FIN 3380 - FINAL (Ch 16)

Expropriation

Action by the state or an authority of taking property from its owner for public use or benefit

Greenfield Investment

Type of FDI where a company establishes operations in a foreign country. Projects can also include offices & living quarters.

Which country is the largest recipient and initiator of FDI?

United States

When firms engage in FDI by buying a supplier or customer, they are engaged in ____________ integration.

Vertical

Vertical FDI is __________ when it involves an industry abroad that ___________ the MNC.

-Backward; produces inputs for -Forward; sells the output of

What are methods MNCs can use to reduce political risk?

-Form a joint venture with a local company -Use local debt to finance the foreign project -Form a consortium of international companies to undertake the foreign project

What are examples of market imperfections that would lead a company to invest overseas?

-Intangible asset contracting -Trade barriers -Shareholders diversification

What are reasons for a MNC to backward vertically integrate?

-To secure the supply of inputs at a stable price -To obtain monopolistic or oligopolistic control over the input market -To locate manufacturing/processing facilities near natural resources

After Macro and Micro type, what type can political risk be classified into?

-Transfer Risk -Operational Risk -Control Risk

What is the ranking of the countries, from least to most corrupt, according to the 2015 Corruption Perception Index?

1.Singapore 2.Germany & UK 3.USA 4.Japan 5.China 6.Russia

cross-border mergers and acquisitions

>>Deal between foreign companies and domestic firms in the target country. >>Acquisition refer to the purchasing of assets or stocks of part or all of another firm (or other firms) that result in operational control of the whole or part of the other firm. >>Mergers describe the case where two separate firms are combined or amalgamated into a single business.

Internalization Theory

>Firms that have intangible assets with a public good property tend to invest directly in foreign countries in order to use these assets on a larger scale and, at the same time, avoid the mis-appropriation of intangible assets that may occur while transacting in foreign markets through a market mechanism. >>The argument that firms prefer FDI over licensing in order to retain control over know-how, manufacturing, marketing, and strategy or because some firm's capabilities are not amenable to licensing. >>The internalization may proceed forward to internalize the acquire's intangible assets or backward to internalize the target's intangible assets

What are the key factors that are important in firms' decisions to invest overseas?

>Trade Barriers >Imperfect labor markets >Intangible assets >Vertical integration >Product life cycle >Shareholder diversification services

Vertical Integration

A strategy whereby a company owns/controls its suppliers, distributors, or retail locations to control its value or supply chain. Vertical integration benefits companies by allowing them to control the process, reduce costs, and improve efficiencies.

Intangible Assets

An asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights.

When a firm does not want to pay an import tariff on its exports to a particular market and that market is part of a free trade area, where might the MNC wish to produce?

Anywhere in the free trade area

Transfer Risk

Arises from uncertainty about cross-border flows of capital, payments, know-how, and the like

Control Risk

Arises from uncertainty about the host country's policy regarding ownership and control of local operation

Operational Risk

Associated with uncertainty about the host country's policies affecting the local operations of MNCs

Firms may move production to foreign countries because of trade ________ such as tariffs, quotas, and transportation costs.

Barriers

When a MNC's intangible assets are licensed to a local firm and that knowledge is then used to compete against the MNC, it is an example of the _____________ effect.

Boomerang

Trade barriers led to Japanese auto manufacturers in the 1980s to engage in FDI by __________?

Building new plants in the US

A widely-used measure of perceived corruption in the public sector, based on surveys and assessments from institution, that is compiled by Transparency International is the ____________________?

CPI (Corruption Perceptions Index)

US companies are legally prohibited from bribing foreign officials by the ________>

FCPA (Foreign Corrupt Practices Act)

For what firms are M&A popular mode of investment?

For firms wishing to protect, consolidate, and advance their global competitive position, by selling off divisions that fall outside the scope of their core competence and acquiring strategic assets that enhance their competitiveness.

Bribes from politicians and government officials for contracts and smooth bureaucratic processes are referred to as _________ payments.

Grease

Labor services in a country can be severely under-priced because ____________ barriers prohibit workers from freely moving across national boundaries to seek higher wages.

Immigration

Foreign Direct Investment (FDI)

Investment in a foreign country that gives the MNC a measure of control.

What are the types political risk can be classified as?

Macro risk and micro risk

The US government organization that offers insurance against political risk is known by the acronym ________.

OPIC (Overseas Private Investment Corporation)

Why do firms choose M&A as a mode of investment?

Popular for firms wishing to protect, consolidate, and advance their global competitive positions, by selling off divisions that fall outside the scope of their core competence and acquiring strategic assets that enhance their competitiveness.

Political Risk

Potential losses to the parent firm resulting from adverse political developments in the host country

What are the two key advantages that Cross-boder M&A offers over greenfield investments?

Speed and access to proprietary assets

If after an acquisition the value of the combined firm is greater than the stand-alone valuations of the acquiring and target firms, then there are said to be ___________ gains.

Synergistic

According to Raymond Vernon, what is the product life-cycle theory?

When firms first introduce new products, they choose to produce at home, close to their customers. Once the product becomes standardized and mature, it becomes important to cut production costs to stay competitive. At this stage, firms may set up production facilities in low-cost foreign countries.

When do firms become multinational?

When they undertake foreign direct investment (FDI)

Macro risk

Where all foreign operations are affected by adverse political development in the host country

Micro risk

Where only selected areas of foreign business operations or particular foreign firms are affected

Although there is some variation internationally, cross-border M&A ________ create synergies, with _______ outcomes typically accruing to the target than the acquirer

does; better