FIN 3034 INTERNATIONAL FINANCIAL MANAGEMENT WEEK 3 TUTORIAL

FIN 3034 INTERNATIONAL FINANCIAL MANAGEMENT WEEK 3 / TUTORIAL 2 TUTOR: IMTIAZ SIFAT

COMPETITIVE ADVANTAGE

Competitive Advantage MNEs vs. Host Nations Economies of Scale Lower Average Cost Broader scope for products & services Product Differentiation Skill-Based Managerial skills Marketing Expertise Technological skill-sets Finance-based More options to raise capital Financial competitiveness Factors of Production Land: cheaper rent / property prices Labor: lower cost for wage/salary Capital: Lower WACC Entrepreneurship Host Nation Environment FDI friendly Tax-benefits Low political barriers Geopolitical risk Value Chain Enough suppliers Strong local demand

POLITICAL RISKS MACRO VS. MICRO PERSPECTIVES MACRO • Country-specific • Transfer risk / Conversion risk • Malaysia’s capital control in 1997 • Regulatory embargo • Cultural risk • Local values/customs/religion • Language • Global-specific • War/terrorism • Cyber-warfare • Environmental concerns • Poverty micro • Happens at the corporate level • Examples: • Corporate Governance • Geographical Location • Bribery/Corruption/Kickback • Revolving Door • Personal Investment • Conflicts of Interest

BLOCKED FUNDS Transfer Risk Sudden change in laws Prohibition on remittance/repatriation Things to look out for: • • • Balance of Payment Debt/GDP Ratio FX stability FX reserves Central Bank’s Attitude

Entering a New Market What should an MNC do? There are many ways an MNC can choose to enter a new market. Deciding on the correct "Mode of Entry" is highly important. Here are some of the options available: • Export / Import • But then, you are only an International Firm (Recall last week’s discussion) • Licensing / Franchising • Management Contract • Turnkey Operation • Pure FDI

Other Ways Forming a Subsidiary Joint Venture Strategic Alliance

Team Exercise 1

What are the advantages and disadvantages of licensing and management contracts compared to producing abroad?

Team Exercise 1 Form a group of 3 members Think about the problem for 10 minutes List down as many points as possible • • List down all the points Must make 3 bullet points at least Write, write Writing helps with memory-building

Some Points • In Licensing, you are letting a company abroad use your trademarks, patents, techniques, etc. • You charge a licensing fee. This is your only profit. • In other words, licensing/franchising = SELLING the "way of doing things" • You are not actually SELLING anything yourself • Management Contract = actually doing the business • For MC, you are basically selling your management skills and expertise to run an operation abroad. • MC Example: Production Facility / Technical Operation / Advisory Service / Consultancy • Local Example: Malaysia Airport (MAHB) operates Sabiha Gokcen Airport in Istanbul (Turkey) • MC is very popular in the hospitality/hotel sector

Team Exercise 2

What are the advantages and disadvantages of Greenfield FDI vs. Acquisition of a local firm?

Greenfield • You are setting up a branch or subsidiary in another country • Naturally, Greenfield operations require high start-up capital • On the plus side, you have (almost) full control • Good idea if the investors/owners have a long-term plan • Lack of competition • Firms in DEVELOPED countries target operations in DEVELOPING countries

Acquisition • Much faster • Potentially easier access to liquidity • Operational efficiency / managerial advantage • More common in DEVELOPED countries

Slides • Available for download: http: //www. sifat. asia/INTFIN • As always, refer to the answer/solution material uploaded on E-Learn for exam related purposes. • Always refer to Dr. Aditi Mitra for all coursework/assignment/exam related queries.

End of Class