1. Lecture 12: Foreign Investment (1)
Benjamin Graham
Lecture 17: Foreign Investment (1) Benjamin Graham

2. Lecture 17: Foreign Investment (1) Benjamin Graham
Today’s Plan
Housekeeping
Reading Quiz
Today’s topic:
Foreign Investment
We’re going to talk both government perspective and firm perspective
Lecture 17: Foreign Investment (1) Benjamin Graham

3. Lecture 17: Foreign Investment (1) Benjamin Graham
Housekeeping
Outline of the course:
Trade
Foreign Investment
Money and Finance
Foreign Aid, Migration
Why start with supply and demand?
Lecture 17: Foreign Investment (1) Benjamin Graham

4. Lecture 17: Foreign Investment (1) Benjamin Graham
Reading Quiz(1)
What is the title of the subsection I assigned?
A. The World is Flat
B. Foreign Investment 101
C. Investment and Development
D. The Golden Straightjacket
E. Investments and Consequences
F. The Race to the Bottom
Lecture 17: Foreign Investment (1) Benjamin Graham

5. Lecture 17: Foreign Investment (1) Benjamin Graham
Reading Quiz(2)
What/Who is the electronic herd?
A. Government regulators
B. Foreign investors -- especially bond traders
C. Casual internet users
D. Hackers
E. All of the above
Lecture 17: Foreign Investment (1) Benjamin Graham

6. IR 213: Introduction Benjamin Graham
Quiz (3)
Which of the following is NOT one of the golden rules of the Golden Straitjacket?
A. privatizing state-owned industries
B. regulating capital markets
C. maintaining low rate of inflation
D. removing restrictions on foreign investments
IR 213: Introduction Benjamin Graham

7. Categories of Foreign Investment
Foreign direct investment (FDI)
You (partially) control the enterprise you’re investing in
Portfolio investment (no control)
Stocks
Bonds: i.e. loans to firms (sold at auction)
Bank loans
Sovereign debt (government bonds)
Lecture 17: Foreign Investment (1) Benjamin Graham

8. Lecture 17: Foreign Investment (1) Benjamin Graham
Hot Capital
Hot capital is capital investors can pull out quickly when they get scared.
Volatility
Includes:
Stocks
Short term loans
i.e. Short-term bonds (both private and government)
These investors make money off of:
Interest rate differentials across countries
Currency speculation
Lecture 17: Foreign Investment (1) Benjamin Graham

9. Cold Capital: Foreign Direct Investment
Actually control the business in question
Tends to be a long term investment
b/c its harder to find buyers for entire companies
This makes firm especially vulnerable to political risk (i.e. war, expropriation)
Obsolescing bargain (discuss later)
Firms invest overseas to:
Seek factors of production (land, labor, natural resources)
Seek markets
Lecture 17: Foreign Investment (1) Benjamin Graham

10. Why do governments prefer FDI to portfolio investment?
A. Potential positive spillovers – domestic firms learn things from foreign firms
B. Portfolio investment is too slow – it can’t enter quickly enough when you need it.
C. Portfolio investment tends to flood out quickly during economic downturns, making the country vulnerable to a financial crisis
D. A & C
E. All of the above
Lecture 17: Foreign Investment (1) Benjamin Graham

11. Multinational Enterprises (MNEs)
Vertical diversification
Different steps of the development/production/sales process occur in different locations
Economies of scale
International specialization
Horizontal diversification
Produce the same good/service in several locations
Avoid tariffs, shipping costs
Customize product to local market
Lecture 17: Foreign Investment (1) Benjamin Graham

12. Checking Understanding
Apple designs iphones in Cupertino, manufactures them in China, and makes components in several other countries. This is an example of:
A. Vertical Integration
B. Horizontal Integration
Lecture 17: Foreign Investment (1) Benjamin Graham

13. Lecture 17: Foreign Investment (1) Benjamin Graham
Mode of Entry Choice
Say Anheuser-Busch wants to sell Budweiser in Canada. It can:
A. Build a brewery in Wisconsin, and ship the Bud to Canada for sale (export)
Economies of scale
But face tariffs and shipping costs
B. Build a brewery in Canada, sell in Canada (FDI)
No shipping costs
But lose economies of scale, and exposed to political risks
“Sunk Costs”
C. License a Canadian company to make and sell Bud in Canada (licensing)
Loss of quality control (brand risk)
Requires capable local partner
Lecture 17: Foreign Investment (1) Benjamin Graham

14. Mode of Entry Choice: Checking Understanding
If Canadian tariffs on beer went up, it would:
A. Make exporting a worse strategy
B. Make FDI a worse strategy
C. Make licensing a worse strategy
D. B&C
Lecture 17: Foreign Investment (1) Benjamin Graham

15. Mode of Entry Choice: Checking Understanding
If economies of scale are very high, it is best to:
A. Manufacture in only one country and export from there
B. License production to partners in as many countries as possible
C. Build factories in as many countries as possible (FDI)
D. All of the above
Lecture 17: Foreign Investment (1) Benjamin Graham

16. Lecture 17: Foreign Investment (1) Benjamin Graham

17. The Obsolescing Bargain
Year 1: A mining firm signs a contract with a government
The government offers good terms to attract the investment
Years 2-5: the firm spends millions developing the mine
Year 6: The government “renegotiates” the contract
Or just nationalizes the mine
“Expropriation”
Obsolescing bargains are a much more general phenomenon
For example, disarmament of rebel groups following a ceasefire
Lecture 17: Foreign Investment (1) Benjamin Graham

18. Expropriation is Out of Style
The archetypical nationalizations occurred following leftist takeovers in the 1960s-1980s.
These events have high reputational costs
Also, damage bilateral relations with investor’s home country
Bilateral Investment Treaties protect investors
Many free trade agreements also have investment chapters
Controversial part of the Transpacific Partnership Agreement (TPP)
So countries often have to pay damages following expropriations
Lecture 17: Foreign Investment (1) Benjamin Graham

19. 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

20. 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

21. 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

22. 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