CHAPTER 2 - Test Bank, Manual Solution, Solution …testbanktop.com/wp-content/uploads/2016/12/Donloadable... · Web viewHow can a firm protect its domestic market by investing overseas?

Chapter 02 - International Trade and Foreign Direct Investment

Chapter 2International Trade and Foreign Direct Investment

Learning Objectives

L.O. 1 appreciate the magnitude of international trade and how it has grown

L.O. 2 identify the direction of trade, or who trades with whom

L.O. 3 explain the size, growth, and direction of foreign direct investment, worldwide and in the United States

L.O. 4 identify who invests and how much is invested in the United States

L.O. 5 understand the reasons for entering foreign markets

L.O. 6 comprehend that globalization of an international firm occurs over at least seven dimensions and that a company can be partially global in some dimensions and completely global in others

OverviewThis chapter addresses three major concerns, the state of international trade, that of foreign investment, and then an exploration of why businesses enter foreign markets.

International trade and foreign direct investment have grown dramatically over the last three decades. Although new trading and investment patterns are emerging, developed nations tend to trade with and invest primarily in other developed nations.

Firms go abroad either to increase profits and sales or protect them from being eroded by competition. To increase profits and sales, they may enter new markets, go to markets that promise to help them obtain greater profits, or enter markets in order to test market. The competitive moves are motivated to protect the home market, to attack competition in their home market, to protect their foreign markets, to guarantee supply of raw materials, for geographic diversification, and to satisfy management’s desire.

The traditional approach to international involvement was to begin with exporting, then setting up foreign sales companies and finally, where the sales volume warranted, establishing foreign production facilities. Increasingly, because countries have liberalized trade restrictions and IT has made communication instantaneous, companies are becoming involved in trade and FDI for many reasons.

Globalization may occur along seven dimensions: product, market, promotion, where value is added to product, competitive strategy, use of non-home country personnel, and extent of global ownership in the firm.

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Suggestions and Comments

1. Students often are unaware of the rapid growth of international trade, so we discuss Figure 2.1 in class. We point out that there have been numerous changes in trade relationships as Tables 2.2 and 2.4 illustrate. Most students believe that the major trade direction is between developed and developing nations (exchanging raw materials for finished goods). Table 2.3 shows that developed nations continue to trade with other developed nations, but the increase in industrialization of developing nations is resulting in greater trade among them.

2. Generally students are surprised to learn that the United States’ share in total foreign investment is still as large as it is (Table 2.6). They also believe that Japan’s share is largest. Do you want to see how many read the assignment? Ask them which country has the largest share of foreign direct investment (U.S.).

3. There is a common misconception that firms have a choice between exporting and foreign production. We show that this choice often is unavailable when we cover the reasons for going abroad.

4. You may be interested in discussing the topic, “Does trade lead to FDI or does FDI lead to trade?” This illustrates how closely trade and FDI are interlinked.

5. This is a good time to introduce the 7 global dimensions because the issue of globalization will occur throughout our discussion of international business.

Student Involvement Exercises1. Ask the students to check advertisements in The Wall Street Journal , the Financial Times and

New York Times, for ads in which investment inducements are offered by foreign governments. Similar ads also appear in The Economist, Business Week, and Fortune. Students can also search the web to find such inducements for various countries. What kinds of inducements are offered? Does your city and state offer foreign firms inducements to invest in your area?

2. We state in the text that one reason for going overseas is to protect the firm’s foreign markets. In many countries, the major U. S. competitors are competing as they do here. The students might take an industry and see in how many countries the top two or three industry leaders are present. For example, in how many markets do Colgate-Palmolive and Procter & Gamble compete using their own local production facilities? The annual reports of these firms will tell where production facilities are.

Guest LecturersSome businesspeople who could contribute to the material in this chapter would be:

1. Someone in the technical department of a multinational to talk about licensing and contract manufacturing arrangements that firm has with overseas licensees.

2. Product manager of the international division of a multinational who should be knowledgeable about licensing and all the means for entering a market. Such a person can also explain why the firm went overseas.

3. Financial person in the international division who can discuss the points mentioned in questions 1 and 2 plus the return obtained from these arrangements.

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4. Representatives from a foreign-owned subsidiary in your area. Ask them to tell the class what motivated their company to come to the United States and your area.

5. If you have an economic development department in your state that is active in attracting foreign investors, you may be able to get a representative to explain to the class what it does to attract foreign investors and what foreign investors are looking for. Your chamber of commerce director of economic development may have had visits from foreign company representatives that he or she is willing to share.

Lecture Outline

I. The Opening SectionIn this chapter, three topics are examined that relate directly to exporting and production in foreign countries: (1) international trade, which includes exports and imports; (2) foreign direct investment; and (3) why firms enter foreign markets. A related activity, foreign sourcing, is treated later in the text.

II. International TradeA. Volume of Trade

1. The volume of international trade in goods and services was $7.9 trillion in 2000, and in 2007, $17 trillion.

2. While smaller in absolute terms, trade in services has grown faster since 1990 than has merchandise trade.

3. African trade has increased in value, but decreased in its proportion of world trade.4. As Figure 2.1 indicates, the proportion of exports from Latin America, Africa and the

Middle East has decreased.5. North America and the EU proportions of world trade have increased. With the EU,

new members account for some of the growth.B. Direction of Trade

1. Developed nations trade primarily with other developed nations (Table 2.4). 2. Developing nations also trade primarily with developed nations, although this

proportion is declining. (Japan and U.S. are exceptions.)3. The direction of trade frequently changes over time among nations or regions.

Regional trading blocks (NAFTA, EU, ASEAN) have been trading more within themselves.

C. Major Trading Partners: Their Relevance for Businesspeople1. Advantages of focusing attention on a nation that is already a sizable purchaser of

goods from the would-be exporter’s country include:a. Business climate in the importing nation is relatively favorable.b. Export and import regulations are not insurmountable.c. There should be no strong cultural objections to buying that nation’s goods.d. Satisfactory transportation facilities have already been established.e. Import channel members are experienced in handling import shipments from the

exporter’s area.f. Foreign exchange to pay for the exports is available.g. The trading partner’s government may be applying pressure on importers to buy

from countries that are good customers for that nation’s exports.

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2. Major trading partners of the United States. a. Table 2.5 shows the major trading partners of the United States. Mexico and

Canada are major trading partners, in great part because of their geographic proximity. Now, as members of NAFTA, their importance is growing.

b. Rankings of America’s trading partners have changed markedly in 30 years. Asian nations have become increasingly important trade partners for both exports and imports.

c. Many Asian countries appear as major importers of American goods because (1) their rising standards of living enable their people to afford more imported products, and export earnings provide foreign exchange to pay for imports, (2) they are purchasing large amounts of capital goods to further their industrial expansion, (3) they are importing raw materials and components to assemble into subassemblies or finished goods to subsequently export, often to the U.S., and (4) their governments, sometimes under pressure from the U.S. government, have sent buying missions to the U.S. to seek products to import.

3. Relevance for BusinesspeopleFor a company starting to search for new international business opportunities, the preliminary steps of studying the general growth and direction of trade and analyzing major trading partners would provide an idea of where the trading activity is.

III. Foreign InvestmentForeign investment is usually divided into two components: portfolio investment and direct investment. The distinction between these two has begun to blur, particularly with growing size and number of international mergers, acquisitions, and alliances.A. Portfolio Investment

1. Not directly concerned with the control of a firm 2. Nonresidents owned American stock and bonds with a value of $6,132 billion in 2007.

Americans owned $6,649 billion in foreign securities in 2007. B. Foreign Direct Investment (FDI)

1. Volume.a. The book value of all foreign direct investments was nearly $12.5 trillion at the

end of 2007 (Figure 2.2). b. The U.S. is one of the largest investor nations, with $2.4 billion invested abroad,

which was 1.6 times the FDI of the next-largest investor, the United Kingdom, and 2.2 times that of the third-largest investor, France$2.4 billion invested abroad, which was 1.6 times the FDI of the next-largest investor, the United Kingdom, and 2.2 times that of the third-largest investor, France.

c. The proportion of FDI accounted for by the United States declined by over 47 percent between 1980 and 2006, however, from 36 to 19 percent. The proportion of FDI accounted for by the EU increased from 36 percent to 52 percent in 2006. Japan declined from 12 percent in 1990 to 4 percent in 2006. Developing countries increased their proportion of FDI, from 1 percent in 1980 to 13 percent in 2006, an increase of approximately 1,200 percent. (Fig. 2.2).

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.d. Annual FDI outflows hit a historical high in 2000—$1,201 billion, more than

250 percent of the level in 1997 (see Table 2.6). However, the slowdown that began to hit most of the world’s economies in late 2000 resulted in a subsequent decline in the overall level of annual FDI flows. By 2002, the total was only $647 billion, only about 54 percent of the 2000 figure but still the fifth-highest annual level of FDI to that point in history. Outflows subsequently increased, reaching $1,216 billion by 2006 (Table 2.6).

2. Direction. The industrialized nations invest primarily in one another just as they trade more with one another.

3. Trade and FDIHistorically, foreign direct investment has followed foreign trade because:a. Foreign trade is less costly and less risky. b. Management can expand the business in small increments rather than in the

greater investment and market size that a foreign production facility requires. 4. Does trade lead FDI or does FDI lead trade? a. New business environment of fewer government barriers to trade, increased

competition from globalizing firms, and new production and communications technology is causing international firms to locate their production systems close to available resources. They then integrate the entire production process either regionally or globally.

b. Where to locate may be either an FDI or a trade decision.C. U.S. Foreign Direct Investment

1. Figure 2.2 shows that the U.S. is the world’s largest foreign investor. 2. American firms have invested in developing nations, approx. 70 percent of the total. 3. U.S. investment is largely into other developed countries, to Europe, Latin America,

and Asia and the Pacific. D. Foreign Direct Investment in the United States

1. Rapid increase. FDI in the U.S. rose from $185 billion in 1985 to $1,789 billion in 2006 (Figure 2.3b). Over 85 percent was from 8 nations: (1) United Kingdom, (2) Japan, (3) Germany, (4) Netherlands, (5) France, (6) Canada, (7) Switzerland, and (8) Luxembourg.

2. Acquire going companies or build new ones? Most FDI in the U.S. has been to acquire going companies rather than to establish new ones. Reasons for this include company availability as a result of corporate restructuring, foreign company desire to gain rapid access to U.S. technology, desire to acquire known brand names, and increased international competitive pressures, including the pursuit of improved economies of scale.

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IV. Why Enter Foreign Markets?A. Increase Profits and Sales

1. Enter new markets. Managers facing a mature, saturated market at home may find that markets with rising GDP per capita and population growth appear to be attractive for doing business. a. New market creation b. Preferential trading arrangements. For many products, preferential trading

arrangements (European Union, NAFTA) have created new, larger markets. This can be particularly important for nations that still lack sufficient market potential on their own.

c. Faster-growing markets. Many foreign markets are growing faster than the home market.

d. Improved communications.2. Obtain greater profits.

a. Greater revenue. Where there is less competition, the firm may get a better price.b. Lower cost of goods sold. Increasing total sales by exporting can reduce R&D

costs per unit, permit economies of scale in manufacturing and other activities, and provide access government inducements.

c. Higher overseas profits as an investment motived. Test market. Opportunity to trial changes to any part of the marketing mix

based on results from a less important foreign market; danger that a market test will give competitors an early warning.

B. Protect Markets, Profits, and Sales1. Protect domestic market

a. Follow domestic accounts overseasb. Attack in competitor’s home market to keep it occupied defending that market c. Use foreign production to lower costs. Firms move part or all of their production

facilities overseas to lower manufacturing costs and protect their domestic markets from lower-priced imports.

d. In-bond plant concept2. Protect foreign markets

a. Lack of foreign exchange–Firms produce in countries where foreign exchange for buying their exports is scarce.

b. Local production by competitors–Firms follow competitors who invest in their export markets.

c. Downstream markets–Some companies, such as those from OPEC nations have invested in downstream manufacturing and marketing outlets to guarantee market for their products.

d. Protectionism–Firms go abroad when governments erect import barriers to their exports.

e. Guarantee supply of raw materials, especially in nations that lack sufficient domestic supplies.

f. Acquire technology and management know-how.g. Geographic diversification, as a means of maintaining stable sales and earnings

when the domestic economy or their industry goes into a slump.h. Satisfy desires of management, shareholders, financial analysts, and others for

continued expansion.

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V. How to Enter Foreign MarketsTwo ways: (1) export to them, and (2) manufacture in them.

VI. Multidomestic or Global Strategy?Many multinationals begin their foreign operations by first exporting and then manufacturing overseas, but they also enter some markets by manufacturing. They employ all the methods we have discussed to reach their worldwide markets.A. The World Environment is Changing

1. Although the linear relationship of first exporting and then manufacturing overseas still holds for many firms, manufacturing overseas still hold for many firms, changes in the world environment are affecting trade and foreign investment-(1) governments have liberalized flow of factors of production, (2) improvements in information technology enable managers to direct company activities over long distances in diverse areas. As a result, global competition has increased.

2. Which strategy will the company follow- multinational or global; that is what can the company standardize worldwide?

B. Seven Global Dimensions1. There at least seven dimensions along which management’s can standardize: (1)

product, (2) markets, (3) promotion (4) where value is added to product, (5) competitive strategy, (6) use of non-home-country personnel, (7) extent of global ownership in the company.

2. Possibilities range from zero standardization (multidomestic) to standardization along all seven dimensions (completely global). Management must decide how far the firm should go along each dimension.

Answers to Questions1. How large and important of a role do small and medium-sized enterprises play in generating

export sales?

Technology is giving small and medium-sized enterprises the opportunity to compete in the international environment. Their role is huge.

2. How has trade in merchandise and services changed over the past decade? What have been the major trends? How might this information be of value to a manager?

The volume of international trade in merchandise and services exceeded $4 trillion in 1990. Fourteen years later, international trade had more than doubled to $11 trillion! Trade in services has also increased. The significance of world trade cannot be overlooked. The trends are many and varied, and include trade within regional blocks. It is critical that managers understand these trends in order to develop a competitive strategy to take advantage of this growth. Also, because of increased trade, management must be prepared to face stiff competition in markets abroad as well as the home market.

3. The greater part of international trade consists of an exchange of raw materials from developing nations for manufactured goods from developed nations. True or false? Explain.

This statement is false, but with modification. More than half the exports from developing nations are shipped to developed nations, but this percentage has been steadily declining over the last thirty years. Nearly three-fourths of exports from developed economies go to other industrialized nations. Exceptions to this developed to developing country export trend are the United States and Japan, which send a larger portion of exports to developing nations than do other developed countries.

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4. The volume of exports has increased, but the ranking of the U.S. trading in order of importance remains the same year after year. True or false? Of what use is this to a manager?

False, the direction and volume of U.S. exports has changed overtime. Understanding the volume and direction of trade is critical for management since this will provide information on major trading partners as well as products already being exported from the U.S.

5. What is the value of analyzing foreign trade data? For example, what should the quadrupling in real terms of exports in just 30 years indicate to management?

An understanding of the volume and direction of international trade is critical for anyone developing a plan to begin exporting goods or services. The quadrupling of exports in just 30 years should act as a signal to management of the importance of international trade to the growth of their business.

6. Knowing the nation is a major trade partner of another signifies what to a marketing analyst?

The following is a listing in no particular order of the advantages to focusing on a marketing analyst:

Business climate in the importing nations must be relatively favorable. Import regulations must not be insurmountable. Cultural objections to buying exported goods are not great. Satisfactory transportation facilities exist along with businesses that are experienced

in handling import shipments from the exporter’s area. Foreign exchange is available.

7. What are the different components of foreign investment? Why has the distinction between them begun to blur in recent years?

Investment into different countries can be divided into two components: portfolio investment and direct investment. Portfolio investment is the purchase of stocks and bonds as a passive investment. Direct investment is the purchase in which investors participate in the management of the firm. It is now more difficult to determine if a foreign investment is a portfolio or direct investment due to number of mergers, strategic alliances and acquisitions. Typically if an investor maintains more than 10 percent of the company’s voting stock it is considered a form of direct investment.

8. How has the level and direction of FDI changed over the past decade, both overall as well as in terms of annual outflows? Why would this information be of relevance to managers?

The textbook indicates that it is difficult to make an accurate determination of the present value we can surmise that the level of foreign direct investment into developing countries has been increasing overtime. Tables and figures provide more detailed explanation of trends in FDI. Understanding this information is important since it provides information similar to that explained in the analysis of international trade. Increasing international investment indicates an attractive environment for investment.

9. Why has FDI historically followed foreign trade? What about the new international business environment is causing this path to market expansion to change?

Traditionally FDI has followed foreign trade since foreign trade is typically less costly and risky than making a direct investment into foreign markets. Entering a market via FDI allows management to enter the market in small increments controlling their investment. Globalization of markets is challenging this traditional market entry strategy.

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10. Why has most of the foreign direct investment gone into the acquisition of existing companies rather than establishing new ones?

The two primary reasons companies will acquire an existing business is that the acquisition allows for management to gain rapid access to the country’s market, and advanced technology. Acquisition also provides access to other company assets, such as personnel. In a global environment the pace of competition has forced companies to enter a market more quickly than in the past. Also, acquiring an existing business with known brands rather than spending the money and time on creation of new brands is cheaper in the long run.

11. What are the main reasons a firm might enter foreign markets?

The main reasons a firm might enter a foreign market include to:

Increase profits and sales Gain access to raw materials Create new markets Act on preferential trading arrangements Get into a faster-growing market Lower the cost of goods sold Take advantage of improved communications Test market Follow customers overseas Attack competitor’s home market

12. What are in-bond plants? Why might they be an attractive alternative for a manufacturing company?

Originally an in-bond plant program was referred to as the twin-plant program. For example, a plant on the Mexican side of the U.S. border would complete the labor-intensive processes for its twin on the American side of the border. This can be an attractive alternative for a manufacturing company seeking to lower production cost while remaining close to the U.S. marketplace.

13. How can a firm protect its domestic market by investing overseas?

In some instances a firm will set up an operation in the home market of a competitor hoping that the competitor will be preoccupied defending the home market and will lose focus. A classic example is Kodak’s move into Japan only days after Fuji announced plans to begin manufacturing in the United States.

14. What are the seven dimensions along which management can globalize? How is it possible for a firm to be multidomestic on one dimension of globalization and global on another?

The seven dimensions along which management can globalize include: product, markets, promotion, where value is added, competitive strategy, use of non-home-country personnel, and extent of global ownership. It is possible to completely standardize operations (global strategy) or to undertake zero standardization (multidomestic strategy) and variations of the level of globalization will vary with each dimension. For example, a company may use a global approach to promotion, but adopt a multidomestic strategy for producing the physical product.

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CRITICAL THINKING EXERCISE 2-1Have students review tables 2-2, 2-3, 2-4 and 2-5 related to World Trade in Merchandise Exports and Services. Encourage them to pay particular attention to the percentage change in the share of worldwide exports for the following regions and selected countries:

North America United States

Latin AmericaAfricaMiddle EastAsia

China

India

European Union France

Italy

Ask students to answer the following questions: Are there any noticeable trends?

What are the implications of these trends?

In your opinion, why is there growth in Asia as compared to the decrease for the European Union?

Africa and the Middle East’s percentage shares have decreased or remained stagnant, why do you believe this is the case? Should you, as a future business leader, be concerned about this trend?

Once students have reviewed and answered the questions listed above, ask them to pair with another student to review each other’s responses before discussing as a class.

CRITICAL THINKING EXERCISE 2-2Prior to the start of a lecture on the direction of trade, spending a few minutes discussing the difference between a “Developed Nation” and a “Developing Nation” may be appropriate. Ask students to work cooperatively with a partner or small group to respond to the following statement: True or false, international trade flows from developed countries to developing countries. Please support your answer.

CRITICAL THINKING EXERCISE 2-3

The following minicase with accompanying questions will allow students to begin thinking about themselves in the role of an international business executive. In this mindset students can evaluate decisions regarding product development policies.

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CRITICAL THINKING EXERCISE 2-4Foreign Direct Investment and Portfolio InvestmentThe Chinese have a rich beer making tradition. Anheuser-Busch’s strategy in China has been multifaceted. The company has initially made a portfolio investment in Tsingtao Brewery, a direct investment in Harbin Brewery as well as a direct investment in a Budweiser Brewery located in Wuhan.Have students research articles related to Anheuser-Busch and its strategy in China, then discuss the types of foreign investment methods employed by the company. Doing so brings the concept of direct investment into the real world and is an excellent opportunity to engage students in a meaningful discussion.

CRITICAL THINKING EXERCISE 2-5Inward foreign direct investment can bring about nationalistic reactions. Have students discuss the attempted acquisition of some U.S. ports by a company located in Dubai , Lenovo's purchase of IBMs personal computer division, and CNOOC's attempted purchase of Unocal. The following articles will provide background for a class discussion around these topics.

Ben White, "Uproar Surprised Dubai Firm," Washington Post 24 February 2006: D1.

Jonathan Weisman and Bradley Graham, "Dubai Firm to Sell U.S. Port Operations," Washington Post 10 March 2006: A1.

Qin Jize, "Snow: US May Review CNOOC's Oil Takeover," China Daily 30 June 2005: 2.

Ben White, "Unocal Accepts Chevron's Raised Bid," Washington Post 21 July 2005: D1.

Jeffrey Burt, "IBM, Lenovo Complete Deal," eWeek 9 May 2005: 27.

Jonathan Cox, "IBM Lenovo Deal OK'd," The News and Observer 10 May 2005: D1. CRITICAL THINKING EXERCISE 2-6Sometimes an emotional reaction to foreign direct investments clouds the real reasons why businesses enter these arrangements. Have students think about the following questions using Daimler-Benz's acquisition of Chrysler as a starting point.

Why did Daimler-Benz acquire Chrysler Automotive rather than start a new automotive brand in the United States?

What are the benefits of this strategy? What are the pitfalls?

What does foreign investment of this type say about the business climate in the United States?

Another option is to have students research recent portfolio or direct investment into the United States such as Lenovo's acquisition of IBMs personal computer division or Nestle's purchase of Ralston Purina and answer the same questions as above. The activity provides a great opportunity to introduce the students to the library and research methods needed for classes in the future.

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CRITICAL THINKING EXERCISE 2-7The Seven Global Dimensions (SGD) management one can utilize to globalize the business strategy can be confusing. An excellent way for students to better understand the SDG is to present examples and ask them to surmise how many of the elements have been standardized or why they should be standardized. This exercise provides the opportunity for students to contemplate which types of products need adaptation and which can be completely standardized.

Life Clinic, Inc. sells a treatment for diabetes to all countries of the world.

McDonald’s sells product in countries like India or China.

Emerson Electric sells generators to Brazil.

Ford Motor Company sells vehicles in the European Union.

Whirlpool sells appliances to Southeast Asia.

CRITICAL THINKING EXERCISE 2-7With all chapters following this one, we will include a meaningful paragraph exercises hoping to get students comfortable free writing about topics and improving their ability to write about complex issues.

Meaningful Paragraph

Choose five vocabulary words from the end of the chapter to write a paragraph. Your use of the vocabulary should demonstrate your comprehension of each word. The paragraph should not merely be a listing of the words and their meanings. Rather your paragraph should show a working knowledge of each vocabulary word within an integrated meaningful paragraph.

GlobalEDGE AnswersExercise One http://globaledge.msu.eduGo to Resource Desk: http://globaledge.msu.edu/ResourceDesk/ Search Phrase: “International Trade Statistics”globalEDGE™ Category: “Research: Statistical Data Sources”Resource Name: WTO: International Trade StatisticsWebsite: http://www.wto.org/english/res_e/statis_e/statis_e.htmOn the WTO website, click on the most recent “International Trade Statistics” link. The requested information can be accessed by clicking on the “Trade in Commercial Services by Category” heading.

Exercise Twohttp://globaledge.msu.eduGo to Resource Desk: http://globaledge.msu.edu/ResourceDesk/ Search Phrase: “FDI Xchange”globalEDGE™ Category: “Industry: Multi-Industry”Resource Name: FDI XchangeWebsite: http://www.fdi.net/On the FDI Xchange website, click on the “Opportunities” tab, and then select the “Automotive” sector.

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http://www.fdi.net/

http://globaledge.msu.edu/ibrd/ibrd.asp

http://globaledge.msu.edu/

http://www.wto.org/english/res_e/statis_e/statis_e.htm

http://globaledge.msu.edu/ibrd/ibrd.asp

http://globaledge.msu.edu/


Minicase 2.1 Frontier Markets: An Attractive Opportunity for International Investment?

1. What are the main strengths and weaknesses of investing into frontier markets?

Strengths include the large population base (nearly 1 billion people) and relatively substantial overall GDP (an estimated $2.4 trillion) of these markets; the potential for attractive growth opportunities in many of these markets; returns that are less correlated with those of more traditional investment targets in the developed countries, which helps to diversity risk; strong natural resource endowments in many of these nations; relatively lower levels of competition for investments due to their less known nature as destinations for investment;.

Weaknesses include high potential volatility of these emerging markets; high level of diversity among these markets; limited level, range, and liquidity of investments in some of the markets that have limited diversity and/or low levels of trading in company equities; weak institutional infrastructure in many of these countries and their financial systems, potential for risk of economic, political, natural environmental, or other nature; difficulty of systematically gathering accurate, current data about many markets.

2. Are frontier markets attractive investment opportunities for (a) large institutional investors, such as pension funds and stock fund managers; (b) individual investors; or (c) companies seeking to make partial or full acquisitions of companies in frontier markets in order to gain managerial control of these ventures? For each of these types of investors, why would, or would not, investments into frontier markets make sense?

(a) Large institutional investors typically have substantial human, technological, relationship and financial resources to draw upon. As a result, they may be able to better manage the risks associated with incorporating frontier market investments as a part of their overall portfolio.

(b) Individual investors typically confront barriers associated with knowledge, liquidity demands, local contacts, and other challenges that are common with investments in frontier markets, making such investments potentially much more risky for these investors.

(c) Companies seeking to engage in partial or full acquisition may find that frontier markets represent a viable means of entering into relatively underexploited market opportunities, and thereby providing strategic options for longer term positioning within international marketplaces. However, the risks associated with these markets can still be substantial and may pose challenges for managers of international companies.

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CHAPTER 2 - Test Bank, Manual Solution, Solution …testbanktop.com/wp-content/uploads/2016/12/Donloadable... · Web viewHow can a firm protect its domestic market by investing overseas?