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International Financial Management - Essay Example

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International Financial Management Table of Contents 2. Literature review 4 2.1 Transportations Costs 4 2.2 Market imperfections 5 2.3 Strategic behaviour 6 2.4 Product life cycle 6 2.5 Location specific advantage 7 3. FDI trend 7 4. Potential problems 10 5…
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International Financial Management
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International Financial Management

Companies engage in foreign direct investment due to various reasons, but mainly to generate profit and secondly to hedge risk. Sometimes the companies would have huge cash surplus and fear that due to unfavourable movement in the exchange rate the dollar value of the cash surplus would decrease (Bajaj, 2001). The companies would park their extra cash in various foreign countries in the form of foreign direct investment. Generally the FDI are long term in nature but a company looking for quick gain can resort to short term borrowing. The research endeavours to create an international financial management report on FDI for Infosys. Infosys, a software giant in India is contemplating to conduct a FDI in another international country. The target firm chosen is Apple and the target market chosen is USA. The choice of the target market and the choice of the target company bear special significance (Bonaccorsi and Daraio, 2009). Apple has a myriad of products and service starting from electronic gadgets to the creation of operating systems. Apple has experienced one of the highest rises in the price of shares and apart from that the company is in an excellent growth trajectory. Infosys wants to cash in from the excellent growth opportunity of Apply by investing directly in it its path breaking technologies. Apart from this USA has a strong track record of FDI. These are two motivating factors behind the choice of Apple and America for FDI. Infosys wishes to follow a joint venture Greenfield with Apple. The joint venture Greenfield will help to create new products in USA. 2. Literature review The factors affecting the global flow of foreign direct investment in USA or as a matter of fact any country is many and varied. Although in the present context, only 4 important factors are considered which are transportations costs, market imperfections, strategic behaviour, product life cycle and location specific advantage. 2.1 Transportations Costs The diagram given below is an indication of the transportation cost at present in USA. The cost of transportation is shown as cumulative of the average costs incurred by travelling both by air and road. The cost of transportation is major issues but only for those products which have a low value to weight ratio. In the present case the value to weight ratio is assumed to be very high (Clark and Mathur, 2013). This is because of the reason that the target products (electronic gadgets) are negligible in terms of weights. So the cost of transportation will not pose as a serious threat. Fig 1: Transportation cost over the last 10 years Source: (Mintzberg and Waters, 2011) 2.2 Market imperfections Over the last 50 years almost 56% of the foreign companies that took part in the FDI considered market imperfections to be the single most important factor. Whenever there are impediments in both exporting and sale of know-how through licensing then FDI takes place. Barriers to export include quotas, complete bans, tariffs and other restrictions that hinder the free flow of product between two nations. Most of the foreign countries in the world do not share a mutual bilateral trade between themselves that facilitates the flow of goods and services (Das, Quelch and Swartz, 2000). During 2000 to 2012 phases some of the emerging nations resorted to FDI with USA since international groups like NATO ordered restrictions on establishing trade relations with different countries. Thus these countries like China, Japan, Korea, ... Read More
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International Financial Management
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