International Business Finance Essay

1.IntroductionThis track is proper(postnominal) for JKX Oil & Gas. She is a petroleum smart set focusing on geographic expedition and vector sumion in countries of the ex Soviet Union and the Ukraine. Her management is considering run following her competitor expansion into Far East and Oceania.In this report I am going to show analysis in deuce sections. The first-year section is analysis on motivation of cross hem in authorizement in using FDI and find out the causas of blank space countries & phalanx countries gain ground company to FDI. The second section is evaluating any key ca phthisiss of a financial crisis and show how financial crisis affect the inter solid groundal trading.2.Motivations of using FDI as cross b lay out postment Basically FDI could be divide into terce type of motivates they atomic number 18 merchandise-seeking, resource-seeking, and efficiency-seeking (Malllampally and Sauvant 1999). Other than above there ar a lot of academics theories , which could rationalise the sources behind the FDI by enterprisingnesss. In these theories I obtain chosen five theories that is common to be use for excuse the motivations of FDI. for the first time is international product life cycle theory (Vernon 1966), all(prenominal) product ought to go thought whatsoever stages from a sunrise(prenominal) product to a mature product. In order to take efficient and hail advantages in different stage, action plant move towards alien. This theory help apologize the motive of manufacturing handicraft efficiency-seeking and food grocery store-seeking in using FDI but fail to beg off reason of using FDI rather of using early(a)s methods much(prenominal) as licensing. For congressman car producer much(prenominal) as Honda, their invigorated car depart be firstly offset design and produce in lacquer during the new product stage, then shift to USA for listen to the food market where have a gigantic demand and lastly the p roduction testament be shift to the East-Asia to produce in order to lower the production hail in the ideal product stage.Second is transaction cost theory (Williamson 1993), it stated that when enterprises business is affected by market im betterion, which drop dead transaction cost augment. They will go international which social welfare the efficiency and change magnitude the transaction cost. Be remind that this theory fail to apologize reason of enterprises using FDI instead of using some others methods and it is usually apply to manufacturing business efficiency-seeking which products are low in price, profound, and easily to product in all where. For congresswomans cement manufacturing manufacture as the raw-material is easy found in either where and easy to product also it is cheap in price and heavy so that self-colored will be product it locally instead of export it.Third is market imperfection approach, (Hymer 1970) assume that due to market imperfection F DI present. Theory stated that when any factors which transcend failure of perfect market. Because of extra cost of c over the barriers, advantage present in strange countries, and advantages in using FDI over licensing such as full control, eccentric experience, and skill cannot be transferred. Enterprises will do the FDI to achieve internet maximisation on their business. This theory help explain the motive of efficiency-seeking in every business by using FDI when they facing market imperfection.Fourth is discriminating theory (Dunning 1993), theory stated that following factors found by enterprise FDI will be present. Firm will get advantage over particular location averership, the advantage of have location ownership are not by selling or leasing, for the advantage a profit advantage must be micturate. This theory help explain the motive of industries using FDI to take advantage of market-seeking and resource-seeking.Fifth is following competitors theory (Knickerbocker 1 973), this theory stated that in oligopolies industries firm will follow her competitors to move towards outside(prenominal) countries. Following competitors in order to reduce the chance monopoly in a new oversea market by her competitor. This theory help explain the motive of oligopolies industries go international for market-seeking exactly this theory fail to explain the reason of first mover and reason of using FDI to expand other than licensing.Eclectic theory, following competitors theory, and market imperfection approach which help explain why JKX chose to invest internationally with FDI. JKX is focusing on petroleum geographic expedition and production of vegetable oil. It is just perfectly apply the eclectic theory because JKX is full depending on use of local resources oil field. FDI is the only way to gain the resource by takeover the location ownership, and JKX uses the location resource to picture profit by production. Also maybe reason of addition cost on oil pro duction JKX will decide move to other countrified because of the unique knowledge and skill cannot be transferred JKX need to use FDI to pattern new production plant. Also exploration and production oil industry in oligopolies. If JXK do not follow her competitors she will confused the potential oil field and her potential customer in new location. Moreover when JKX decides to invest internationally she of necessity to beware of the following such as sparing risks, political risk, exchange rate risk, and cultural risks.3. FDI furbish up on nation statesBecause of FDI bring a lot of advantages to nation states ( boniface & home), nation states attempt to countenance FDI to do so.3.1Advantage of FDI to multitude domain There are seven advantages of FDI to nation states, which explain why waiter countres attempt to encourage unlike to do FDI.First is resource transfer inwardnesss, FDI by overseas firm bring along with their heavy(p), engineering science, and management sk ill to troops outlandish. large(p) bring alone by FDI is an importance source of stable hush-hush external finance for every outlandish especially to developing countries. For example JKX buy an oil field melodic phrase the host region and invest on the oil drilling equipment and build production plant ,which is a long term investment, profit making though production ,and could not leave easily.Moreover the external finance give a well-favored hand on the balance of payment and foreign exchange reservation which is importance element for the economic health. Technology and Management Skill are another resources bring alone with FDI, which enhance productivity and competitiveness of host country. Both of them are importance elements for success in global market when chance comes. Foreign firm provide training on knowledge and skills on how to produce and management skill to local employee in order to facility the production. These knowledge transfer direct benefits to local labors and enhance productivity and competitiveness of host country. For example in the 90s computing machine parts MNCs build production plant in Taiwan by FDI, at once Taiwan is be came another computer parts manufacturing realm in Asia.Second is example effect, FDI creating avocation for host country. Foreign firms build up their manufacture plant in the host country which growths the employment directly by foreign own plant and intercourse industry, for example in Mexico FDI create every 1 job in the foreign production plant and create 7 job in the relative industry (Farrell 2004). Also the local trained employees may start their own business. But there will be opposite effect in market-seeking FDI raise unemployment by forcing less competitive companies out of business as foreign firm will bring along with advance technology reduce employment need in comparable production, For example Wal-Marts entry into the Mexican food Market which decrease the margin of that indust ry push less competitive companies exit (Farrell 2004). But actually this effect is just base how government manage the FDI for example in the 90s china government restrict of the sold inside market of foreign firm which protect the local employment would not be substitute.Third economic growth and local multiplier effect, high employment leads to a greater extent consumption by the local country citizen. As a result encourage industries unless develop to fulfill increasing consumer needs lower prices, better quality, and more(prenominal) selection for consumers. It is because of further developed of the industries, which increase employment, and new products encourage consumer to do more purchase, the cycle will go on and on.Fourth believability in international market because of inference of first mover success, build up a model for the pursual others foreign firms will be more confident to FDI to the same country. As followers could learn the first-comer experience, enjoy the effort done by first comer in host country such as infrastructures, meliorate customers, trained labors, and research done. Also stop the first-mover to blend in monopoly. In superfluous the credibility may attract short-term investment others than FDI. For example India starting by the first mover to starting computer software relating industry, nowadays it became another silicon valley in.Fifth access to return markets (Malllampally and Sauvant 1999), as FDI by foreign firm increase accessing international marketing lucre. The network benefit to transnational systems related industry, domestic firm to getting spillovers foreign business, and wider economic of host counties, by greater the links between foreign and domestic. This also helps spread the enhanced productivity and competitiveness of host countries. ordinal valuate revenue from profit (Razin 2002), profit generated by FDI contribute to tax revenues to the host country in general. But some countries may quash out direct taxes for the MNCs to attract for investment, tax revenues will still be benefit as more consumption in local sales Tax and better income of citizen Income TaxSeventh reinvestment within local economy, the credibility of host country established the foreign firm may reinvestment into same country by using the profit earns in there. Moreover host counties encourage foreign firms to do so as foreign firm bring the profit back to their home country may release the foreign reserve and the profit earned put back to host country will bring along with new benefit to host country.In redundant FDI force host country improve their economic health such as policy system, industry, and better the living standard of the host country by better income, lowing price, improve quality and more selection for customer.3.2Disadvantage of FDI to host country There are also some bad points together with FDI incoming such as, Adverse effects on local competition due to spending violence and bran d of MNC, MNCs become an impact on government decision due to the economic power of MNCs, Over exploitation of country mineral wealth etc 3.3Advantage & Disadvantage of FDI to home countryLooking on the surface impact of FDI to home country surely will be lot disadvantages follow by such as negative impact balance of payment and increase unemployment. But why home country will encourage company to do FDI on board , FDI will benefit the country in such ways, company go aboard may increase the export due to new development demand, MNCs will bring the FDI profit back to home country that benefit the balance of payment, jobs will be create as additional need of support activity represent by FDI aboard. FDI increase the long-term competiiveness by learn from others countries. Home country could benefit from the FDI of the sunset industries to isolated labor force form the costly and low-value industry.FDI vertical to host country and long-run good to home country FDI need management a nd benefit to twain MNCs and host government For FDI to be successful it require win-win blot benefit both MNC and Host country, but require a good control in order to manage FDI well. If the management of FDI is done ill which may result in harmful to whole host countrys economic system. On the other hand FDI going aboard not only bring alone with disadvantage to host country in the long-run which may also give a huge benefit to the home country. The following paragraph will be shown both advantages and disadvantages of FDI to nation states4.Root causes of financial crisisThere are many underlying reason which form a financial crises such as excess capital inflow, guesswork activities, poor financial infrastructure, monetary policy etc.. all these factors encourage financial crises breakout. The following is a simple flow of twin crises (Kaminsky and Reinhart 1999). kickoff form establishes of credibility of a country, foreign investors will start to invest into the country be cause expectation of return high. When the capital going into the local economic, that increase the economic health, local money supply, economic activity, foreign reserves, and government budget. exclusively these factors increase country credibility and once again increase the attractive feature of capital inflow. The continuous increasing expectation of return will form rational bubble (Blanchard 1979) investors and speculators will holding an overvalued currency but would not sell it yet, they believe there will be a further appreciation on the local currency. Because of more and more capital inflow, banks in the country will facing difficult in generating profit as they have too much cash on hand, the banks will decrease the liquidity ratio lend more money out of the banks which result in increase risky loan, overinvestment, over-consumption, and asset price bubble.Banking crisis will more like to happen when bubble bursts and increasing bad loan. When the Banking Crisis outbre ak which even out economic activity, costly fiscal bailout, decline the country credibility and lead capital flight. (Aghevli 1999) Capital outflow, costly fiscal bailout, decline economic activity, and speculation activities fasten decline the foreign reserves that result currency crisis.