International Business Investment Opportunities: Trends and Theory of Foreign Direct Investment (FDI)

This blog would analyse the Foreign Direct Investment trends in China under recent Federal Reserve Meeting.
Foreign Direct Investment Introduction
Foreign Direct Investment definition: The purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control.
Key competitive advantages to originate and sustain foreign direct investment:

1.      Economies of scale and scope can be developed in production, marketing, finance, research and development, transportation, and purchasing.

2.      Managerial expertise includes skill in managing large industrial organizations from both a human and a technical viewpoint.

3.      Advanced technology includes both scientific and engineering skills.

4.      Companies demonstrate financial strength by achieving and maintaining a global cost and availability of capital.

5.      Firms create their own firm-specific advantages by producing and marketing differentiated products.

6.      A strongly competitive home market can sharpen a firm’s competitive advantage relative to firms located in less competitive home markets.

Identify factors and forces that must be considered in the determination of where multinational enterprises invest.
In theory, a firm should identify its competitive advantages. Then it should search worldwide for market imperfections and comparative advantage until it finds a country where it expects to enjoy a competitive advantage large enough to generate a risk-adjusted return above the firm’s hurdle rate.
In practice, firms have been observed to follow a sequential search pattern as described in the behavioural theory of the firm. Human rationality is bounded by one’s ability to gather and process all the information that would be needed to make a perfectly rational decision based on all the facts.
 
Quantitative Easing Policy Reducing Analysis on Foreign Direct Investment Trends in China
January Federal Reserve (2014) state that

''To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. ''

According to FengHuang (2013), the reducing of QE would make big structure changes in Chinese capital market. There are several influence of Chinese capital market would be analysed in the following.

1.      The profitability of bond would increase and credit would turn to intensive.

2.      Import trading would decrease in China.

3.      Most emerging economy currency would depreciate, but RMB may continue appreciating.

4.      Stock market would decrease.

However, it should be mentioned that, Chinese Yuan has been depreciated in Jan. and February and March.

If QE decrease with each passing day, plenty of capital would possible draw out Chinese capital market. Therefore, it seems that the decreasing of FDI in China would be the direct factor influenced by QE reducing and have effect on other capital market aspects.
However, some other experts announced that the reducing of QE could possibly have positive effect on opening Chinese capital account. Although, there are several factors shows that opening Chinese capital account have benefits on capital floating balanced management, capital structure revolution, RMB globalization, it still should be concerned cautiously.
Except forecasting procedure - the reducing of Quantitative Easing Policy, Federal Reserve officials started debating raising interest rates which is not expected before. If American Federal Reserve raising its interest rates, some capital in China would turn back to America and the Foreign Direct Investment would extremely decrease, in particular in those large-scale capital industry such as real estate industry and finance industry.

 

Bibliography:

Federalreserve.gov,. (n.d.). FRB: Press Release--Federal Reserve issues FOMC statement--January 29, 2014. Retrieved 24 February 2014, from http://www.federalreserve.gov/newsevents/press/monetary/20140129a.htm

Finance.huanqiu.com,. (2013). 美联储QE退出:中国恐难独善其身 外贸将首受冲击_财经_环球网. Retrieved 20 February 2014, from http://finance.huanqiu.com/data/2013-06/4048825.html

Financial Times,. (2014). China slowdown? FDI inflows confound the sceptics. Retrieved 20 February 2014, from http://blogs.ft.com/beyond-brics/2014/02/19/china-slowdown-fdi-inflows-confound-the-sceptics/?

Ftchinese.com,. (2012). 资本账户开放应谨慎 - 评论 - FT中文网. Retrieved 20 February 2014, from http://www.ftchinese.com/story/001043661

Lim, J., Mohapatra, S., & Stocker, M. (2014). Tinker, Taper, QE, Bye? The effect of quantitative easing on financial flows to developing countries. Retrieved from http://jamus.name/research/if9.pdf

Moffett, M., Stonehill, A., & Eiteman, D. (2006). Fundamentals of multinational finance (1st ed.). Boston, Mass.: Pearson/Addison-Wesley.
 

 

Corporate Risk Management & Multinational Tax Management

Corporate Risk Management & Multinational Tax Management

-          Tata group case analysis

This blogger would analyse corporate risk management as Tata Group an example.

Theory introduction:

Risk Management

In the world of finance, risk management refers to the practice of identifying potential risks in advance, analysing them and taking precautionary steps to reduce/curb the risk.

Generally, interest rate and exchange rate risk management are considered significantly for international operating corporations.

There are two main risks (basis risk and gap exposure) are included in interest rate risk as well as 3 main risks (transaction risk, translation risk and economic risk) are included in exchange rate risk.

Basis risk

Basis risk is related to two floating rates which are not determined using the same basis.

Transaction Exposure

Transaction exposure is the risk that the amount of domestic currency either paid or received in these foreign currency transactions may change due to movements in the exchange rate.

Translation Exposure

Translation exposure refers to the possibility that, as a result of the translation of overseas assets, liabilities and profits into the domestic currency, the holding company may experience a loss or a gain due to exchange rate movements.




Economic Exposures

Economic exposure refers to the risk of long-term movements in exchange rates undermining the international competitiveness of a company or reducing the net present value of its business operations.

It should be mentioned that, economic risk is a more general type of exchange rate risk than transaction and translation risk.



Tata Group Case Analysis:

Related Corporations brief introduction

Tata group:

Jaguar Land Rover:

Tata group bought Jaguar Land Rover Case:

 As an Indian based corporation, Tata group acquiried Jaguar Land Rover (a British corporation) is belong to international acquisition. With different culture and national location of two corporations, Tata group would get exchange risk. For example, Tata group would get some transaction risk during the acquisition payment period. After acquisition, as the parent corporation of Jaguar Land Rover, Tata group would get translation exposure when recieving and chekcing the financial statement of Jaguar Land Rover every year. Moreover, as exchange floating frequently by some global events, Tata group would get economic exposures and should justify Jaguar Land Rover predicting profit under global trend consideration. For example, as America reducing quantitative easing policy, both India and UK would have effect on that. However, as the decreasing of quantitative easing leading emerging economy capital price decreasing, the emerging country India would get huge negative exchange impact from quantitative easing policy draw back and Indian Rupee rapidly and extremely depreciation. While UK does not get much impact on that policy for its better capital structure and national economy revive. Then, Indian Rupee is depreciating by comparing British Pound in this period. Therefore, for Tata Group, it is better to consider the influence of quantitative easing policy by comparing with two countries specific influence and deduct the predict of Jaguar Land Rover, such as Jaguar Land Rover may have better gainning than Tata Group other corporations in India. Except considering global events influence, Tata Group could make specific exchange strategy to control the risk.





Bibliography:

The Economic Times,. (n.d.). Risk Management Definition | Risk Management Meaning - The Economic Times. Retrieved 20 February 2014, from http://economictimes.indiatimes.com/definition/risk-management

Watson, D., & Head, A. (2007). Corporate finance (1st ed.). New York, NY: Financial Times/Prentice Hall.

Top of Form

Bottom of Form

Raising Finance for Multinational Enterprise, Collaborative Ventures & Foreign Subsidiaries

Blog 1： Raising Finance for Multinational Enterprises, Collaborative Ventures & Foreign Subsidiaries

Raising money is a important thing for the corporations to support business operations. There are two main methos for current corporations raising finance, such as, equity finance and debt finance. This blogger would analyse and compare both financing method under some specific examples.

1. Definition: Equity Finance & Debt Finance

Equity finance: An efficient way for SMEs to finance high-risk investments because it allows investors to share more fully in the rewards of a successful venture.

Debt finance: When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

2. Advantages & disadvantages

2.1 Equity finance advantages: 

A. Usually there is no obligation to pay dividens.

B. The capital does not have to be rapaid.

2.2 Equity finance disadvantages:

A. High cost: Equity finance cost of capital would normally higher than debt finance cost of capital. First of all, some extra direct cost would have in equity finance such as advice cost, the legal, accounting and prospectus costs. Secondly, to satisfy shareholder, corporation would have cost on returning. 

B. Loss of control: Under equity finance method, shareholder have some rights to influence corporation decisions.

C. Dividends cannot be used to reduce taxable profit: Dividens are paid out of after-tax earnings, whereas interest payments on loans are tax deductible.

2.3 Debt finance advantages:

Debt financing allows you to have control of your own destiny regarding your business. You do not have investors or partners to answer to and you can make all the decisions. You own all the profit you make.

If you finance your business using debt, the interest you repay on your loan is tax-deductible. This means that it shields part of your business income from taxes and lowers your tax liability every year. Your interest is usually based on the prime interest rate.

The lender(s) from whom you borrow money do not share in your profits. All you have to do is make your loan payments in a timely manner.

You can apply for a Small Business Administration loan that has more favorable terms for small businesses than traditional commercial bank loans.

2.4 Debt finance disadvantages:

The disadvantages of borrowing money for a small business may be great. You may have large loan payments at precisely the time you need funds for start-up costs. If you don't make loan payments on time to credit cards or commercial banks, you can ruin your credit rating and make borrowing in the future difficult or impossible. If you don't make your loan payments on time to family and friends, you can strain those relationships.

3. Comparison with fact examples

(Businessweek, n.d.)

According to Gofunding, the corporations like Neovasc which hold high profitability would prefer choose equity financing to raising money for their business. As a corporation which formed in 2008 (Neovasc, 2012), Neovasc is a newly and small corporation which depends on equity financing in its early stages of development (Gofunding, n.d.).

(Amec, n.d.)

Although, debt financing is usually be used in small pattern corporations, some big corporations could possible using debt financing to raising money in some specific situations. According to BBC (2014), some corporations like Amec would use debt financing to raise funds to fill up the insufficient currency payment. As the characteristics in less risks and transaction fees of debt financing, corporation usually use debt financing in this situation rather than equity financing. Moreover, according to Gofunding (n.d.), the corporations with steady profitability would use debt financing. From above chart, the general stable increasing of Amec shows enough evidence to prove that.

After comparing with two types of financing methods in specific examples, it could be concluded that small and newly corporations with high profitability would prefer equity financing, while stable big corporations prefer debt financing.

Resource related:

Amec.com (n.d.). Amec | financial reports. [online] Retrieved from: http://www.amec.com/media/financial_reports/financial_reports.htm [Accessed: 22 Feb 2014].

BBC News (2014). Amec offers £1.9bn for swiss firm. [online] Retrieved from: http://www.bbc.co.uk/news/business-25711210 [Accessed: 21 Feb 2014].

Businessweek.com (2014). Neovasc inc (nvc:venture): financial statements - businessweek. [online] Retrieved from: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=NVC:CN [Accessed: 28 Mar 2014].

Go4funding.com (n.d.). Choosing between debt and equity financing. [online] Retrieved from: https://www.go4funding.com/Articles/Small-Business/Choosing-Between-Debt-And-Equity-Financing.aspx [Accessed: 22 Apr 2014].

Marketwire (2014). Neovasc inc. closes c$25 million bought deal equity financing. [online] Retrieved from: http://www.marketwired.com/press-release/neovasc-inc-closes-c25-million-bought-deal-equity-financing-tsx-venture-nvc-1892625.htm [Accessed: 28 Mar 2014].

Neovasc Inc. (2012). Canadian biotech firm specializing in cardiovascular devices. [online] Retrieved from: http://www.neovasc.com/heart-valve-bovine-tissue-tmvi-coronary-sinus-reduction/about-neovasc-canadian-biotech/ [Accessed: 28 Mar 2014].

Trail blog: International Stock Exchanges & Stock Market Efficiency

International Value Management (revised by trail blog)

Shareholder wealth maximisation is used to choose as firm objective by corporation in value management. Although, many firms do not use shareholder value as the most important goal, the increasing threat of takeover by teams of managers searching for poorly managed businesses changes abovementioned situation. In 2011, Netflix share prices reduce from $304 to $70 as its DVD price increasing strategy. In addition, Blackberry loss it 77% shares because its PlayBook tablet strategy. According to examples on Netflix and blackberry, it could be found that shareholder wealth are influenced by corporate strategy significantly.

 

Comparing shareholder value-based management, earnings-based management leads some drawbacks which are:

Accounting is subject to distortions and manipulations;

The investment made is often inadequately represented;

The time value of money is excluded from the calculation;

Risk is not considered

In addition, there is one more issue could be existed in earnings per share which is the price to earnings ratio seems to not fairly price an asset. For example, the EPS and P/E would be different under identical assets but different equity as the difference in net income and tax.

 

	Firm A	Firm B
2004	1.5	1.8
2005	1.6	1.0
2006	1.7	2.3
2007	1.8	1.5
2008	2.	2.0

 

 

Therefore, shareholder wealth maximisation should be considered as a corporate goal. Analysing above table, firm a shareholder value could be considered more than firm B as it low standard deviation in firm A shows low risks. There are 5 actions could create value such as increasing the return on existing capital, raising investment in positive spread units, divesting assets, extending the planning horizon and lowering the required rate of return.

Then, based on that result, Rappaport (2006) has defined 10 ways to create shareholder value.

1.    Do not manage earnings or provide earnings guidance

2.    Make Strategic Decisions that maximize expected value, even at the expense of lowering near-term earnings

3.    Make acquisitions that maximize expected value, even at the expense of lowering near-term earnings.

4.    Carry only assets that maximize value

5.    Return cash to shareholders when there are no credible value-creating opportunities to invest in the business.

6.    Reward CEOs and other senior executive for delivering superior long-term returns.

7.    Reward operating-unit executives for adding superior multiyear value

8.    Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly.

9.    Require senior executives to bear the risks of ownership just as shareholders do.

10. Provide investors with value-relevant information.

However, although those ten ways could help create long-term shareholder value for most corporations, some corporations should carefully approach those methods, in particular high-tech corporations. The reason of that is IT corporations development have highly sensitive relationship with shareholders price. As a high risk and high return of high-tech corporations, the return expectation of those corporation investors would much higher than other types of corporation shareholders. When share price goes down, less attraction would get by investors rapidly and those high-tech corporations may loss fund support for investors. Moreover, as high-tech corporations used to have long-term research and development cycle time, the less fund support would easier to let those corporations into capital shortage. Then, the corporations would turn to a vicious circle. Therefore, for those high-tech corporations, the manager should may much attention on short-term profit strategy to attract its shareholders.

All in all, shareholder wealth maximization is generally reflecting a corporation value at most time. 10 ten above-mentioned ways would help to most corporations, except high-tech corporations. For those high-tech corporations, long-term strategy is important and profit value should still be considered.

Bibliography:
Rappaport, A. (2006). Ten ways to create shareholder value. Harvard Business Review, 84(9), 66--77.