Question

 

1)What are the advantages and disadvantages of FDI as opposed to a licensing agreement with a foreign partner?

2)What operational and financial measures can a MNC take in order to minimize the political risk associated with a foreign investment project?

3)Discuss the different ways political events in a host country may affect local operations of an MNC.

Answer 1

1. Advantages of FDI:

a. Allows local benefit

b. Resource transfer

c. Creates jobs in the host country

d .Hedge exchange rates

Disadvantages of FDI

a. Drives local companies out of business

b. May monopolize the market

c. Importing inputs from abroad may result in local tariffs

Advantages of Licensing:

a. Keep costs minimal (for the licensee)

b. Increased market share (for the licensee)

c. Brand recognition (for the licensee)

d. Increased job growth (for the licence purchase

Disadvantages of licensing:

a. Loss of technology

b. Loss of control

c. Some countries may not have the capability for your business

2. Steps taken to minimize the political risk

a. Get into forward agreements for the currency exchange rate between the local currency and the home currency. The political uncertainty can result in rapid rate movement on the exchange rate which may hurt the company

b. Similarly the weakness in the economy due to political risk may increase inflation and thus increase in interest rate. Therefore the foreign player in that country can take loans in the home control and transfer it to the domestic country rather than taking loans in domestic country

c. Also diversify the business across various geographies and countries rather than just one country to minimize political risk

3. The political events in the host country that may affect the business locally

a. Imposition of import tariffs on its goods in the home country

b. Increased corporate taxes in the home country so as to push businesses to generate employment in home country and not else ware

c. Increased difficulty in transfer pricing which is used to repartirate the prodits from the subsidary to the host.