Question

Let’s say that a firm has given itself the ‘green light’ to build factory #5.

What forces will determine whether this firm will OBTAIN FINANCING for the factory? (in class we discussed a sum of $100 million)

2. Why may some firms DELAY previously planned construction projects in the next year?

3. In theory, what forces may influence a firm to build factory #5 in a country outside the U.S.?

4. What forces may influence a firm to build factory #5 on U.S. soil?

5. List and discuss some of the GOVERNMENT REGULATIONS a firm must deal with if it builds and operates a factory on U.S. soil.

6. What is “infrastructure”, exactly? Please give five examples

. 7. What role does infrastructure play in a firm’s decision to build factory #5 in one particular country?

Answer 1

1) The firm can raise financing through both debt and equity. If the net present value of the project is positive, the firm should be able to obtain financing as the banks expect such firms to not default on their loans. It is also important to understand the underlying risk of investment such as the kind of product and the consumer being targetted from the point of view of the bank. Sometimes even projects with positive NPV may not get funding if they are too risky. Equity issues generally work well only for old firms who have developed consumer confidence.

2) There can be several reasons for the delay. An unexpected shock like the one we are currently facing - Covid 19- can destroy supply chains and severely hamper expected profits. The firms will have no option but to delay. The firms also form expectations about government policies. If they expect a major subsidy (or tax break) for construction next year, they can delay the process. Firms can also hold on if they are gathering more information such as exploring the potential to set up a plant abroad.

3) Some forces are: a) Lower cost of labor outside US. Many developing countries have cost of labor that is cheaper than USA. Firm may want to exploit this lower cost. b) Tax Holiday, many countries offer tax breaks and holidays to multinational firms in order to boost their economy and attract foreign investment. c) Closer location to final consumers, if the majority of consumer basis located outside the US then products have to be transported once produced. This can be avoided by manufacturing close to the final consumers.

4) There are many forces : a) Familiarity with the conditions. The management will understand the US regulation and laws much better and will be more comfortable in operating from USA b) Unpredicitbility of international politics, there is always a risk of the foreign government making unfavourable policy decisions that affect the firm negatively. This is less likely to happen at home.