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International Business Finance Essay

1.Introduction

This report is specific for JKX Oil & Gas. She is a petroleum company focusing on exploration and production in countries of the ex Soviet Union and the Ukraine. Her management is considering weather following her competitor expansion into Far East and Oceania.

In this report I am going to show analysis in two sections. The first section is analysis on motivation of cross border investment in using FDI and find out the reasons of home countries & host countries encourage company to FDI. The second section is evaluating any key causes of a financial crisis and show how financial crisis affect the international trading.

2.Motivations of using FDI as cross border investment Basically FDI could be divide into three type of motivates they are market-seeking, resource-seeking, and efficiency-seeking (Malllampally and Sauvant 1999). Other than above there are a lot of academics theories, which could explain the motives behind the FDI by enterprises. In these theories I have chosen five theories that is common to be use for explain the motivations of FDI.

First is international product life cycle theory (Vernon 1966), every product ought to go thought some stages from a new product to a mature product. In order to take efficient and cost advantages in different stage, production plant move towards foreign. This theory help explain the motive of manufacturing business efficiency-seeking and market-seeking in using FDI but fail to explain reason of using FDI instead of using others methods such as licensing. For example car producer such as Honda, their new car will be firstly starting design and produce in Japan during the new product stage, then shift to USA for listen to the market where have a huge demand and lastly the production will be shift to the East-Asia to produce in order to lower the production cost in the standard product stage.

Second is transaction cost theory (Williamson 1993), it stated that when enterprises business is affected by market imperfection, which lead transaction cost increase. They will go international which benefit the efficiency and decrease the transaction cost. Be remind that this theory fail to explain reason of enterprises using FDI instead of using others methods and it is usually apply to manufacturing business efficiency-seeking which products are low in price, heavy, and easily to product in every where. For examples cement manufacturing industry as the raw-material is easy found in every where and easy to product also it is cheap in price and heavy so that firm will be product it locally instead of export it.

Third is market imperfection approach, (Hymer 1970) assume that due to market imperfection FDI present. Theory stated that when any factors which lead failure of perfect market. Because of extra cost of cover the barriers, advantage present in foreign countries, and advantages in using FDI over licensing such as full control, unique knowledge, and skill cannot be transferred. Enterprises will do the FDI to achieve profit maximization on their business. This theory help explain the motive of efficiency-seeking in every business by using FDI when they facing market imperfection.

Fourth is eclectic theory (Dunning 1993), theory stated that following factors found by enterprise FDI will be present. Firm will get advantage over particular location ownership, the advantage of have location ownership are not by selling or leasing, for the advantage a profit advantage must be gain. This theory help explain the motive of industries using FDI to take advantage of market-seeking and resource-seeking.

Fifth is following competitors theory (Knickerbocker 1973), this theory stated that in oligopolies industries firm will follow her competitors to move towards foreign countries. Following competitors in order to reduce the chance monopoly in a new oversea market by her competitor. This theory help explain the motive of oligopolies industries go international for market-seeking But this theory fail to explain the reason of first mover and reason of using FDI to expand other than licensing.

Eclectic theory, following competitors theory, and market imperfection approach which help explain why JKX chose to invest internationally with FDI. JKX is focusing on petroleum exploration and production of oil. It is just perfectly apply the eclectic theory because JKX is fully depending on use of local resources oil field. FDI is the only way to gain the resource by takeover the location ownership, and JKX uses the location resource to generate profit by production. Also maybe reason of addition cost on oil production JKX will decide move to other country because of the unique knowledge and skill cannot be transferred JKX need to use FDI to build new production plant. Also exploration and production oil industry in oligopolies. If JXK do not follow her competitors she will lost the potential oil field and her potential customer in new location. Moreover when JKX decides to invest internationally she needs to beware of the following such as economic risks, political risk, exchange rate risk, and cultural risks.

3. FDI impact on nation states

Because of FDI bring a lot of advantages to nation states (host & home), nation states attempt to encourage FDI to do so.

3.1Advantage of FDI to host country There are seven advantages of FDI to nation states, which explain why host countres attempt to encourage foreign to do FDI.

First is resource transfer effects, FDI by foreign firm bring along with their capital, technology, and management skill to host country. Capital bring alone by FDI is an importance source of stable private external finance for every country especially to developing countries. For example JKX buy an oil field form the host country and invest on the oil drilling equipment and build production plant ,which is a long term investment, profit making though production ,and could not leave easily.

Moreover the external finance give a big hand on the balance of payment and foreign exchange reserve which is importance element for the economic health. Technology and Management Skill are another resources bring alone with FDI, which enhance productivity and competitiveness of host country. Both of them are importance elements for success in global market when chance comes. Foreign firm provide training on knowledge and skills on how to produce and management skill to local employee in order to facility the production. These knowledge transfer direct benefits to local labors and enhance productivity and competitiveness of host country. For example in the 90’s computer parts MNCs build production plant in Taiwan by FDI, nowadays Taiwan is be came another computer parts manufacturing kingdom in Asia.

Second is employment effect, FDI creating employment for host country. Foreign firms build up their manufacture plant in the host country which increases the employment directly by foreign own plant and relative industry, for example in Mexico FDI create every 1 job in the foreign production plant and create 7 job in the relative industry (Farrell 2004). Also the local trained employees may start their own business. But there will be opposite effect in market-seeking” FDI raise unemployment by forcing less competitive companies out of business as foreign firm will bring along with advance technology reduce employment need in same production, For example Wal-Mart’s entry into the Mexican food Market which decrease the margin of that industry push less competitive companies exit (Farrell 2004). But actually this effect is just base how government manage the FDI for example in the 90’s china government restrict of the sold inside market of foreign firm which protect the local employment would not be substitute.

Third economic growth and local multiplier effect, high employment leads more consumption by the local country citizen. As a result encourage industries further develop to fulfill increasing consumer needs; lower prices, better quality, and more selection for consumers. It is because of further developed of the industries, which increase employment, and new products encourage consumer to do more purchase, the cycle will go on and on.

Fourth credibility in international market because of demonstration of first mover success, build up a model for the followers others foreign firms will be more confident to FDI to the same country. As followers could learn the first-comer experience, enjoy the effort done by first comer in host country such as infrastructures, educated customers, trained labors, and research done. Also stop the first-mover to become monopoly. In additional the credibility may attract short-term investment others than FDI. For example India starting by the first mover to starting computer software relating industry, nowadays it became another silicon valley in.

Fifth access to return markets (Malllampally and Sauvant 1999), as FDI by foreign firm increase accessing international marketing network. The network benefit to transnational systems related industry, domestic firm to getting spillovers foreign business, and wider economic of host counties, by greater the links between foreign and domestic. This also helps spread the enhanced productivity and competitiveness of host countries. Sixth tax revenue from profit (Razin 2002), profit generated by FDI contribute to tax revenues to the host country in general. But some countries may cancel out direct taxes for the MNCs to attract for investment, tax revenues will still be benefit as more consumption in local {Sales Tax} and better income of citizen {Income Tax}

Seventh reinvestment within local economy, the credibility of host country established the foreign firm may reinvestment into same country by using the profit earns in there. Moreover host counties encourage foreign firms to do so as foreign firm bring the profit back to their home country may deplete the foreign reserve and the profit earned put back to host country will bring along with new benefit to host country.

In additional FDI force host country improve their economic health such as policy system, industry, and better the living standard of the host country by better income, lowing price, improve quality and more selection for customer.

3.2Disadvantage of FDI to host country There are also some bad points together with FDI incoming such as, Adverse effects on local competition due to spending power and brand of MNC, MNCs become an impact on government decision due to the economic power of MNCs, Over exploitation of country mineral wealth etc… 3.3Advantage & Disadvantage of FDI to home country

Looking on the surface impact of FDI to home country surely will be lot disadvantages follow by such as negative impact balance of payment and increase unemployment. But why home country will encourage company to do FDI aboard , FDI will benefit the country in such ways, company go aboard may increase the export due to new development demand, MNCs will bring the FDI profit back to home country that benefit the balance of payment, jobs will be create as additional need of support activity represent by FDI aboard. FDI increase the long-term competiiveness by learn from others countries. Home country could benefit from the FDI of the sunset industries to free labor force form the costly and low-value industry.

FDI good to host country and long-run good to home country FDI need management and benefit to both MNCs and host government For FDI to be successful it require win-win situation benefit both MNC and Host country, but require a good control in order to manage FDI well. If the management of FDI is done badly which may result in harmful to whole host country’s economic system. On the other hand FDI going aboard not only bring alone with disadvantage to host country in the long-run which may also give a huge benefit to the home country. The following paragraph will be shown both advantages and disadvantages of FDI to nation states

4.Root causes of financial crisis There are many underlying reason which form a financial crises such as excess capital inflow, speculation activities, poor financial infrastructure, monetary policy etc.. all these factors encourage financial crises breakout. The following is a simple flow of twin crises (Kaminsky and Reinhart 1999). Starting form establishes of credibility of a country, foreign investors will start to invest into the country because expectation of return high. When the capital going into the local economic, that increase the economic health, local money supply, economic activity, foreign reserves, and government budget.

All these factors increase country credibility and once again increase the attractiveness of capital inflow. The continuous increasing expectation of return will form rational bubble (Blanchard 1979) investors and speculators will holding an overvalued currency but would not sell it yet, they believe there will be a further appreciation on the local currency. Because of more and more capital inflow, banks in the country will facing difficult in generating profit as they have too much cash on hand, the banks will decrease the liquidity ratio lend more money out of the banks which result in increase risky loan, overinvestment, over-consumption, and asset price bubble.

Banking crisis will more like to happen when bubble bursts and increasing bad loan. When the Banking Crisis outbreak which decline economic activity, costly fiscal bailout, decline the country credibility and lead capital flight. (Aghevli 1999) Capital outflow, costly fiscal bailout, decline economic activity, and speculation activities fasten decline the foreign reserves that result currency crisis.


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