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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

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

21. 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

22. 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

23. 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

24. 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