Lecture13: Foreign Investment (2) Benjamin Graham Lecture 18: Foreign Investment (2) Benjamin Graham

Lecture 18: Foreign Investment (2) Benjamin Graham Today’s Plan Housekeeping Paper topics are up Bring in a thesis statement next TUesday Today’s topic: Writing a good paper Foreign Investment (continued) Lecture 18: Foreign Investment (2) Benjamin Graham

A Talk to Attend Tonight Professor James Lo is speaking to the applied statistics club. VKC 261 from 6:30 pm to 8:00 pm Lecture 18: Foreign Investment (2) Benjamin Graham

IR 213: Introduction Benjamin Graham Quiz () According to Moran, what sorts of foreign direct investment are usually good for the host country? a. participation in privatization of infrastructure b. foreign investment in extractive industries (e.g.: oil, gas, copper) c. investment in industries that are subsidized to protect domestic markets of the host country d. a&c e. all of the above IR 213: Introduction Benjamin Graham

Lecture 18: Foreign Investment (2) Benjamin Graham Your papers Don’t worry about answering the exact prompt or the whole prompt Write a good paper with a compelling, well supported argument If your central claim can’t plausibly be wrong, your paper is boring Lecture 18: Foreign Investment (2) Benjamin Graham

Lecture 16: Paper Writing Workshop Benjamin Graham No One Has Time Take the complex and render it simple Any fool can do the reverse Be brief Write long drafts and cut them back Never use two words where you can use one Organization is king Facilitate skimming You work hard as a writer to make reading easy The more complex the ideas, the simpler the prose Lecture 16: Paper Writing Workshop Benjamin Graham

How to facilitate skimming There are 2 jobs: 1. Articulate your argument 2. Provide the evidence to back it up Skimmable means the reader can understand the argument easily while reading only intro paragraph and topic sentences If they want evidence for a given point, they know what paragraph to read Lecture 16: Paper Writing Workshop Benjamin Graham

How to facilitate skimming (2) Clear thesis statement Introduction as roadmap Topic sentences that make the point of the paragraph Evidence should be where I expect it In longer papers, subject headings and subheadings are crucial May be needed even in a paper this short Lecture 16: Paper Writing Workshop Benjamin Graham

Writing a good intro to a short paper If necessary, BRIEFLY provide the reader the relevant facts re: the topic Avoid generalities and broad statements. Get to the thesis quickly. Deliver the thesis statement BRIEFLY and SIMPLY give the main points you will use to back up your thesis Each of these points will get its own paragraph/section in the body Lecture 16: Paper Writing Workshop Benjamin Graham

Writing good body paragraphs One paragraph = 1 new idea relates back to the thesis statement 1/2 a page max (3-6 sentences) Topic sentence identifies the new idea, and starts to do the work of the paragraph Sound reasoning, detailed and specific evidence round out the remaining sentences Final sentence ties the evidence back to the thesis statement Only sometimes necessary -- may already be obvious Lecture 16: Paper Writing Workshop Benjamin Graham

Lecture 16: Paper Writing Workshop Benjamin Graham The Conclusion In longer papers, it is necessary to re-summarize the whole paper In short papers, this can be redundant However, it can still be good to restate the thesis In some types of writing, the intro provides the motivation, or the puzzle Tells the reader why he/she should be interested This can sometimes be taken for granted You can use your conclusion to: give broader implications speculate about extensions of the argument relate your argument to other ideas/debates Lecture 16: Paper Writing Workshop Benjamin Graham

Property rights across borders Property rights of the investor vs. policy flexibility and sovereignty of the host government. New regulations may harm foreign investors but still be “good” governance Lecture 18: Foreign Investment (2) Benjamin Graham

Creeping Expropriation Creeping Expropriation: Adverse changes in tax rates or regulations that reduce the value of a firm’s invested assets This is a REALLY broad category Includes transfer risk In my research, I look at 3 categories of political risk Policy risk Bureaucratic risk Risk of Political Violence Lecture 18: Foreign Investment (2) Benjamin Graham

Lecture 18: Foreign Investment (2) Benjamin Graham Policy Risk Risk of adverse policy change at the national level Increased taxes, new regulations, changes to government contracts, outright expropriations What kind of countries: Countries with unconstrained executives are risky Elections, legislatures, independent courts More “veto players” = more stability Lecture 18: Foreign Investment (2) Benjamin Graham

Lecture 18: Foreign Investment (2) Benjamin Graham Veto players Critical social science concept Veto player = someone who can veto a change to the status quo Simple logic: more veto players = more stable status quo Firms love stability, predictability Without it, long-term investment is not possible Many projects have high costs up front, pay out over a long time period. Not possible without stability -- too risky. Lecture 18: Foreign Investment (2) Benjamin Graham

Lecture 18: Foreign Investment (2) Benjamin Graham Bureaucratic Risk Risk imposed by bureaucrats and local officials Corruption (e.g. bribe demands), inefficient civil courts, inefficient customs processing, excessive red tape What kind of countries: Countries with low government capacity Civil servants that are undertrained, underpaid, and/or unaccountable Lecture 18: Foreign Investment (2) Benjamin Graham

Risk of Political Violence Risks imposed on firms by violence in the host country Interstate wars, civil wars, government violations of human rights Wars destroy assets, disrupt transport, tank the domestic economy, kill employees Violence by governments against civilians puts employees at risk Foreign wars don’t pose a lot of risk -- its wars fought at home Lecture 18: Foreign Investment (2) Benjamin Graham

Lecture 18: Foreign Investment (2) Benjamin Graham Transfer Risks Risks associated with trying to repatriate your profits Capital controls, exchange rate volatility Can fit either with policy risk or bureaucratic risk Central banks OR policymakers can induce it Type of countries: No independent central bank Large government debt & deficits Large current account deficit Unconstrained executive Lecture 18: Foreign Investment (2) Benjamin Graham

FDI and Development (The Good) Higher wages Increases capital per worker Spillovers: Local firms learn from foreign firms Demonstration effects and competition effects Foreign firms hire and train local workers These workers then leave Joint ventures are sometimes required by law to increase spillovers May have explicit “technology transfer” provisions Lecture 18: Foreign Investment (2) Benjamin Graham

Wages Paid by Multinationals Lecture 18: Foreign Investment (2) Benjamin Graham

Lecture 18: Foreign Investment (2) Benjamin Graham GE in China GE had dominated the Chinese market for power generation equipment To access the Chinese market, GE was required to enter a joint venture with a Chinese state-owned enterprise (SOE) And to share their technology Tradeoff: Sales now, but competition later Lecture 18: Foreign Investment (2) Benjamin Graham

FDI and Development (The Bad) Sovereignty concerns: MNEs meddle in local politics Case of Allende in Chile (International Telephone and Telegraph) United Brands in Honduras ($1.25 million bribe) Powerful MNCs may extract cushy deals from governments Race to the bottom concerns Lax regulations Over-generous tax breaks and land-usage rights Labor rights violations Lecture 18: Foreign Investment (2) Benjamin Graham

The Foreign Corrupt Practices Act Makes it a crime for American companies (and foreign companies publicly traded in the U.S.) to bribe foreign officials Covers actions taken by foreign partners on a firm’s behalf The benefits are obvious, but... Some argue it places U.S. firms at a disadvantage Especially vis-a-vis Chinese firms Lecture 18: Foreign Investment (2) Benjamin Graham

MNEs and Competitive Advantage To survive, you have to be better than the local competition “Liability of Foreignness” Lack language skills, cultural familiarity Lack relevant social networks Access to information, ability to enforce contracts Possess knowledge (technology, management expertise) Economies of scale Lecture 18: Foreign Investment (2) Benjamin Graham