Joint ventures
The two distinct types of joint venture are industrial co-operation (contractual) and joint-equity. A contractual joint venture is for a fixed period and the duties and responsibility of the parties are contractually defined. A joint-equity venture involves investment, is of no fixed duration and continually evolves. Depending on government regulations, joint ventures may be the only means of access to a particular market.          (0.5 mark)

Licensing
Licensing is an alternative to FDI. It involves conferring rights to make use of the licensor company’s production process to producers located in the overseas market in return for royalty payments.          (0.5 mark)

Advantages of joint ventures
* Relatively low cost access to new markets
* Easier access to local capital markets, possibly with accompanying tax incentives or grants
* Use of joint venture partner’s existing management expertise, local knowledge, distribution network, technology, brands, patents and marketing or other skills
* Sharing of risks
* Sharing of costs, providing economies of scale.              (2 points @ 0.5 marks = 1 mark)

Disadvantages of joint ventures
* Managerial freedom may be restricted by the need to take account of the views of all the joint venture partners.
* There may be problems in agreeing on partners’ percentage ownership, transfer prices, reinvestment decisions, nationality of key personnel, remuneration and sourcing of raw materials and components.
* Finding a reliable joint venture partner may take a long time.
* Joint ventures are difficult to value, particularly where one or more partners have made intangible contributions.
(2 points @ 0.5 marks = 1 mark)

Advantages of licensing
* It can allow fairly rapid penetration of overseas markets.
* It does not require substantial financial resources.
* Political risks are reduced since the licensee is likely to be a local company.
* Licensing may be a possibility where direct investment is restricted or prevented by a country.
* For a multinational company, licensing agreements provide a way for funds to be remitted to the parent company in the form of license fees.                  (2 points @ 0.5 marks = 1 mark)

Disadvantages of licensing
* The arrangement may give to the licensee know-how and technology which it can use in competing with the licensor after the license agreement has expired.
* It may be more difficult to maintain quality standards, and lower quality might affect the standing of a brand name in international markets.
* ‘Market seeking’ firms engage in FDI either to meet local demand or as a way of exporting to markets other than the home market. Examples of this are the manufacturing operations of US and Japanese car producers in Europe. Some FDI is undertaken to provide a sales and market organisation in the overseas economy for the exporter’s goods.           (2 points @ 0.5 marks = 1 mark)

• Market seeking
• Raw material seeking
  Firms in industries such as oil, mining, plantation and forestry will extract raw materials in the places where they can be found, whether for export or for further processing and sale in the host country.
• Production efficiency seeking
  The labour-intensive manufacture of electronic components in Taiwan, Malaysia and Mexico is an example of locating production where one or more factors of production are cheap relative to their productivity.
• Knowledge seeking
  Knowledge seeking firms choose to set up operations in countries in which they can gain access to technology or management expertise. For example, German, Japanese and Dutch companies have acquired technology by buying US-based electronics companies.
• Political safety seekers
  Firms which are seeking ‘political safety’ will acquire or set up new operations in those countries which are thought to be unlikely to expropriate or interfere with private enterprise or impose import controls.

Risks and issues relating to One-Village’s proposed project in a foreign country.
Considering the target country’s lower ranking on the ease of doing business, the directors of One-Village should expect some political risks, legal risks, and other issues that may make it difficult for them to set up and operate successfully. Below
are some risks and ways of addressing them.

• Risks or issues
  Lower rank for dealing with construction permits suggests that One-Village may face the risk of government frustration which might create room for bribery and corruption.
• The lower score for paying taxes suggests that One-Village may face uncertainty and inconvenience about taxes, which may make its compliance with tax laws difficult. Frequent changes in tax laws and ambiguity about the position of the tax law would increase the risk of One-Village failing to honour its tax obligations.
• The lower rank for trading across borders suggests that country may be restricting free flow international trade or the country is otherwise not accessible to other countries. The risk of trade restrictions may make it difficult for One-Village to
  import machinery and inputs into the country.
• One-Village may face legal risks, particularly those related to enforcement of intellectual and other property rights and enforcing contracts. The lower score for registering property and enforcing contracts are testaments to the presence of this risk.
• Besides the political and legal risks, One-Village may also face some financial risks. Key of them is the risk of bankruptcy. Although it appears that it is easier to get credit in the destination country, the directors should be concerned about risk of insolvency as the score for resolving insolvency is low.
• Other issues that should be considered are the following:
  1. Impact of its operations on the environment. For instance, the effect of damming a river to create water reservoirs on shelters around the river bank.
  2. Ethical issues relating to recruitment, compensations to residents affected by their operations, abuse of market power when dealing with suppliers and customers etc.
  3. Cultural differences between its home country and the destination country.             (Any 4 points)

Suggested solutions/recommendations

• On the risk of government frustration, One-Village should negotiate with the government for a favourable investment environment. Further, it should begin regulatory processes early, so it can complete the project on schedule even when there
  are delays granting permits. The directors should be mindful of bribery and corruption as the firm goes through regulatory procedures.
• On tax compliance, One-Village should engage experts in the destination country’s tax system for advice on meeting tax obligations. Considering the importance of irrigation to farming in Sub-Saharan Africa, One-Village could negotiate for a stable tax regime during its presence in the country.
• On the legal risks, One-Village should consider international arbitration to enforce property rights and contracts. It should also do well to comply with existing laws and plan for changes in them. In case of intellectual property, operations should be
  structured to limit technology transfer.
• On the risk of bankruptcy, One-Village should reduce debt financing for the project as resolving insolvency could be difficult.        (Any 4 points)
  

Eiteman, Stonehill and Moffet (1992) in their book, Multinational Business Finance, set out five main strategic reasons for engaging in FDI, as follows:
i) Market Seeking
Such firms may be purely exporting to markets overseas or producing in foreign markets to meet local demand, overseas car manufacturers in Ghana and communication firms in Ghana are examples of market seekers.

ii) Raw material seeking
Firms in industries such as oil, mining, plantation and forestry will extract raw materials in the places where they can be found, whether for export or for further processing and sale in the host country.

iii) Production Efficiency seeking
Here firms locate production where one or more factors of production are cheap relative to their productivity. A common place example is the utilization of low cost labour in the Far East (Taiwan, Malaysia and Mexico)

iv) Knowledge seeking
Knowledge seeking firms choose to set up operations in countries in which they can gain access to technology or management expertise. Firms go to India mostly to tap into their technological prowess.

v) Political safety seekers
MNCs may seek countries in which there will be little political interference with foreign operations. More positively these countries may offer grants, tax concessions and protect the interest of the foreign firms in the country

Most foreign direct investment is undertaken by firms and multinational corporations, who hope to benefit from some of these advantages:
* Take advantage of lower labour costs in other countries (e.g. India is one of biggest recipients of FDI, where labour costs are much lower than in the OECD.
* Take advantage of proximity to raw materials rather than transport them around the world.
* Avoid tariff barriers and other non-tariff barriers to trade.
* Reduce transport costs. For example, by producing cars in the UK, Nissan has lower transport costs for selling to the UK market.
* Opportunities for using local knowledge to help tap into domestic markets. For example, by investing in a foreign country and working with local workers, a multinational can gain a better insight into what works well for local markets.    (Any 2 points)

MEMORANDUM
To               : Board of Directors
From           : Finance Director
Date            : August 14th 2017
Subject        : Proposed Export Business
It has been proposed that the company should utilize its surplus capacity by opening up export business to a number of countries. The following are some of the main points which will need consideration before a final decision is made.

i) Export Pricing and Profitability
First, extensive market research will have to be carried out in the countries under consideration to ascertain:
* Whether there is a demand for our products;
* Whether we would have any direct competition for our goods;
* The quality and price of competitors’ products;
* Whether the price we could charge for our products in that country would achieve the profit margin the company requires.

Depending upon the outcome of these initial investigations, consideration would then have to be given to the pricing and invoicing of the products abroad.
The export price would obviously not only have to cover our normal costs, overheads and profit margin, but also take into consideration any further costs associated with selling goods abroad such as transport, distribution, shipping and insurance costs. However, as there exists some surplus capacity, the items for export may be priced on variable or marginal cost basis.
The potential effect of the variability of exchange rates on pricing policy must also be considered. These effects could be reduced or eliminated in the following ways:

By invoicing in our own currency. This would eliminate the possibility of loss due to exchange rate fluctuations as it transfers any exchange risk to the buyer. However, this could have a detrimental effect on sales and thereby, profit.

By invoicing in the buyer’s own currency but including an ‘extra’ profit in the invoiced price to cover possible exchange losses. However, this policy has the danger of possibly making our price uncompetitive.
By invoicing in dollars – Fluctuation of the dollar against other currencies would affect our exposure.     (2.5 marks)

ii) Credit terms and methods of obtaining payment
When deciding upon credit terms to be offered to foreign customers, consideration must be made of the additional time lag involved in sales to foreign countries.
In addition to the period of trade credit granted there is also the time involved in the shipment of goods to the country and the time taken to transfer the funds back.

This brings us to the choice of the method of obtaining payment. There are several ways in which payment in foreign currency can be received:
* By cheque or bank transfer
* By a bill of exchange drawn on the customer by the company
* By a documentary credit facility (or letter of credit). The documentary credit system works as follows:
-The buyer and seller agree to a sales contract which provides for payment through a documentary credit;
-The buyer then requests a bank in his country to issue a letter of credit in favour of the exporter;
-This bank guarantees payment to the exporter provided that the exporter complies with the terms and conditions set out in the letter of credit such as presenting a transport document, copies of the invoice, certificate of insurance, etc.       (2.5 marks)

iii) Risk Avoidance
The exchange risk can be avoided by one of three methods.
By selling the currency forward. By this means the exporter can be sure of the exact amount of cedis he will receive. However, as there will be presumably many sales, the numerous foreign currency sales will have to be negotiated.

By borrowing the currency now. By this method the exporter would borrow foreign currency and sell the currency for cedis and then repay the loan from the sale proceeds. In this way short-term assets and liabilities are being matched in the same currency so as to eliminate exchange exposure. By this method one loan can be arranged to cover numerous sales.

By invoicing and receiving payment in our currency. However, as already mentioned this could have a detrimental effect on sales.               (2.5 marks)

iv) Forms of representation or local organization in export markets
If the company is to sell the goods in foreign countries then consideration must be given to how the goods will be sold. It will be necessary for the company to have some form of ground support in the countries concerned probably by selling through an overseas agent. Such agents might be found through an export organization such as the Ghanaian Export Promotion Board or with the help of a local bank. Consideration should also be given to the remuneration of such agents and the commission that they will be allowed.                  (2.5 marks)

A company could undertake foreign manufacturing establishment as a strategy to defend existing business due to the following;
1. Demand for local manufacture in foreign country;
2. Reduction in cost of transportation (cost savings);
3. Government policy on tariffs, taxes, import controls and legislations;
4. Challenges with agents and licenses;
5. The need to protect patents and intellectual property;
6. Protection of parent company shareholders against recession;
7. The search for profitable uses for under-employed resources;
8. The need to internationalize to match competitors, suppliers and customers
9. Fear of losing local market
10. Development of global plan and strategies.                          (Any 5 points)