Stuffirm & Bacon Law Offices

Should Stuffirm & Bacon open a law office in Africa? What are the various business, legal, political, and cultural issues concerning this investment?

What are the benefits for the law firm and/or the country (Kenya or the Ivory Coast) by entering this market?

What risks are involved with this type of investment?

Foreign Direct Investment Chapter 6

FDI is an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor and the purpose is to have a voice in the management.

(flow and stock of FDI)

Portfolio investment occurs when investors buy stocks of foreign firms in search of profit opportunities.

Types of Foreign Direct Investment

Horizontal FDI: investment in the same industry abroad due to:

• market imperfections; exporting/licensing not appropriate

• transportation costs• follow competitors

• location specific

advantages (transplant)

Vertical FDI: backward investment into suppliers for production or forward investment using outputs of a firm’s production due to:

• interest in increasing market power by limiting competition and strengthening local market control

A Decision FrameworkHow high are transportation How high are transportation costs and tariffs?costs and tariffs?

Is know how amenable to Is know how amenable to licensing?licensing?

Is tight control over foreign Is tight control over foreign operation required?operation required?

Can know-how be protected Can know-how be protected by licensing contract?by licensing contract?

Then licenseThen license

ExportExport

Horizontal FDIHorizontal FDI

Horizontal FDIHorizontal FDI

Horizontal FDIHorizontal FDI

No

High

Yes

Yes

Low

No

Yes

No

Figure 6.5

Where to Invest?

How does a company decide which markets should be served? Where production should be located to serve those markets?

[Screening Process]

What type of information should a company be collecting about FDI? [Evaluation Process]

How does a company compare FDI opportunities? [Selection Process]

Where To Live Economist 1/7/94

Political Risk

Political risk is the likelihood that a business’ foreign investment will be constrained by a host government’s policies.

• Of particular concern are 3rd world countries or doing business with gov’ts that have discouraged FDI in the past.

• Political climate can change quickly; safe investments can become high risk (Kuwait)