Corporate Strategy & FDI( s )
Transcript of Corporate Strategy & FDI( s )
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Corporate strategy and FDI
Why move overseas?
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Decision to move abroad
Found to be due to no one singlefactor:
An outside proposalFear of losing a market
A ‘bandwagon effect’ Competition from abroad in thehome market
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Other possible reasonsTrade restrictions; tariffs/quotas
Apply own technology overseas
Capture local marketspreferences/savings on freight
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Branch v/s foreign subsidiary
Branch: advantagesLosses are immediately
deductible against parent’sdomestic income
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Disadvantages
Disclosure of data onworldwide operations, eventhough more disclosures arealso required for subsidiaries
Losses cannot be carriedforward
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Non-Tax considerations
Public image in hostcountryManagement incentives
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Foreign currency gains and losses
Import/export transactionsForeign currency loansForward foreign exchangetransactions
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Ownership and control in
developed economiesCapitalism is not synonymouswith stock markets- UK and
USA are the exceptions2 main types of financingstructure:
1. Bank based2. Markets based
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Bank based
Close involvement in corporatesector.In UK/USA, banks have littleinfluence over companies, exceptwhen in distressGermany/Japan: have power toinfluence company policyProvide long term finance
Leading role in rescues
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Markets basedReliance on financial markets, i.e
SecuritiesShare ownership widely dispersed-
little incentive to participate in thecontrol or restructuring of companiesMain interest of markets:
development & maintenance of liquidsecondary markets
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Problem areas with market basedownership
Dual classes of sharesShares concentrated in the handsof insider investors-relatedenterprisesMonopoly/ abuse/ collusionIn UK/USA- financial institutionshave the potential to influence co.policy but are reluctant to do so
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Multinational companiesExchange rate & inflation
risksInternational capital marketsMultiple tax regimesControls/restrictions
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Multinational companies An evolutionary
development process-companies become
multinational by degrees:a gradual commitment
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Raw material seekersMarket seekers
Cost minimisers
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OLI ParadigmOwner specific advantages
Location specificInternationalisation
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Competitive advantageKey ingredient to maintain firm-
specific competitive advantage:Possession of proprietary info.
Control over human capital
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Transnational corporationsOwned by a coalition of investorslocated in different countriesManaged on a decentralised basisFlat organisational structure
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Internationalisation
Competitive advantage –
how to maintain it?
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Alternatives to FDILicensing
Joint venturesStrategic alliances
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Joint ventureHigh tech products where
costs of research anddevelopment are high
Joint marketing & serviceagreement
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IssuesExporting v/s production abroadLicensing and management contractsv/s control of assets abroad
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Question
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IssueIf a firm is truly
multinational, should it seeitself in terms of itsperformance summarised inthe currency of the parentcompany only?