INTERNATIONAL FINANCE

International Finance

International Finance

Part (a)

With the development of economic globalization, foreign direct investment (Domestic Manufacturing) is increasingly being recognized as an important factor in the economic development of countries. Although Domestic Manufacturing began centuries ago, the biggest growth has occurred in recent years. This growth resulted from several factors, particularly the more receptive attitude of governments to investment inflows, the process of privatization, and the growing interdependence of the world economy.

Foreign direct investment (Domestic Manufacturing) occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country (Charles w.l.hill, "International business"). Domestic Manufacturing takes on two main forms; the first is a green-field investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. On the other hand, Domestic Manufacturing is divided into two kinds; horizontal Domestic Manufacturing (market-expansion investments) which is investment in the same industry abroad as a firm operates in at home; And vertical Domestic Manufacturing (resource-seeking investments), which comprises two forms further; the first is backward vertical Domestic Manufacturing investing an industry abroad that provides inputs for a firm's domestic production process. The second is forward vertical Domestic Manufacturing in which an industry abroad sells the foods of a firm's domestic production processes.

Part (b)

Analysis of advantages and disadvantages of Domestic Manufacturing

In addition to Domestic Manufacturing, the firms are also able to expand foreign market by means of exporting and licensing.

Compared with exporting and licensing, the advantages of Domestic Manufacturing for companies

1. Low transportation cost. As far as the firms which mainly adopt horizontal Domestic Manufacturing are concerned, transportation cost must normally be considered to production costs. When the firm produces a low value-to-weight ratio production such as margarine newspaper and the like, relative to exporting, Domestic Manufacturing would only need a low transportation cost. But for products with a high value-to-weight ratio, transport costs are a minor component of total landed cost. In this case, the advantage of Domestic Manufacturing over exporting is very limited.

2. Avoidance of trade restriction. For various reasons, many countries might make it impractical in many ways for companies to reach their market potential through exportation alone. The primary form of impediment to exporting is import barrier. Many countries' governments place tariffs on imported goods and limit import through the imposition of quotas, both of which make exporting unprofitable. On the other hand, it increases the profitability of Domestic Manufacturing. Thus, for entering countries that place tariffs but have a large growing market potential such as China, many firms choose Domestic Manufacturing and/ or licensing to expand their foreign markets.

3. Advantage of tax incentives. In some developing countries, on the one hand, they need to place tariffs on imported goods for protecting their own firms, on the other, they also strive to create a favorable and enabling climate to attract Domestic Manufacturing, which brings capital, facilitates the transfer of technology, organizational and managerial practices and skills as well as access ...