trade barriers set up by both countriestowards each other. Will they affect your companys future operation in Brazil if you are only

interested in selling to the Brazilian carmakers? Why or why not? [4 points]

b. China has signed free-trade agreements with Chile and Peru, two South American neighbors ofBrazil. Would you reconsider your choice of Brazil as the investment destination if you are also

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interested in selling to China? Please be explicit in what circumstances you would or would not

reconsider. [4 points]

Question 3 Foreign Direct Investments

=====================12 Nov 2011 BEIJING -- China Petrochemical Corp. (Sinopec) said Friday it has agreed to buy a 30% stake

in the Brazilian unit of Portuguese oil company Galp Energia SA for $3.54 billion, continuing China's drive

to acquire energy assets.

The Sinopec-Galp deal, which requires approval from Chinese authorities, would provide Sinopec with

21,300 barrels of oil-equivalents a day in 2015, Sinopec said. Its supply would peak at 112,500 barrels of

oil-equivalents a day in 2024.

"Taking into consideration this investment and projected future capital expenditure, the total cash

payout amounts to approximately $5.18 billion at closing," Sinopec said.

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a. Using the OLI framework we discussed in class, explain the following (you only need certaincomponents of the framework, not the whole thing):

(i) Why do we see more FDI from developing countries in host countries with less desirableinstitutional environments: high corruption, high political uncertainty, etc.? [2 points]

(ii) Why are companies more eager to own oil fields when oil prices are highly volatile? [2 points]b. Recently Brazil discovered large oil reserves offshore. Large export of oil is expected in the coming

years.

(i) The news about the discovery of oil reserves made Brazilian manufacturers worried. Why? [3points]

(ii) Does your answer to (i) change if these oil fields are owned by domestic firms such asPetrobras, the countrys government-controlled oil firm, or by foreign companies such asSinopec? [2 points]

(iii)Does your answer to (i) change if the Brazilian government puts all the oil revenue into asovereign wealth fund, which is invested overseas? [2 points]

c. The Brazilian government is thinking of a Buy Brazil policy for all the oil rig equipment used inthe newly-found oil fields. Which WTO principle does it possibly violate? [2 points]