INTERNATIONAL FINANCE

International Finance

International Finance

Answer (a)

With the development of economic globalization, foreign direct investment (domestic production) is increasingly recognized as an important factor in economic development. Although domestic production began centuries ago, the fastest growth has occurred in recent years. This increase is due to several factors, in particular, are more receptive attitude of the public investment inflows in the process of privatization and the growing interdependence of the global economy.

Foreign direct investment (domestic production) occurs when a company invests directly in the production and / or market the product in another country (wlhill Charles, "International Business"). Domestic production takes two main forms, the first investment in green, which involves the creation of an entirely new operation in a foreign country. The second involves the acquisition or merger with an existing business in a foreign country. On the other hand, domestic production is divided into two types, horizontal domestic production (expansion of market share), which are investments in the industry even abroad, the company operates in the home, vertical and domestic production (resource investment research), which has two forms on the first back vertical national investment industry production abroad, providing information to internal production workflow. The second is located opposite the domestic vertical, in which the industry sells abroad the products of the internal processes of the production company.

Part (b)

Analysis of advantages and disadvantages of domestic production

In addition to domestic production, the company also succeeded in expanding foreign markets through exports and licensing.

Compared to the export licensing, the benefits of domestic production for businesses

1. lower transportation costs. As for companies that agree to first horizontal national production are concerned, transport costs tend to be taken into account in the cost of production. When a company produces low cost and weight, such as margarine production of paper, etc., compared to exports, domestic production will be enough low-cost transport. But for products with a high ratio of cost and weight, transportation costs minor component of total landed cost. In this case, the advantage of domestic production for export is very limited.

2. Prevention of traffic restrictions. For various reasons, many countries, it may be inappropriate in many ways for businesses to reach their potential market by exports alone. The basic shape of the barrier to export is the main barrier to imports. Many governments place tariffs on imported goods and to restrict imports by imposing quotas, because it makes exports unprofitable. On the other hand, it increases the profitability of domestic production. Thus, entering the country, prices up, but there is great potential for growth markets like China, many firms choose domestic production and / or licenses to expand their markets overseas .

3. The advantage of tax benefits. In some developing countries, on the one hand, they must put tariffs on imported goods in order to protect their businesses, on the other hand, they also strive to create a promotional environment conducive to attracting production interior, which provides capital, technology transfer, institutional and managerial skills, as well as access to international ...