71521831 international-financial-management-3


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71521831 international-financial-management-3

  1. 1. Unit-IIIFDIWhy do firm invest abroad:New source of demandEconomies of scaleFor use of foreign raw Mtrl / technologyTo exploit cost monopolistic advantageTo diversify inter nationallyTo expand in politically safe countryFor knowledgeHow does FDI flow: Exporting / importing / joint venture / mergeracquisition / licensing?/ Franchising / turnkey project management contract.Requirement for bringing FDI: Reliable excess to economic informationLow level of corruption] (Low)Stable Govt. / stable business environmentGrowth potential (More)Good infrastructureAbility to meet STD35003000 increasing trendbut2500 fall in 1999 ~ 200120001500100050091-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-0 0-01 0-02Measure to attract FDI: - 1. Liberal laws2. Centralize approval1
  2. 2. 3. Liberal rule of business4. Reduce entry barrier5. Proper information6. Policy reform7. STD guide lines8. Strong intellectual property right9. Transparency10.Dispute resolution11.EPZ’s creation12.Formation of council1998 ~ 89 ~ 2001-02Fall in FDIPermission of FDI in India: - ThroughFinancial collaborationJoint ventureTechnical collaborationEuro issueSectors in which FDI not allowed In India: -Arm & ammunitionAtomic energyRailway transportCoal miningReason of FDI growing in India: - big market / skilled manpowerCapability of knowledge managementProperly place-financed systemDemocratic politicsMajor FDI bringing industry:Telecom / electrical equipmentComputer software % 50Transportation industry (excluding railways)2001- China FDI – 46.8 us $ (in billion)India FDI – 3.4 us $ (in billion)Rank wise FDI in India – 1991-20021. Mauritius – 38.7 %2. USA – 17.1 % India’s share in business – 1%3. Japan – 6.84. UK – 5.22
  3. 3. INTERNATIONAL PORTFOLIO INVESTMENT- Security are bought & sold in the form of port folio- It reduces risk :- same risk – high returnLess risk – same returnComparatively less risk increase forComparatively high rate of return- Gain from stock diversification- Risk from exchange rate reduced- Political risk reduced- Legal / social / country risk reduced- Standard deviation & variance are used to measure risk- Two outcomes1) Dividend 1) interest2) Capital gain 2) principalPortfolioFix income variable returnInterest rate bond or variable interestrate bond & securityDebenturesNo fix maturityFix maturity3
  4. 4. Decision in portfolio investment- Which type security to select for investment- Which market that security should be taken / analyses / taxon security- International diversification- Time of diversification- Compare risk & return, with domestic- How to reduce riskRisk in % Total risk of domesticdiversification25 Total risk of internationaldiversification20151055 10 15 20 25 30No. Of Security New page4
  5. 5. Factors Effecting portfolio investment return: - global economic trendsWorld business cycleTrend in word trade world specificWorld incomeNational incomeNational economic trend nation specificBusiness cycleCost factorOut put industry specificRelative price change for inputFirm specific factorCurrency in which return earnestExchange rate behavior currencyfactorForeign exchange market5
  6. 6. Aspect of portfolio investmentFix income security variable return securityFix income security : - invest in appreciating country /- (foreign investmentto bond is better than home )- calculate after tax returnInternational equity investment : - Compare tax on dividend- Compare return of home with return fromforeign byAdjusting currency exchange rate- Measurement of stock return- Select of indent portfolio returnFactors of portfolio investment- Foreign exchange rate – appreciating / depreciating- Profitability- Tax factor: - high / low – profit after tax- Risk factor : economic/ political / legal / social / country /natural factor- Foreign exchange risk : economic/ transaction / translationrisk & exposure- Management- Market segmented or integrated- Availability of information (speed / reliability / on time )- Laws / policy govt- STD guideline- Return- To invest in fix income bond / variable return security- Which market to invest- Which currency to invest- At what time to invest- How many no’s of stock- How much qty of money to invest- Time of maturity required- Global economic trends- World business cycle- Trend in world trade6
  7. 7. - World income- National income- National economic trend- Domestic business cycle- Output how much increase or decrease (relative pricechange of output)- Relative price change in input- Currency in which return required- Invest in bond or security- Compare home return it international portfolio in vestmentBENIFIT OF INTERNATIONAL PORTFOLIO INVESTMENT1. Same risk – high return2. Less risk – same return3. International portfolio investment is better thandomestic4. Less cost of capital – high return5. Better opportunity6. Knowledge increase7. Domestic threat can be removed8. Economics of scale9. Better use of recourse.7
  8. 8. INTERNATIONAL CAPM .rj = rf + Bw (rw – rf)Bw= Cov (rjrw)Var (rw)rw = world market expected returnrj = required expected return on security / portfolioVar rw = variance of world market portfolioCov (rjrw) = covariance between security or portfolio and world market wSegmented market gives better return than integrated marketIf unsystematic risk is removed (overcome cause of segmentation &diversify internationallyReturn151055 10 15RiskReason of market segmentation- Legal barrier- tax rates- Information- Exchange rate risk- Expected return depend on domestic factor- Listing costs variation- Reduce systematic risk of domestic market-- DETERMINANTS OF VOLUMEVolume means how much flow of FDI8
  9. 9. Determinants of volume: -- If profitability is high in another country then high FDI- Govt policy if favorable then high volume of FDI- If country risk less than FI flow will be high- If good infrastructure the high volume of FDI- Labour problem less – high FDI flow- If legislation favorable to FDI – them high FDI- Political stability effects volume favorable for FDI- Finance market effects FDI- Economic policy if favorable for FDI, then high FDI- Price stability effect FDI- Exchange rate flexibility effect volume of FDI ]- If return on investment is high then high volume of FDI- Social environment- Cultural environment- Availability of skilled labour- Tax factor- Availability of information / accurately and timely- Relative price change in inputs- Attitude of Govt toward home industry- Cost factor- National income- National business cycle- Availability of technology at home- Registration & approval procedure- Entry barrierInfrastructure: / rail / road / electricityRemittance restrictionBusiness norms & traditionInflation / interest rateMarket size /skilled manpower / financial system9
  10. 10. COMPOSITION OF FDI- Formula- Machine- Drawing- Software- License franchising- Technology- Turnkey projects- Management- Idea- Finance- Joint venture- Merger & acquisition- Through euro issue10
  11. 11. DIRECTION OF FDIYear- 2001From : (1) Mauritius : 38.7%(2) USA : 17.1%(3) Japan : 6.8% To India(4) UK : 5.2%(5) Germany : 5.0%FDI Inflow 2001(1) China :6.4%(2) Hongkong :3.1% Of world FDI(3) India : .5%(4) Korea : .4%FDI – from developed country to least developed countryFrom developed country to developing countryFrom business saturated country to expanding countryFrom high technology country to low technology countryFrom US/ UK /Europe – to –Asian countries- African countriesHigh tax country to – low tax countriesDeveloped countries to – highly populated countriesFDI is coming through MNC’sFrom economically unstable countries to economically stable countriesU-3PROCESS OF CAPITAL BODGETING- Search project- Assess political climate of that country- Check strategy- Cash flow analysis11
  12. 12. - Required rate of return- Economic evaluation- Select- Risk analysis- Implement- Execute control- Post auditMULTINATIONAL CAPITAL BUDGETINGAPPLICATION & INTER PRETATIONApplicationAPV is best method (adjusted present value)- Parent & project cash flow- Problem in foreign investment analysis- Issue in foreign investment analysis- Adjustment of riskOut of prospective investment – select a combination of these projectwhich maximize the company value to its share holder in itdiscounting of project flow is doneUnique complexities of foreign project evaluation: -- Parent cash flow are different from project cash flow- Conversion of currency into parent’s currency- Two tax : parent & host country- Inflation effect cash flow of parent- Forex variation effect parents cash flow- Most country can impose restriction political riskProblem & issue in foreign investment analysis- Cost of equity- Foreign exchange risk- Remit hence restriction- - Profit transfer problem- - Fee / royalty- - Deprecation- - Concessionary loan- Tax issue- Risk free rateRequirement- Sales creation- Opportunity cost- Transfer pricing12
  13. 13. - Fee/ royalty- Cost of capital- Segmented capital market- Types of financing debt / equity- Life of project- Price of product- DemandProject Vs parent cash flow- - Tax- - Exchange control Deferens in parent Vsproject- Management fee / royalty- Evaluation project cash flow- Cash flow to parent- Both (cost & benefit (indirect)METHOUED OF CAPITAL BUDGETING1) No discounted method :- payback2) Discounted cash flow method- NPV- IRR- ARR3) ADJESTED PRESENT VALUE- It is used to evaluation of unique aspect of foreign project- Different component discounted separately- There is same flexibility to accommodate various things- Different rate for different segment- Testing of variability can be done- If project is not acceptable than additional evaluation can bedone(According to complexities)- Rimetence- Exchange control- Last export- Blocked foundCriteria of selection - accept / reject criteriaMutually exclusiveCapital rationsAPV13
  14. 14. APV = present value + Pv of side effects associated with projectPolitical RiskU-3FM INDICATOR: -- Stability of Govt- Inflation- Priorities of Govt / Govt control- Attitude of Govt- Low return- War- Tax- Direction of polices- Debt- BOPRISK: -- Expropriation: - forced dis investment- Confiscation – without compensation- Nationalization – package given- Unwelcome regulation- Interface with operation- Goal conflict- Capital flight- Exchange rate- Govt regulation & control- Price control- Tax risk / legal- Low return- High inflationCountry factor - fiscal / exchange control / over expenditure / capacity ofcountryGeographic –dispute bourderSocial factor – religion /languageCompany factor – nature of industry / technology / competition14