Essay Sample on Foreign Investment Strategies

Foreign investment refers to the investment whereby a firm based in a different country has a controlling stake in a firm in another country. It hence differs from foreign portfolio investment in that the latter has direct control. Foreign investment can be categorized into four: official flows, foreign portfolio investment (FPI), foreign direct investment (FDI), and commercial loans (Canh et al., 2020). Countries intending to promote direct investment may have to avail of a dependable, open, and transparent environment for all organizations, whether local or foreign. Such measures include import accessibility, ease of grade, more flexible labour markets, and the protection of intellectual property rights. They may also have to establish an Investment Promotion Agency (IPA). United States emerged as the second-largest global investor behind Japan in 2019, with FDI outflows of about USD 125 billion (Canh et al., 2020). This essay will compare and contrast the foreign investment strategies employed by the United States with those of other countries.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Making Capital Investment Decisions

Capital investment (capital budgeting) refers to the procurement of money a firm acquires to promote its business objectives and goals. It also relates to a firm’s acquisition of long-term assets like machinery, real estate, and manufacturing plants. Capital investment involves risks that can be mitigated by adopting a process that will end up with the best option. The steps are the determination of the capital requirements for both the existing and the new projects, acknowledging resource limitations, identifying the alternatives, evaluating those alternatives through screening and preference decisions, and lastly, making the decision. To come up with the best choice, a firm will have to employ analytical tools, including the payback criteria and the rate of return method to assist in the screening and preference decisions (Lichtenbaum & Ribner, 2020)

The investing firm must have to decide what capital allocation is of immediate need. For example, replacing certain machines before putting up a new building, or whether both needs to be done concurrently. Such decisions may be affected by external factors too. In 2016, the “Brexit” vote in the UK led to instability, which slowed or stagnated capital spending (Dhingra et al., 2016). Exploring resource limitations helps evaluate the firm’s capability to invest in capital expenditures, considering the availability of time and funds. Firms will mostly have just enough funds to use in a limited number of investments. A business must, therefore, evaluate both the time and money it needs to obtain each asset. The limitation of funds may be due to extensive up-front acquisition costs, inadequate capital fundraising, or capital tied up in non-liquid assets (Dhingra et al., 2016).

Establishing baseline criteria for the alternatives involves measurement methods to aid in differentiating the other options. Such measurement methods include net present value, the payback method, internal rate of return, or accounting rate of return. Evaluation of alternatives involves using the measurement methods to compare results. The comparison will not just be made against other options, but also against a set of predetermined rate of return on the investment determined for the project (Lichtenbaum & Ribner, 2020). In this case, a firm may use industry set standards or experience to establish criteria for evaluating the alternatives. Screening may be done to let businesses eliminate those alternatives less desirable, given their inability to meet basic standards. Where one or more options meet or exceed the basic expectations, the management should opt for the preference decision. Such a decision compares potential projects that meet the screening decision method and will line up the options according to their importance, desirability, or feasibility to differentiate among the possibilities. Upon settling on the rank order, a firm may decide on the best. Making a final decision should consider all financial and non-financial factors (Lichtenbaum & Ribner, 2020).

Machines versus Minimum Wage Workers

Firms are today looking for good deals, and this does not include more hiring. According to Rampbell (2011), workers have become more expensive, while equipment is growing cheaper, driving organizations to spend more on machines and less on people. Firms are struggling to automate to compete effectively with countries like China and India, where labour costs are much lower. Vista Technologies spent $450,000 last year on new technology, hiring just two new employees, whose total salary and benefits were $160,000 in a year - a cheaper and more sustainable option (Rampbell, 2011).

With the costs of equipment dropping and tax incentives subsidizing capital investments, the trend will most likely continue. Businesses are positively responding to the subsidies, making capital relatively cheaper compared to labour. Software and equipment prices have gone down by 2.4 percent since the recovery began, owing to foreign manufacturing. On the other hand, the cost of labor has gone up 6.7 percent (Rampbell, 2011). The cost of healthcare has played a significant role in raising the compensation costs.

Capital Budgeting Decision Model for MNCs

Multinational capital budgeting looks at cash inflows and outflows related to long-term (foreign) investment decisions, with its techniques employed in the analysis of foreign direct investment. The capital budgeting process occurs in five steps, in which proposal generation is the initial step. Here, individuals at various levels in the firm proposes capital projects to be included in the budget. The proposals are then followed by a review and analysis of the project's economic viability and suitability related to the organization's overall aims. Such can be achieved by creating cash flows relevant to the intended project and using capital budgeting techniques for evaluation (Ghasemi & Koosha, 2018).

This phase includes risk factors analysis. The third step is the decision-making stage, where the proposals are looked at against the predetermined methods and are either accepted or ruled out. The fourth stage is the implementation phase, in which the project is implemented upon the acceptance and availability of funds. The final stage is the follow-up phase, which is the post-implementation audit of the projected versus actual revenues and costs from the project. This step aids in determining if the revenues from the proposal are in tandem with the pre-implementation projections (Ghasemi & Koosha, 2018). The following formula is used to calculate the net present value.

NPV=t=1∑n Rt/ (1+i) t

Where:

Rt = Net cash inflow-outflows during a single period t

i = Discount rate or return that could be earned in alternative investments

t=Number of timer periods

Accept the project if NPV>0

The management should consider the investment if it’s Net Present Value (NPV) meets or exceeds the proven minimum requirements in terms of return rate, cost, future earnings, and payback compared to the invested amount. However, the firm must employ analytical tools like accounting rate of return, payback method, and other more astute techniques in making screening and preference decisions. The latter is critical when making a final investment decision suitable for the business (Lichtenbaum & Ribner, 2020).

Conclusion

Foreign investment is a situation in which a firm based in a different country has a controlling stake in a firm in another country. It can be categorized into four: official flows, foreign portfolio investment (FPI), foreign direct investment (FDI), and commercial loans. To promote direct investment, countries should provide a dependable, open, and transparent environment for all organizations, whether local or foreign. United States registered FDI outflows of about USD 125 billion in 2019. Capital investment involves risks that can be mitigated by adopting processes that will end up with the best option. The steps are the determination of the capital requirements for both the existing and the new projects, acknowledging resource limitations, identifying the alternatives, evaluating those alternatives through screening and preference decisions, and decision-making.

Given the current drop in equipment costs, tax incentives subsidizing capital investments, and the continued increase in labor costs escalated by healthcare costs, the trend will most likely persist. The capital budgeting process occurs in five steps: the proposal generation, review, and analysis of the economic viability and suitability of the project, the decision-making stage, the fourth stage is implementation phase, and the final stage is the follow-up phase. Management should consider the investment if it’s Net Present Value (NPV) meets or exceeds the proven minimum requirements in terms of return rate, cost, future earnings, and payback compared to the invested amount.

References

Canh, N. P., Binh, N. T., Thanh, S. D., & Schinckus, C. (2020). Determinants of foreign direct investment inflows: The role of economic policy uncertainty. International Economics, 161, 159-172.

Dhingra, S., Ottaviano, G., Sampson, T., & Van Reenen, J. (2016). The impact of Brexit on foreign investment in the UK. BREXIT 2016, 24(2).

Ghasemi Bojd, F., & Koosha, H. (2018). A robust goal programming model for the capital budgeting problem. Journal of the operational research society, 69(7), 1105-1113.

Lichtenbaum, G., & Ribner, D. J. (2020). Foreign Investment Screening in the USA.

Rampbell, C. (2011, June, 9). Companies Spend on Equipment, Not Workers. New York Times. p. 2.

Retrieved from https://www.nytimes.com/2011/06/10/business/10capital.htmlRandhawa, S. (2020). Foreign Investment Risk Review: Modernization Act, 2018-USA. Ct. Uncourt, 7, 13.