Skip to main content

Risks of Foreign Investment

I read an article in the WSJ (Merger, Indian Style: Buy a Brand, Leave it Alone) a while back about how Tata Motors was going to buy Jaguar and Land Rover from Ford. The main focus of the story was how Tata was looking to learn from the US companies:
Rather than seeking to wring profits out of two luxury automotive brands that frequently have lost money, Tata is looking to learn from them to help launch its own global expansion in autos, using the brands' own management team and a full roster of employees.
I thought that was an interesting trend. I later came across an opinion piece by Matthew Slaughter, an associate dean and professor at Tuck, about what the Tata deal tells us about the benefits of foreign direct investment. He pointed out how these multinationals undertake their "insourcing" deals:
It is well known that new FDI can come via "greenfield" investments that build new businesses from scratch. Think photo opportunities of business executives and government officials turning fresh dirt with shiny shovels.

But foreign multinationals can also merge with, or acquire part or all of, an existing U.S. company. Greenfield investments can protect proprietary technologies. Acquisitions can yield quicker presence, and can build on target-firm assets such as customer connections and managerial talent.

The second thing he points out is who has been making these investments. Traditionally, FDI has flowed from high-income or "developed" nations. But there has been a significant rise in FDI from developing countries such as China and India.

There was a more recent article on the topic (Capital Flow from Emerging Nations to U.S. Poses Some Risks) from the WSJ that put in perspective the total flows of currency and the risks they pose. Here's where the money's coming from:

The U.S. has to import, on net, almost $2 billion in capital a day to cover its enormous trade gap. Of the $920 billion that foreigners pumped into U.S. stocks, bonds and government securities last year, $361 billion -- a stunning 39% -- came from emerging-market nations, according to calculations by Bank of America, using Treasury Department data.

China alone accounted for 21 percentage points of the total, with Brazil at 8.4 points, Russia at 2.8 points, and Mexico, Singapore, Malaysia, South Korea and others in the mix.

Here's a chart that summarizes things:



So, what's the problem with this? Well, these countries aren't just investing in the U.S. because they get better returns, indeed "from 2002 to 2006, as the dollar slid, foreigners earned an average annual return of 4.3% on their U.S. investments, while Americans earned 11.2% on their investments overseas." The article concludes "that it's not the profits that attract foreign money to the U.S., it's the sophistication of U.S. capital markets." That's where the real risk comes in. If you lose the transparency in the U.S. markets, you may just lose that investment. Subprime mortgage problems, speculation, etc. aren't helping things.
Labels:

Comments

Post a Comment

Popular posts from this blog

Biofuels May Hinder Anitglobal-Warming Efforts

Read an interesting article a couple weeks back in the WSJ on how biofuels may actually increase carbon emissions in the medium to long-term. Apprently the shifts in land-use necessary to support the production of bio-materials like soybeans, corn, or palm could in fact release more carbon emissions. The time it takes to get carbon-neutral on some of these projects is pretty crazy - 319 years for soybean biodiesel from Brazil (assuming you're clearing rainforest), 93 years for corn ethanol from the U.S. (assuming you're clearing grasslands), 86 years for palm biodiesel from Indonesia (assuming you're clearing rainforest). I suppose biofuels really aren't meant to reduce carbon emissions, but just crazy that they potentially exacerbate the problem so much.
3 comments
Read more

Nine Prescriptions for Building the Duke Entrepreneurial Community

I think Duke can have one of the strongest entrepreneurial communities in the world. Are we there yet? Well, not yet. But there's a tremendous amount of momentum that I saw build in just the past two years while I was getting my MBA at Duke. While leading Duke's 10th annual business plan competition, the Duke Start-Up Challenge (DSC) , last year, I witnessed a near doubling of participation on campus in just a single year. The interest on the ground was clearly there and building rapidly. But now that I'm an alum, I'm looking back and wondering ... how do we rev-up the Duke entrepreneurial community even more? I read a great article by Daniel Isenberg, a professor of management at Babson, called " How to Start an Entrepreneurial Revolution " in the June edition of the Harvard Business Review. Isenberg outlines nine prescriptions for governments that want to create entrepreneurship ecosystems in their countries. Although he was focused on governments an
3 comments
Read more

Bloomberg for President?

We can only hope. I read an article in the WSJ about how business people across the country, from entrepreneurs to bankers, are all hoping for Bloomberg to run. The economy thus far seems to have taken an unusual backseat in this years election but seems to be emerging as an important issue. An interesting excerpt: As the economy has emerged as a dominant issue in the 2008 campaign, candidates have struck populist notes, from Republican Mike Huckabee's boast that he is not a "wholly owned subsidiary of Wall Street" to Democrat Barack Obama's visit to Wall Street to chastise finance executives for failing to protect the middle class. I can see the approach these guys are taking and I'm sure they have really smart campaign strategists. But I really wonder if this type of message of polarizing the "working man" vs. "big business" really resonates with voters anymore? Is the middle-class really that disgruntled with big business and income dispa
2 comments
Read more