Short and Long-Term Returns on Overseas Market Development - Essay Example

Short Term Returns On Overseas Market Development Are More Important Then Long Term Returns. With international trade and business reaching new peaks everyday, everyone wants a piece of the cake. Individual investors, mutual fund houses, equity managers, virtually everyone is looking for opportunities for short and long term returns. Having exhausted the moneymaking opportunities in their homelands, these fund houses are now eyeing foreign markets. Among the foreign markets, the BRIC (Brazil, Russia, India and China) countries hold a lot of promise in terms of returns on capital. The emerging markets of China, India and Indonesia are particularly attractive to foreign investors. Many of the plausible explanations for the growth in overseas investment and much of the background to the economic analysis presented here has been spurred by the growth of multinational companies. Many firms, like large oil or chemical companies, operate in industries with large economies of scale and their operations spill across national boundaries simply to be competitive. Why investment not trade Cost considerations (e.g. transport) are important in choosing whether to increase exports or invest overseas. Equally tariff barriers to trade can encourage direct investment, but non-tariff barriers are also important. Many services are not exportable in any direct sense and have to be delivered in the overseas market through direct investment. They need to respond to the changing demand considerations of overseas markets - especially where product specifications are different from the home market. This may make it sensible to locate closer to the main centres of demand, to enable easier adaptation without disruption to production in the domestic market. Other disincentives to direct trade could be that competition takes place on grounds other than price and quality of output. For example, competition in some product markets may be mainly in terms of after sales service. Most direct investment, as with trade, occurs between similar industrial countries. direct investments will take place without displacing trade. They may even encourage greater trade flows, because intermediate inputs of production will need to be exported to support the overseas plants. In this instance, as in some others, direct investment is complementary to trade. On other occasions, it may substitute for it. Another explanation for overseas investment with parallels in trade theory is a version of the "product cycle" theory. Here production initially begins in the domestic country where the product was developed, with good access to the skilled designers and technicians responsible for "inventing" the product. As the product matures, these inputs become less important and production shifts to a country with a cost advantage in the production of the now standard good. Production overseas is cheaper and goods are exported back into the domestic economy. A further explanation for firms' investment in a foreign market rather than exporting goods to it is that there are external benefits (or spillovers) from overseas investment. These are most likely to stem from location in markets which set trends in demand, or are the "centers of excellence" in terms of production techniques, design, marketing or organization. Why overseas investment The prime motivation for investment in the international market must be that the stream of earnings is expected to exceed that which could be earned in the domestic markets. This could often be attributed to lower production costs in other countries. This investment will ultimately benefit the economy as a whole. The stream of income from overseas investments changes the composition of the current account of the balance of payments. Most directly, it does so by increasing the economy's earnings from abroad. But it may also indirectly promote a net trade improvement. Portfolio Investment In portfolio investment, there is no attempt by portfolio investors to actively control the management of a firm, rather it aims to seek out and invest in pre-existing "good management". In contrast, direct investments are concerned with actively gaining a lasting influence in the operations and management of an enterprise. Why speculate overseas Portfolio investment choice suggests that investors should diversify their portfolios widely and in markets between which there is poor or negative correlation of returns. In such a situation, a crash in one market can be balanced by a boom in the other. Diversification may be possible within very large countries like the United States, where there is enough variation between regions in the domestic economy to allow risk and returns on portfolios to be traded off. But in smaller countries like the UK, economic shocks are more likely to affect the whole economy in much the same way and low or negative correlation between assets will require investment further afield in foreign markets. Benefits of investing overseas Can help survive cyclical downturns Overseas investment may help firms and their employees to survive cyclical downturns. When there is an economic slowdown in one part of the globe, there is usually an opportunity for high returns in another part of it. Improvement in Productivity Investment in overseas markets can enable firms to improve productivity by picking up foreign techniques and expertise. This , however would be beneficial only in the short term. Once the techniques and expertise are mastered, there is no reason why the firm should be invested overseas. It can benefit more by way of short term returns than long term returns. Economies of Scale Investment in foreign markets benefit from a variety of economies of scale and, far from exporting jobs, may require increased employment in some managerial roles. Furthermore, where exports are complementary to investments, outward investment can support increased UK export production. Higher Returns And finally, as portfolio theories suggest, there are benefits to diversification abroad, both for portfolio investment and also direct investment. High returns to portfolio investment bring wide benefits to the UK population by increasing the future value of pensions and other savings and reducing the costs of insurance. Short Term Returns as Compared to Long Term Returns While calculating the returns from overseas markets, one must take into consideration the total returns in domestic currency terms. The advantages of short term returns as compared to long term returns would be : 1. Fluctuation in currency rates in the long term In the short term, there might not be too much variation in the currency and exchange rates. This will help the investor realize his expected profits. Fluctuation in currency rates in the long term can eat into the profits of the investor. Thus, it is advisable to book profits in the short term, than remain invested for a long term. 2. Poor Long Term Dividends and Capital Performance Due to uncertainty of demand and other market factors, the returns from a particular investment in foreign markets may not yield high returns in the long term. Thus it is better to go in fro high returns in the short term, rather than stay invested for a long term. 3. Volatility in Long Term All capital markets are subject to volatility from time to time. Instead of exposing the investment to these long term volatilities in the foreign markets, it would be prudent to book profits in the short term and move out. 4. Political Uncertainty Any country is put through political vagaries in the long term. So, it is better to make use of favorable policies and conditions in the short term and get higher returns than to stay invested in the long term and subject the investment to risks like change in government policies, taxation rules and procedures, removal of sops and subsidies. 5. Marketability of shares might become a problem In the long run, some shares might get delisted and the investor's money gets locked. In some overseas markets, trading volumes can be small and marketability of shares might become a problem. Dealing and settlement procedures can also pose a problem as settlement can be very slow in some countries. 6. Restrictions Imposed By Foreign Governments There could be new and strict restrictions imposed by the governments of other countries in the long term, which could lead to eroding of capital. Thus, it is better to stay invested in the short term than be too greedy and block all the capital in the long run. 7. Taxation Issues Taxation on capital gains is a fairly complicated issue. One should consider the net returns after allowing for various double taxation reliefs. There is generally a heavy tax burden to be paid if an investor stays put in the markets for a long term. Thus, it would be advisable to be invested in the short term than the long term. Analyzing all the points mentioned above, we can safely conclude that it is better to invest in foreign markets for a short term and make hay while the sun shines than to stay invested in the long term and expose the investment to market, bureaucratic and political uncertainities. References http://archive.treasury.gov.uk/pub/html/top/top8/an1.html http://www.staff.city.ac.uk/p.booth/notesonoverseasinvestment.pdf http://www.topnews.in/overseas-investment-limit-raised-mutual-funds-22487 http://www.financialexpress.com/news/Overseas-investing/230538/0 http://www.thestreet.com/etf/etftuesday/10287205.html http://www.fpif.org/briefs/vol3/v3n1tax.html http://www.atkearney.com/main.tafp=5,3,1,140,1 http://books.google.com/books The Hegemony of International Business, 1945-1970 By Mark Casson http://books.google.com/books Investment Performance Measurement By William G. Bain http://books.google.com/books British Protectionism and the International Economy: Overseas Commercial ... By Tim Rooth Read More