CASE 12: CONSIDERATION OF DIRECT FOREIGN INVESTMENT
1. Introduction to Direct Foreign Investment (DFI) and its benefits 2.1 Introduction to DFI
1.1.1 DFI is an integral part of an open and effective international economic system and is seen as a source of economic development, income growth and employment. A firm which obtains DFI would be beneficial by new marketing channels, cheaper production facilities, access to new technology, products, skills and financing.
1.1.2 For all of the benefits that DFI could bring to either a host country or the foreign firm that receives the investment, Blades Inc. is seriously considering DFI in Thailand which is a profitable market and has been placed among the world’s fastest growing economies. (See Appendix 1 & 2 page 5 for Thailand imports and exports evidence).
2.2 Benefits obtaining from DFI
1.2.1 The overall benefits from considering DFI in Thailand is maximizing profits and minimising costs. As the fact shows that Thai baht is now a freely floating currency and has depreciated 8.88 percent during the last 12 months, which could lower the initial costs required for DFI. In this way, Blade may generate profits when DFI is considered.
1.2.2 Compared to Blades’ U.S. market or U.K. market’s, the Thai roller blade market offers more growth potential. Since Blades’ growth potential there is limited due to product’s high prices charges in the U.S. and a well-established of both domestic and foreign roller blade manufacturers in the U.K., Thailand has been chosen as an export target to attract new sources of demand because of its growth prospects.
1.2.3 Since the cost of goods sold incurred in Thailand is substantially below that incurred in the U.S., Blades may be able to sell its products at a lower price but generate higher profit margins in Thailand than it can in the U.S. Therefore in this way, Blades can make contribution to its profits making motive.
1.2.4 Furthermore, Thai labour may not necessarily be less costly than U.S. or U.K labour, but there may be a cost advantage to the raw materials in Thailand, such as rubber and plastic components. These components’ prices are relatively low in Thailand than in the U.S or U.K.
1.2.5 By expanding its operations to Thailand, Blades is more diversified and reduces its exposure to the U.S.
2. Problems that Blades may face when considering DFI in Thailand 3.3 Level of economic uncertainty
2.1.1 Recent events in Thailand have increased the level of economic uncertainty.
2.1.2 Global economic uncertainty which has been weighed down by the high levels of unemployment and slow bank-lending growth.
2.1.3 Thailand’s internal political turmoil of the policy approach taken that will be used to manage the economy has been clashed due to the choice between exchange rate management, monetary policy, and the use of capital control.
2.1.4 Current economic conditions in Thailand may lead to a substantial depreciation of the Thai baht, which would affect Blades negatively.
3.4 Level of inflation
2.2.1 Recent levels of inflation in Thailand have been very high. High inflation in Thailand could cause a shift in the demand for Blade’s products, as local products become more expensive; Thai consumers will most likely purchase more goods overseas. Consequently, Blades’ sales to Thailand may increase. (See Appendix 3 page 6)
3.5 Depreciation of the Thai baht
2.3.1 Since the import and export transactions are denominated in Thai baht, a depreciation of the baht would affect Blades. This means that fewer and fewer U.S. dollars will be converted to due to a continued depreciation of the baht.
* As the recent uncertain economic conditions in Thailand and the depreciation of the baht have significantly lowered the initial costs required for DFI, it would be beneficial if Blades undertakes the direct foreign investment now. In addition, recent high levels of inflation...
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