11.foreign direct investments international business 2010.pdf · 11.foreign direct investments •...
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11.Foreign Direct Investments
• Greenfield (totally new plant)
• Brownfield (foreign company acquiring an existing production facility)
• Having controlling influence:• Having controlling influence:
when at least 10% of voting rights (affiliated company)
• Subsidiary: as from 50%
• Branches: no legal personality
2010 1
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11.Locational factors
• Technological development
• Factors of production, related supporting industries, influence of establishment, attitude of government
• Inherited or natural factors infrastructure) and created factors (human resources)created factors (human resources)
• Domestic demand (quality requirements)
2010 2
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11.Geographical analysis
• Economic and political stability, growth rate, inflation, unemployment
• Infrastructure
• Location/ transportation
• Ecology/environmental requirements
2010 3
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11.New investments
• Need to gain access to new technology (requirement in China, aircraft industry e.g.) , distribution channels, new markets
• Need to increase productivity
• Skilled labor force, services to attract car assembly • Skilled labor force, services to attract car assembly to southern USA, Central Europe
2010 4
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11.FDI in the world economy
• Shifts in the relative importance of regions (Asia, USA, Brazil, Europe)
• Industrialized countries receiving massive FDI while one would expect emerging nations to receive the bulk of itreceive the bulk of it
• Attractiveness of Central Eastern Europe (Poland, Slovakia, Rumania, car assembly e.g.)
2010 5
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11. More complex products: cars
• Toyota-PSA in Kolin (60 km from Prague):– 150 suppliers
– Most new companies around the new plant
– 80% of the parts produced in – 80% of the parts produced in Czech Republic
• Valenciennes, France:– Toyota
• Slovakia:– most important car assembler
in function of population
2010 6
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12. REAL ESTATE
• More volatile than expected
• Subprime disaster in USA
2010 7
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13.Free trade zones (zones franches)
• Example of commercial zone: Colon
• Exterritorial enclave
• Can be commercial and industrial
• Often situated in emerging industrial countries• Often situated in emerging industrial countries
• Administrative solution to bureaucracy
2010 8
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14. LOBBIES
• To modify laws
• Impact on public bodies
• Impact on mentality, perception and approach of perception and approach of authorities so that authorities would adapt to world economy realities
2010 9
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14.Lobbying
• Some 3000 in Brussels
• big part of it is pointless
• gives some contacts to civil servants to the real world and especially the industry and especially the industry concerned
• skills and methods
2010 10
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14.Pro-tariff interest groups
• National firms competing with foreign firms
• trade associations
• to increase industrial output
• to increase employment
• appeal often to national feelings
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14.Anti-tariff interest groups
• Consumers, for them protectionism means smaller variety of products and higher prices
• multinationals : in favor of free trade
• companies having to import raw materials
• usually less well organized that the group of • usually less well organized that the group of protectionists
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15. MONEY
• Billions of $ moving from country to country creating speculative opportunities that can lead to financial destabilization
• Hot money
2010 13
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15.Money in a global world
• Governments experience a growing loss of monetary control
• Need for governmental policies to avoid massive capital flows
• Greece, problems in Iceland• Greece, problems in Iceland
• International circulation of
a currency also a matter of
influence
• Global hedge funds active
• End to bank secrecy
2010 14
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Financial criminality
• Yachts bought by criminal funds
• Real estate
2010 15
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15.Effective exchange rate
• for the economy of a country, the exchange rate of one currency is more important than that of another, the level of a country’s international trade with its individual partners is a good indicator of with its individual partners is a good indicator of that economic importance
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15.Monetary strategies
• Market leadership to maximize use of the national currency (international seigneurage)
• Market alliance: sharing monetary sovereignty in a monetary union
• Market preservation: to maintain market • Market preservation: to maintain market position of the currency
• Market follower-ship: subordinating monetary sovereignty to a stronger currency (quetzal to a certain extent)
2010 17
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15.Foreign exchange markets
• Liquid and volatile
• Inter-bank + hedge funds (33% according to BIS)
• Largely electronic
2010 18
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15.Forms of exchange rate risks
• Transaction risk
• Economic risk• Economic risk
• Translation risk
• Country risk
2010 19
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15.Transaction risk
• The financial outcome of a transaction may differ from the initial expectation : Belgium borrowing 1 Billion $ for period of 5 years…
• both exporter and importer prefer the price in their own currency, the one who can’t get it is saddled own currency, the one who can’t get it is saddled with the transaction risk
• solutions: forward market, options, futures
2010 20
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15.Economic risk
• Concerns unknown future transactions
• future exchange rates may have an adverse effect on a company’s future export revenue, on the competitive position (due e.g. to the appreciation of the domestic currency when deals are traditionally the domestic currency when deals are traditionally made in that currency)
2010 21
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15.Translation risk
• Values of the assets and liabilities on the balance sheet change on the occasion of the translation of these values in the reporting currency
• especially when a number of foreign subsidiaries
• can have serious impact on results• can have serious impact on results
2010 22
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15.Country risk
• Rating agencies (having lost part of prestige)
• Risk assessments based on:
– legal issues
– political stability
– attitude towards business– attitude towards business
– vulnerability (diversification of their
exports by category ))
• Hedge funds based on national markets
2010 23
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16. RAW MATERIALS
• Finally (essentially for the developing world) higher prices for raw materials!
• Gold price
2010 24
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16. Subsidized agricultural products
• For some developing nations import of subsidized agricultural products discourages local producers
• For others these products are • For others these products are needed to fight starvation!
2010 25
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16. Central Europe
• Open to foreign trade
• Higher competition leading to higher productivity
• Well run institutions (Warsaw Stock Exchange)Stock Exchange)
• Good education levels
• Reasonable labor cost
2010 26
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16. China
• Imposing conditions to FDI
• Offer state owned undercapitalized firms
• Need to maintain management, and brand name (e.g. XUGONG) and to give the brand name world class class
• All over Africa
• In search of raw materials
2010 27
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China: environmental problems
• Demonstrations
• Provincial leaders appointed centrally but difficult to control
2010 28
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16. Where are the petrodollars ?
• Previously mainly in banks of oil importing industrialized countries
• Now some reluctance (controls, money (controls, money laundering…)
• Companies, trusts, hedge funds, offshore financial centers, private equity
• Dubai saved by Abu Dhabi
2010 29
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17.Interdependence
• EU- USA –Japan-China-Russia….,
• The new regionalism bridges the traditional division between industrialized and developing countries
2010 30
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18.Corporate governance
• Retail and institutional investors
• Equal treatment of shareholders
• Remunerations at top leve
• Market abuse: misleading information and insider • Market abuse: misleading information and insider trading
2010 31
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19.Investment banking
• Played an important role in high tech
• The new economy was not everywhere a success and investment banking suffered a real identity crisis
• Mergers and acquisitions business more difficult
• Disappearing• Disappearing
2010 32
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19.Credit rating agencies
• Moody’s, Fitch and Standard and Poor’s
• Too slow to spot companies' declining health
• Ratings are intended to look at the likelihood of default for periods longer than a year
• Junk bonds as from just one “B” • Junk bonds as from just one “B”
• Partially responsible for subprime disaster (Colleteralized debt obligations)
2010 33
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21. ENVIRONMENT
• Environmental dumping
• Delocalization towards less demanding countries
• Mining
• Maquiladoras sometimes with • Maquiladoras sometimes with dangerous fibers?
• Asbestos in ships to be treated in Bangladesh
• Turkey’s labor conditions (jeans)
2010 34
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21.Sustainable development
• Spoiling nature is not unavoidable to economic growth
• Need to phase out environmentally damaging subsidies
• Economic growth creates assets to spread around, • Economic growth creates assets to spread around, to be shared with the poorest
2010 35
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21.Renewable energy sources
• Wind (but little wind when very cold and when very hot)
• Sunlight (solar powered • Sunlight (solar powered generation plants) in poor areas : subsidies…
• Waves
• Realism needed
2010 36
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CHINESE IN AFRICA
• Sudan (China: biggest foreign
investor), Tchad, Niger,
Mauritania, Angola, Nigeria,
Congo Brazzaville, MaliCongo Brazzaville, Mali
• Chinese in ALGERIA: building
industry (oil and gas…)
• ETHIOPIA: roads and bridges
built by Chinese HUNAN
HUANDA2010 37
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AFRICA
• Rising commodity prices
• Strong growth in oil producing countries
• Unfortunately - still high unemployment
• Social and political turmoil
2010 38
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AFRICA AND OIL• NIGERIA: exports’ growth, new
refinery built by Texaco Chevron, excellent performance : pipelines, better banks, repatriated funds, oil…
• ANGOLA: Chinese hunting for • ANGOLA: Chinese hunting for new oil reserves; growth factor also diamonds - new diamond polishing factory built by Israelis (Lev Leviev)
• ALGERIA : vast reserves of funds and oil
2010 39
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23.THE GLOBAL WORLD
• Economic growth and distribution of wealth
• Social justice and support of people and companies producing real wealth
• Tribute to be paid to those who are courageous enough to fight poverty and those who at the risk of enough to fight poverty and those who at the risk of their lives combat those who create poverty and misery in the world
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23. Objectives
• Identify problems and causes of crisis
• How to prevent them
• How to reduce the effects of crisescrises
• Where are the opportunities and solutions
• Long and short term tactics and strategies
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Mergers and acquisitions
• If need to raise funds : cost of say 8,5 % of raised amount !
• LBO’s (SIDAPLAX case), when management believes in future, synergies, integration, believes in future, synergies, integration, economies of scale
• Raiders (predators) and targets
• FORTIS (RBS- Santander)case – ABN-AMRO
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Difficulties with M & A
• Too complex conglomerates
• Loss of house style
• Processes difficult to combine
• Trade unions• Trade unions
• Getting approval via proxy fights : case of Société Générale de Belgique : Suez against de Benedetti
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Impact on market price
• Raiders loosing… The target (victim) gaining
• White knights’ activities
• Corporate governance
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Crisis managemnet
• New ideas required
• Management style no longer adapted to the world of business
• New markets• New markets
• Choices of diversification or core business
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Economies of scale
• Common central services
• Reduction of risks and costs
• Getting the right managers (BOVIS - P&O)
• Research• Research
• Marketing
• Engineering
• Ability to borrow from banks
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Convertible bonds
• When to offer convertible bonds (lower interest, cheaper for the company, dilution when exchanged, expecting conversion)
• Beware of reverse ones !!!2010 47
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P/E and Solvency
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Non performing loans
• Euphemism for bad debts
• Wrong policies (NatWest -Heythrop-in Latin America)Heythrop-in Latin America)
• Bad judgment
• Solidarity between banks (Bank of Brussels case)
• Wait! (patience required)
2010 49
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Enterprise bonds
• More in US
• For listed companies generally
• To avoid dilution
• Tax advantages• Tax advantages
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MONEY LAUNDERING
„Criminal proceeds taking on the outward appearance of legitimacy.”
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UNLAWFUL ACTIVITIES
• Narcotics
• Terrorism
• Racketeering• Racketeering
• Espionage
• Hostage - taking
• Sexual exploitation
• Illegal immigration
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Unlawful activities (continued)
• Traffic in body organs
• Illicit arms trafficking
• Sale of nuclear technologies
• Tax evasion (grey economy)• Tax evasion (grey economy)
• Insider trading and market manipulation
• Bribery
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Unlawful activities (continued)
• Counterfeiting currency and products
• Trafficking in stolen goods
• Car theft
• Piracy• Piracy
• Environmental crime
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Non-financial businesses and
professions
• Casinos (including internet casinos)
• Real estate agents
• Dealers in precious metals and stones
• Lawyers, notaries• Lawyers, notaries
• Trust and company service providers, providing registered offices, business addresses and accommodation
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Payment difficulties for criminals
• Cash = difficult to move: street cash = 6 x weight of cocaine!
• Laws prohibiting payment in cash for large amounts
• Risks and costs of transportation• Risks and costs of transportation
• Smurfing
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Cost of investigation
• Financial detectives charge a commission of 50% plus traveling coststraveling costs
• Six minutes of transfer can cost inquirers six months of investigation
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Independent directors protecting
investors
• No knowledge without “all ranks”
information
• Not always seen favorably by • Not always seen favorably by
colleagues
• By definition poorly paid
• But fully responsible…
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Investment funds and companies
• From invisible hand to invisible costs
• Conflicts of interest: “in and out trading”and out trading”
• Institutional investors to take their responsibilities as active shareholders
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POISON PILLS
• “The company should not employ measures to eliminate a takeover threat. Changes in company share capital should not violate interests of existing shareholders”
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Hedge funds
• Very difficult to define
• Leverage
• High risks with a view to obtain high returns
• Non orthodox financial instruments • Non orthodox financial instruments
• Other types of investments
• Some listed at stock exchanges
• Profitable business at the management level
• Should gain first to be able to loose afterwards
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Financial conglomerates at risk
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Credit and operational risks• Banks needing substantial capital buffers
• Avoiding too risky borrowers
• Basel II favouring large corporations with effective management control systems perhaps not asking for enough protectionnot asking for enough protection
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Banks in times of crisis
• Basel II should not suggest « good » banks to work with minimal capital
• Their credit portfolio suffered, their shares dropped in their shares dropped in value…
• The more sophisticated the risk control system, the less capital required, but is the time right?
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Complexity of giant financial
conglomerates
• Interdependence also in reputation
• difficult to predict impact of market movements on banking
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Safer global investments
• Benefitting countries with good business climate and high level of educatio
• And competitive industrial conglomerates
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CURRENT FINANSIAL CRISIS
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Origin
• ending money to everybody -Ninja Loans (No Income, No Job, no Assets)
• high risk shifted from the • high risk shifted from the mortgage creator to investors with mortgage-backed securities (MBS)
• high ratings formerly granted by rating agencies, misleading
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Results
• “Problems” of
– Lehman Brothers
– AIG
– Fortis
– Many others...
• What have they done to our banks?
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Financial Frauds
• Nick Leeson
• Jérôme Kerviel
• Bernard Madoff
• Need for independent risk committees (EU • Need for independent risk committees (EU proposal)
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Careers in international business
• People
• Plant and Product
• Performance
• For managers with international culture + national sensitivity
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Auld Lang Syne...
201072