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Foreign Direct Investment in Developing Countries

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Information about Foreign Direct Investment in Developing Countries

Published on September 7, 2007

Author: adii

Source: slideshare.net

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Foreign Direct Investment in Developing Countries: An African Perspective
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Group 4: Adriaan Pienaar Mardi Palm Carol-Ann Victor Kyle Day

Group 4:

Adriaan Pienaar

Mardi Palm

Carol-Ann Victor

Kyle Day

Foreign Direct Investment Cornerstone of modern Economy | Central to long-term development & sustainable growth FDI to developing to developing countries has grown from $84bn in 1990 to $178bn in 2000 (Currently = 61% of total foreign investments)

Foreign Direct Investment

Cornerstone of modern Economy | Central to long-term development & sustainable growth

FDI to developing to developing countries has grown from $84bn in 1990 to

$178bn in 2000 (Currently = 61% of total foreign investments)

FDI-trend continues in 21 st century (Bain Capital’s purchase of Edcon & Mittal’s takeover of Iscor) Competitive advantage from investments in developing countries = increased FDI to developing countries are thus continuously increasing Global competition is very intense and fierce rivalry exists to find the best investments

FDI-trend continues in 21 st century (Bain Capital’s purchase of Edcon & Mittal’s takeover of Iscor)

Competitive advantage from investments in developing countries = increased

FDI to developing countries are thus continuously increasing

Global competition is very intense and fierce rivalry exists to find the best investments

Unique blend of factors that influences success and profitability of investments in developing countries Every country presents their own, unique problems / challenges Aim of this study: to develop a conceptual framework with which investments in developing countries could be evaluated Conceptual framework is a combination of various existing models Only the unique, qualitative factors influencing an investment was considered Factors were categorized as Political- , Financial- or Economic Risk Application done with data from SABMiller (Pty) LTD

Unique blend of factors that influences success and profitability of investments in developing countries

Every country presents their own, unique problems / challenges

Aim of this study: to develop a conceptual framework with which investments in developing countries could be evaluated

Conceptual framework is a combination of various existing models

Only the unique, qualitative factors influencing an investment was considered

Factors were categorized as Political- , Financial- or Economic Risk

Application done with data from SABMiller (Pty) LTD

Corporations will aim to gain competitive advantage from investments Determining the crucial factors influencing competitive advantage? 2 models: Porter’s Diamond of National Competitiveness Austin’s Environmental Model

Corporations will aim to gain competitive advantage from investments

Determining the crucial factors influencing competitive advantage?

2 models:

Porter’s Diamond of National Competitiveness

Austin’s Environmental Model

Porter’s Diamond of National Competitiveness Firms Strategy, Structure & Rivalry Demand Conditions Related & Supporting Industries Factor Conditions

Porter’s Diamond of National Competitiveness

Firms Strategy, Structure & Rivalry

Demand Conditions

Related & Supporting Industries

Factor Conditions

Classical Theories – competitive advantage exists in factor endowments (land, resources, labour and population size) Porter suggests that advanced factor endowments can be created (skilled labour, technology, knowledgebase and government support) Austin’s Model – adaptation of Porter, focusing on developing countries Governments in developing countries plays a major role in the success of the economy and any individual investment Austin proposes the addition of environmental factors (economical, political, cultural and demographical) Understand the inter-relationship of above factors – representative of the developing country’s business environment

Classical Theories – competitive advantage exists in factor endowments (land, resources, labour and population size)

Porter suggests that advanced factor endowments can be created (skilled labour, technology, knowledgebase and government support)

Austin’s Model – adaptation of Porter, focusing on developing countries

Governments in developing countries plays a major role in the success of the economy and any individual investment

Austin proposes the addition of environmental factors (economical, political, cultural and demographical)

Understand the inter-relationship of above factors – representative of the developing country’s business environment

Investment Appraisal Process Financial Feasibility (NPV or IRR) Goal Congruence Risk Assessment (unique factors)

Investment Appraisal Process

Financial Feasibility (NPV or IRR)

Goal Congruence

Risk Assessment (unique factors)

Aim: Calculate a meaningful risk premium The model includes factors influencing the potential success and competitive advantage of the investment Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration) Factor Weightings Desirable (0.2) Important (0.3) Essential (0.5) Ranking of each factor using a quintile scale Calculating the risk premium Minimum vs Maximum Rankings Angola vs Botswana (Kyle) THE CONCEPTUAL FRAMEWORK

Aim: Calculate a meaningful risk premium

The model includes factors influencing the potential success and competitive advantage of the investment

Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration)

Factor Weightings

Desirable (0.2)

Important (0.3)

Essential (0.5)

Ranking of each factor using a quintile scale

Calculating the risk premium

Minimum vs Maximum Rankings

Angola vs Botswana (Kyle)

THE CONCEPTUAL

FRAMEWORK

Allocation of Weight to Risk Factors (Gupta et al , 2003) 1.0 Total 0.5 Essential 0.3 Important 0.2 Desirable Weight Category

Quintile Scale to determine likelihood of occurrence 81% – 100% 5 (Most Likely) 61% – 80% 4 41% – 60% 3 21% – 40% 2 0% – 20% 1 (Least Likely) Likelihood Ranking

Aim: Calculate a meaningful risk premium The model includes factors influencing the potential success and competitive advantage of the investment Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration) Factor Weightings Desirable (0.2) Important (0.3) Essential (0.5) Ranking of each factor using a quintile scale Calculating the risk premium Minimum vs Maximum Rankings Angola vs Botswana (Kyle) THE CONCEPTUAL FRAMEWORK

Aim: Calculate a meaningful risk premium

The model includes factors influencing the potential success and competitive advantage of the investment

Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration)

Factor Weightings

Desirable (0.2)

Important (0.3)

Essential (0.5)

Ranking of each factor using a quintile scale

Calculating the risk premium

Minimum vs Maximum Rankings

Angola vs Botswana (Kyle)

THE CONCEPTUAL

FRAMEWORK

SABMiller (Pty) Ltd consider various investment opportunities in different African Countries Our study focuses on potential investments in Angola & Botswana The two chosen countries are very different and thus a good yardstick to test whether our framework produces a meaningful risk premium

SABMiller (Pty) Ltd consider various investment opportunities in different African Countries

Our study focuses on potential investments in Angola & Botswana

The two chosen countries are very different and thus a good yardstick to test whether our framework produces a meaningful risk premium

Bordered by South Africa, Namibia, Zambia & Zimbabwe Pula (local currency) is stronger than the South African Rand Economy (similar to SA): Mining (38 percent - mainly diamonds) Services (44 percent) Construction (7 percent) Manufacturing (4 percent) Agriculture (2 percent) One of the fastest growing economies in the world Botswana has experienced considerable growth in their GDP / capita Thus establishing themselves as a middle-income country with a per-capita GDP of $11,200 in 2006 BOTSWANA

Bordered by South Africa, Namibia, Zambia & Zimbabwe

Pula (local currency) is stronger than the South African Rand

Economy (similar to SA):

Mining (38 percent - mainly diamonds)

Services (44 percent)

Construction (7 percent)

Manufacturing (4 percent)

Agriculture (2 percent)

One of the fastest growing economies in the world

Botswana has experienced considerable growth in their GDP / capita

Thus establishing themselves as a middle-income country with a per-capita GDP of $11,200 in 2006

BOTSWANA

ANGOLA South-central Africa Portuguese colony Significant oil and diamond resources Currently the fastest growing economy in the world 2004 – China’s Eximbank provided a loan worth $2bn to Angola to rebuild infrastructure after 25 years of war Growth in Angola – driven by the rise in oil prices

ANGOLA

South-central Africa

Portuguese colony

Significant oil and diamond resources

Currently the fastest growing economy in the world

2004 – China’s Eximbank provided a loan worth $2bn to Angola to rebuild infrastructure after 25 years of war

Growth in Angola – driven by the rise in oil prices

ANGOLA vs BOTSWANA

QUESTIONS

QUESTIONS

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