Page 244 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 14: Real Options and Cross-border Investments

Notes

Task FDI has a direct impact on the growth and prosperity of any country. For India,
even though the government has come up with a number of initiatives for the free flow of
FDI, which include the opening up of insurance sector, raising the limit in banking sectors
etc., the country has not been successful in getting the required amount of the foreign
investments. India has witnessed modest capital flows during the first quarter of 2003, and
the outlook remains gloomy. Is there a need for the regulators to focus on issues which can
convert promises into performance?

Self Assessment

State whether the following statements are true or false:
12. In franchising, the firm allows an individual to sell its product in a specific territory.

13. In franchising, a local firm in the host country produces the goods to the licensing
corporations’ specifications.
14. Licensing between a multinational firm and a host country partner is a viable strategy if
one finds the right local partner.
15. Direct Foreign Investment (DFI) is a common method of engaging in cross border
investment.

Case Study Foreign Investments

t is notable that the Asian crisis appears to have acted as a watershed in several of the
key relationships affecting the FII flows to India. This is not an overly surprising
Iresult. Research has demonstrated that the Asian crisis caused several major changes
in the financial relationship among European countries halfway across the globe. In fact,
the crisis appeared to have altered several of the ‘ground rules’ of international portfolio
investing around the world. Why exactly the relationships analysed here demonstrate a
structural break at the outbreak of the Asian crisis is a matter of speculation. However, it
is plausible that the crisis and India’s relative imperviousness to it increased India’s
attractiveness to portfolio investors particularly as many other emerging markets began
to appear extremely risky. This ‘substitution effect’, may well have drowned other
long-term relationships. Besides, investors may have started paying closer attention to
obtaining and processing information in destination countries in the wake of the Asian
crisis causing an ‘information effect’ that could have altered the past relationship as well.
Finally, behavioural changes among international portfolio investors following the crisis
cannot be ruled out either.
Questions
1. It is being argued by researchers that the nature of FII flows to India has been
significantly different before and after the Asian crisis. In this context, outline the
nature and determinants of FII flows to India.
2. Discuss the motives for direct foreign investment by MNCs.
3. Do you think the Asian crisis altered several of the ‘ground rules’ of international
portfolio investment around the world? Elucidate with example.
Source: International Financial Management, Madhu Vij, Excel Books.

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