Week 6 Foreign Direct Investment

Foreign direct investment is a company controlled through ownshop by a foreign company or foreign individuals. FDI is important because production facilities abroad comprise a large and increasingly important part of international companies's activities and strategies. FDI plays an growing role in global business, which can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies , capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development (Hill,2005).

When a firm decides to enter a new market in another country through foreign direct investment, the next step is to choose between the different types of FDI, wholly owned subsidiary or joint venture. In joint venture, firms can gain the benefits from a local partner's knowledge of the host countries, competitive conditions, political systems, business systems, culture and language; the costs and risk can be shared by the local partners, especially when the development costs and risks of opening a foreign market are high. Finally, joint venture reduces political risk as it involves a local firm. In many countries, political consideration makes joint ventures the only feasible entry mode (Hill, 2005). While wholly owned subsidiary reduces the risk of losing technical competence to a competitor, particularly when a firm's competitive advantage is based on technological competence. This is why many high-tech companies prefer this entry mode for overseas expansion. And it gives tight control over operations in different countries; this is necessary for engaging in global strategic coordination, as the firm could use the profit from one country to support competitive attacks in another. In order to realize learning curve and location economies, a global production system needs to be establishes and centrally determined decisions are needed, this requires high control over the subsidiaries, wholly owned subsidiary gives such tight control ( Hill, 2005).

I am a fan of VW automotive, which is a world-wide Car maker. The Group now consists of seven major brands, which include Volkswagen Passenger Car, Audi, Bentley, Seat, Skoda, Bugatti and Lamborghini. Most of them were all bought in the form of acquisition. Audi was bought from Daimler-Benze in 1964; Bentley, was bought in 1998 from Vickers along with Rolls-Royce, but the company cannot produce cars using the brand of 'Rolls-Royce's ' because this trademark is belonged to BMW; majority of Seat was acquired in 1987, Bugatti and Lamborghini were both acquired in 1998. The Audi division also bought NUS in 1969, but the brand was never used since 1977. Hence, it is clear that acquisition is the most favorable expansion strategy for VW ( Wikipedia contributors, 2012)

However, joint ventures companies formed by VW in China ( Shanghai-VW and FAW-VW) instead of a dopting acquisition, which is due to the special investment environment (VW, 2012). When VW entered in China, Chinese automotive in dustry was in its primary stage, most local car makers could not meet the quota of production. In order to absorb fund from investment and get world-advanced technology, the Chinese government supported foreign investment. On the other hand, in order to protect the local brand, foreign companies are not allowed to have majority share holdings. In other words, foreign car makers act the role of assistance provider and are strictly limited to helping the China's car industry to develop independently. According to the Chinese policies of  attracting FDI in car market, VW finally chose joint venture entry when it entered the market.

Stock Market Efficiency

Fama (1970) identified 3 forms of efficiency: weak form efficiency, semi-strong form efficiency and strong form efficiency. In term of weak form efficiency, current share prices reflect all past movements and there will be no mechanical trading rules based on past movements which will generate profits in excess of the average market return. While in semi-strong form efficiency, share prices not only reflect all historic and publicly available information, but also react quickly and rationally to new information. It can’t make abnormal returns by studying publicly available information. Finally, in strong form efficiency, share price reflects all information including publicly available or not, and no one can make abnormal returns.

Using Fama’s idea, it is easy understood that Apple inc share price decrease promptly when it announced its financial report on January 24 that gross margin increase slowly. It can be seen that their share price fall successively in next two days. This instant reaction to new information is evidence of the New York Stock Exchange being a semi-strong form when it comes to market efficiency.

           

Kendal (1953) found that prices changed in a random fashion. There is no systematic link between one price movement and subsequent ones. In addition, share prices at any time reflect all known information and changes occur when new news enters the market. According to this argument, the analyst work is meaningless due to the share price is unforcastable. It also challenges to the significance of investment companies like Morgan Stanley and Goldman Sachs.

Reference

Fama, Eugene (1970). “Efficient Capital Markets: A Review of Theory and Empirical Work”, Journal of Finance, 25, pp. 383-417

Kendall, M. G.; Bradford Hill, A (1953). "The Analysis of Economic Time-Series-Part I: Prices". Journal of the Royal Statistical Society. Series A (General) (Blackwell Publishing) 116 (1): 11–34

Week 1-2

Financial management is the core of the enterprise management because to make good financial management can create wealth.The survival,development and profit of the company's overall goal can hardly do without from financing,investment and distribution management of finance. As for an enterprise, it must also need to establish a reasonable financial management goal. In the profit maximization objectives and capital profit margin or every profit maximization goal serious impact can consider to shareholder wealth maximization as enterprise financial management goal. With shareholder wealth maximization goal to replace, on condition that in joint-equity enterprises or limited corporations that its application in a certain extent overcome short-term behavior of the enterprise and can corectly handle the relations of the earnings and risk in the enterprise, the relations between immediate interests and long-term interests. It is based on agency theory which is through the reasonable management in the financial to bring the most of the wealth for shareholders. Realize shareholder wealth maximization requires enterprises to sustainable development and share prices have steady so that the shareholder wealth can achieve maximum, namyly that shareholder value is to bring the future returns for owners. Under the condition of shareholding economy, the shareholder wealth maximization finally embodied in stock prices, stock prices is the present value of the business income in the future. The financial management target from profit maximization to enterprisefinancial management goal and continuour evolution which each have advantages and disadvantages, and also has certain life cycle. China current enterprise wide application and value of enterprise financial management goal will also accept the inspection from the market and constantly improve in practice.

 

In a market economy environment, the two original power of acquisitions behavior is in order to realize the maximization of enterprise value financial goals and strengthen the enterprise market competition ability. By purchase behavior can produce synergistic effect that to realize the strategic restructuring and carry out business diversification, thereby the future earning of enterprise have great influence. Stock acquisition is a kind of purchase behavior which is refers to the acquisition of the target company shareholders to issue its own stock, in exchange for the target company's most or all of the equity and to get the target control of the company.

 

Therefore, the stock acquisition can make company use low cost quickly into the target company in the rapid growth of the industry and that is largely keep the target company's market share and all kinds of available resources, so as to ensure the continuous profitability. Publicly traded stock price reflects many investors to its intrinsic value judgment, it can reflect the enterprise's profit ability, the dividend, enterprise risk, capital structure, asset value and other factors, therefore, in the purchase process, share exchange rate of the market value per share is become a key focus of the acquisition negotiations.

 

1 February, according to China Insurance Regulatory Commission news reported that Charoen Pokphand Group acquired 12% stake by Ping An Insurance Group of China through transaction approval. Then, Ping An H shares(02318)rose1%, to $70.45(HKD). A-share(601318)go up 5%, quote 50.77 RMB. Charoen Pokphand Group hand completely take over 15.57% shares from HSBC which total cost $72.7 billion(HKD). With the completion of the transaction, it means that the richest of Thailand's richest who is Dhanin Chearavanont control of the enterprise and become big shareholders of China's overall financial leading enterprise.

 

And after completed the first equity transactions and share Ping An Insurance Group executives holding company ‘Jiangnan industrial’38% equity that Charoen Pokphand Group actual accumulated hold 16.68% stake of Ping An Insurance Group.

 

This Thailand Company is main business is husbandry, foodstuff and commercial and without involved in the China financial industry. Therefore, the investors worried that the former big shareholders HSBC holdings have been 'behind the scenes is resigned' 10 years, is Charoen Pokphand Group will be interventing into day-to-day operations of the Ping An Insurance Group, thus affecting it established comprehensive financial steps.

 

To this, Charoen Pokphand Group clear statement that will use by long-term strategic investors identity to support Ping An Insurance Group's future development and identity with their current management and comprehensive financial business model, the both sides will jointly to the development of China's rural financial and insurance business which complementary each 'short board'. Familiar with the insurance person all know, compared with another big insurance company --- China life Insurance(LFC), and Ping An Insurance Group of the advantages and disadvantages are obvious. Advantage together with financial full Licences and disadvantage is business share relatively weak in rural market. However, for the Charoen Pokphand Groupcan be in Ping An beaching rural financial market in the process of how many resources to provide assistance? Are they can bring Ping An which shareholders effect or added value, is still uncertain.

 

However, Ping An Insurance Group is basking in executive team 'new and old alternate' transition period, it still need to be alert to the possible management, business model changes brought by the risk. Every decision from the company will affect the stock fluctuations. When stock prices reach the highest will achieve the shareholder wealth maximum. The trend of making the administrants more younger of the Ping An Insurance Group, whether can lead the developing hard-edged gold control group head towards century-old firm? I think it is become one of the most concerned at present.

 

 

 

 

 

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