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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?