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FOREIGN DIRECT INVESTMENT

METHODS OF ACQUISITION:

Companies may accumulate foreign assets through acquisition (buying them) or by building these assets themselves.

Resources for Acquisition:

In order to acquire a foreign asset, firms usually move capital from one country (often the home country) to the country where the newly acquired facility is located (the host country). Sometimes, if the firm already has operations in the host country, it can simply use revenues from host country operations to acquire another facility. In such instances, no international capital movement would occur.

Buy versus Build Decision:

Instead of buying an existing foreign operation, the investing firm might decide to build a new facility from scratch.

Reasons for buying: The investing company might wish to acquire a locally existing name brand, might wish to avoid adding additional capacity to the industry, might wish to avoid having to hire and train new workers. Furthermore, by buying an existing company, the investor avoids inefficiencies during the start-up period and gets an immediate cash flow rather than tying up funds during construction.
Reasons for building: Companies often make investments where there is little or no competition, so finding a firm to buy may be difficult. Furthermore, when acquiring a firm, the investor inherits all the problems that exist in the firm. Finally, a foreign company may find local financing easier to obtain if it builds facilities.

Read more: MGT520 - International Business - Lecture Handout 33

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GATT AND WTO

The World Trade Organization:

The World Trade Organization (WTO) was founded in 1995, and is comprised of 146 member countries and 30 observer countries. The WTO has three primary goals: to promote trade flows by encouraging nations to adopt non-discriminatory and predictable trade policies, to reduce remaining trade barriers through multilateral negotiations, and to establish impartial procedures for resolving trade disputes among members.

Problem Sectors:

One challenge facing the WTO is dealing with sectors of the economy such as agriculture and textiles that most nations protect. Groups including the Cairns Group (a group of major agricultural exporters) have pressured the WTO to ensure that the Uruguay Round policies dealing with agricultural trade are implemented according to schedule. Similarly, developing countries are monitoring the dismantling of the Multifibre Agreement (MFA), which created a complex array of quotas and tariffs on trade in textiles and apparel.

Read more: MGT520 - International Business - Lecture Handout 30