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7/29/2019 Corporate Strategy & FDI( s )
http://slidepdf.com/reader/full/corporate-strategy-fdi-s- 1/23
Corporate strategy and FDI
Why move overseas?
7/29/2019 Corporate Strategy & FDI( s )
http://slidepdf.com/reader/full/corporate-strategy-fdi-s- 2/23
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
7/29/2019 Corporate Strategy & FDI( s )
http://slidepdf.com/reader/full/corporate-strategy-fdi-s- 4/23
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
7/29/2019 Corporate Strategy & FDI( s )
http://slidepdf.com/reader/full/corporate-strategy-fdi-s- 8/23
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
7/29/2019 Corporate Strategy & FDI( s )
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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
7/29/2019 Corporate Strategy & FDI( s )
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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
7/29/2019 Corporate Strategy & FDI( s )
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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
7/29/2019 Corporate Strategy & FDI( s )
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Multinational companiesExchange rate & inflation
risksInternational capital marketsMultiple tax regimesControls/restrictions
7/29/2019 Corporate Strategy & FDI( s )
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Multinational companies An evolutionary
development process-companies become
multinational by degrees:a gradual commitment
7/29/2019 Corporate Strategy & FDI( s )
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Raw material seekersMarket seekers
Cost minimisers
7/29/2019 Corporate Strategy & FDI( s )
http://slidepdf.com/reader/full/corporate-strategy-fdi-s- 15/23
OLI ParadigmOwner specific advantages
Location specificInternationalisation
7/29/2019 Corporate Strategy & FDI( s )
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Competitive advantageKey ingredient to maintain firm-
specific competitive advantage:Possession of proprietary info.
Control over human capital
7/29/2019 Corporate Strategy & FDI( s )
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Transnational corporationsOwned by a coalition of investorslocated in different countriesManaged on a decentralised basisFlat organisational structure
7/29/2019 Corporate Strategy & FDI( s )
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Internationalisation
Competitive advantage –
how to maintain it?
7/29/2019 Corporate Strategy & FDI( s )
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Alternatives to FDILicensing
Joint venturesStrategic alliances
7/29/2019 Corporate Strategy & FDI( s )
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Joint ventureHigh tech products where
costs of research anddevelopment are high
Joint marketing & serviceagreement
7/29/2019 Corporate Strategy & FDI( s )
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IssuesExporting v/s production abroadLicensing and management contractsv/s control of assets abroad
7/29/2019 Corporate Strategy & FDI( s )
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Question
7/29/2019 Corporate Strategy & FDI( s )
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IssueIf a firm is truly
multinational, should it seeitself in terms of itsperformance summarised inthe currency of the parentcompany only?