Starbucks Market Trends Monopolistic Competition

							 INBU 4200
 INTERNATIONAL
 FINANCIAL
 MANAGEMENT
Lecture 13
Foreign Direct Investment (FDI)
      Cross Border Merges and Acquisitions and
      Greenfield Site Investment
Entering a Foreign Market
   Any firm considering entering the foreign
    market must examine four basic issues:
     Which foreign markets/countries to enter?

     When to enter them (timing)?

     What scale (financial commitment)?

     What entry mode strategy should it use

      (organizational structure)?
Three Categories of Entry Modes
   Exporting and Importing
       Exporting: The act of sending goods from one country to
        other nations. Manufacture at home; ship product
        overseas.
       Importing: The act of bringing goods into a country from
        other countries.
   Contractual entry
       Using contracts which permit foreign partners to
        manufacture and/or sell your products in another country.
           Franchising and licensing.
   Investment entry
       Direct investment by your company in another country for
        the purpose of producing and/or selling your product
        overseas.
Investment Entry: FDI
   Foreign Direct Investment refers to business
    investment which acquires a long term and
    controlling interest in an enterprise operating
    in a country other than that of the investor.
   The percentage for classifying FDI control
    varies from country to country, however:
         The U.S., Japan, the UN, and the OECD use 10% stake
          in the voting stock of a foreign enterprise as constituting
          FDI.
         If it is less than 10% it is defined as portfolio investment.
Quick History of FDI
   In the years after the Second World War global
    FDI was dominated by the United States.
       The US accounted for around three-quarters of new
        FDI between 1945 and 1960.
   FDI rose dramatically during the decade of the
    1990s due in large measure to cross border
    merger and acquisitions activity.
       From 1990 to 2000, the stock of outstanding stock of
        foreign direct investment increased from $1.7 trillion to $6.1
        trillion.
       Countries other than the US became major players.
       But FDI flows peaked at $1.4 trillion in the year 2000.
FDI Since 2003
   Since 2003, FDI has increased again spurred
    by a renewal in cross border mergers and
    acquisition activity.
       For 2005, FDI flows were estimated at just under
        $916 billion and the outstanding stock totaled $10
        trillion.
       Preliminary data for 2006 suggests further growth
        in FDI.
           FDI flows for 2006 are estimated at $1.2 trillion, the
            second highest level since 2000.
       Visit:
        http://www.unctad.org/Templates/webflyer.asp?do
        cid=7993&intItemID=1634&lang=1
FDI: 1980 – 2005; Billions of US$
Notes to Previous Chart
   The previous chart segregates World FDI into three
    major categories. They, along with their definitions,
    are as follows:
       Developed Countries: World Bank definition based on
        Gross National Income per capita of $9,266 and above.
        About 40 countries.
       Developing Countries: World Bank definition based on
        Gross National Income per capita less than $9,266. About
        125 countries.
       Commonwealth of Independent States (CIS): Refers to 11
        former Soviet Republics: Armenia, Azerbaijan, Belarus,
        Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia,
        Tajikistan, Ukraine, and Uzbekistan.
FDI 2005 by Region and Country,
Billions of US$ and % of Total
                              Amount        Percent
   World                      $916          100%
   Developed Countries        $542           59%
       UK                            $164       18%
       US                            $ 99       11%
       France                        $ 64        7%
   Emerging Countries         $374           41%
       China (with Hong Kong)        $108       12%
       China excluding Hong Kong     $ 72        8%
Where does FDI go and where does it
come from?
   Inward FDI: Foreign direct investment coming into a
    particular country. Historically, the developed
    countries have captured the majority of this inward
    investment.
       In recent years, however, an increasing percentage has
        gone to the developing countries (especially China and
        India).
       See Appendix 1 for a discussion of FDI impacts on
        developing countries.
   Outward FDI: Foreign direct investment leaving a
    particular country. Historically, developed countries
    have been the major FDI investors overseas.
       The United States is the single largest investor, followed by
        the UK and France.
       See Appendix 2 for data on US FDI
Distribution of FDI by Region and
Selected Countries; (Per cent)
Average Annual FDI (Billions US$)
1999-2004
Basic Forms of FDI: Joint Ventures and
    Wholly Owned Subsidiaries
                   FOREIGN DIRECT INVESTMENT


     JOINT VENTURES WITH A            WHOLLY OWNED
        FOEIGN PARTNER                 SUBSIDIARIES

          MERGER TO                            ACQUISITIONS
                               GREENFIELD
         FORM A THIRD                           OF EXISTING
                               INVESTMENT
           COMPANY                              COMPANIES
Wholly Owned Subsidiary and Joint Ventures
   Wholly Owned Subsidiaries
     The foreign facility is entirely owned and controlled by
      a “single” parent.
         Honda U.S.A.; 100% owned by Honda (Japan)
         Apple Retail Japan; 100% owned by Apple USA (see
          Appendix 3)
   Joint Ventures
     Shared ownership arrangement and the creation of a
      new company.
         A separate company is created and jointly owned by two or
          more companies (or entities).
         Hong Kong Disneyland: Hong Kong Government (53%) and
          Walt Disney Co (47%).
         Starbucks Japan: Starbucks (50%) and Sazaby League (50%)
          (see Appendix 4)
Mergers, Acquisitions, and Greenfield
   Mergers (two companies forming a new company):
     Sony Corporation and Bertelsmann AG completed a

      merger on August 5, 2004 of Sony Music
      Entertainment and Bertelsmann's BMG. The new
      music company, called Sony BMG, is equally owned
      (50/50) by Sony and Bertelsmann.
   Acquisition (one company acquiring another):
     Ford Motor Company bought 100% of Jaguar Cars
      Limited for $2.8 billion in 1990.
   Greenfield site investment (one company building a
    new facility):
     Haier Corporation built a $40 million refrigerator

      manufacturing facility in South Carolina in 2000.
Cross Border M&A, the 1990s
   During the 1990s, cross border mergers and
    acquisitions increased dramatically.
   In 1991, the value of cross border M&A was
    estimated at just under $200 billion.
   By 2000, the value had grown to $1.2 trillion.
   This increase was fueled by global economic growth
    and increasing stock prices, especially the dot.com
    run-up.
   The relative importance of FDI was also shown in its
    percent of global GDP, increasing from 0.5% in
    1991 to around 4% by 2000.
Cross Border M&A 1991 - 2000
Cross Border M&A, 2001

   The global economic slowdown in 2001 and
    falling stock prices contributed to a decline in
    cross border mergers and acquisitions.
   In 2001, the total value of cross border M&A
    at $594 billion was only half that of 2000.
   The number of cross-border M&A also
    declined from 7,800 in 2000 to 6,000 in 2001.
Cross Border M&A, the Present
   Cross border M&A activity has recently accelerated.
   In 2005, the number of cross border M&A totaled
    6,134 (20% increase over 2004) with a combined
    value of $716 billion (88% increase over 2004).
   The recent high level of M&A activity is accounted
    for by:
     Increasing economic growth,
     Rising stock prices.
     Growing involvement of private equity funds and
      hedge funds in M&A activity (see Appendix 5 for data).
     Ongoing liberalizations of country investment policies
      by individual governments (see Appendix 6).
   For a comparison of 2000 with 2005 and data on specific
    M&As see Appendix 7.
Cross Border A&A by Private Equity
and Hedge Funds, Number of Deals
Regulatory Changes, 1992-2005
Barriers to Cross Border Acquisitions
   Even though governments have tended to
    liberalize their investment climate, barriers to
    cross border acquisitions still exist:
   These barriers can be classified as:
       Cultural
           Associated with potential investment in a different
            culture
       Domestic business arrangements
           Business arrangements which hamper acquisitions:
               Keiretsu in Japan
       Specific government restrictions or requirements
Examples of Current Government
Imposed Barriers
   Mexico: Prohibits foreign ownership of oil companies.
   Japan: Prohibits foreign ownership of mining
    companies.
   Canada: Requires a review of all acquisitions of
    Canadian companies.
   US: Foreign ownership of US airlines is limited to 25%.
   China: Foreign ownership of Chinese banks is limited to
    25%.
   Australia: Foreign ownership of national newspapers is
    limited to 30%.
   India: Prohibits foreign ownership of retail business such
    as supermarkets and convenience stores.
Trends in Cross Border M&A, % of
Targets
Greenfield Site Investment (GSI)
   Since there is little data regarding the value of
    GSI, we are forced to examine the actual
    number of projects. This data shows the
    following for 2005:
   Total: 9,488         by investor by destination
   Developed Countries: 8,057 (85%) 3,981 (42%)
   Developing Countries: 1,431 (15%) 5,507 (58%)
   Thus, most GSI originates from developed
    countries and takes place in developing countries.
Popular Targets for GSI, 2005
Total by Destination: 9,488 (100%)
European Union:               2,928 (30.9%)
   U.K.                                514 (5.4%)
   France                              358 (3.8%)
United States:                  527 (6%)
Developing Asia:              3,323 (35%)
  China                             1,196 (13%)
  India                               564 (5.6%)
  Viet Nam                            169 (1.8%)
South East Europe and CIS     1,121 (11.8%)
   Russia                             479 (5.1%)
Latin America                   543 (5.8%)
   Mexico                             134 (1.4%)
Africa                          428 (4.5%)
   South Africa                         59 (0.6%)
FDI Theories
   Theory: The purpose is to “explain” or “predict” the
    behavior of a particular phenomena.
     For example, why do firms engage in FDI?

   The theoretical development of FDI began in the
    1960s when models were advanced to explain the
    motives behind outward investments by U.S.
    multinationals (see Appendix 8).
       Prior to this time, theoretical modeling was concerned
        primarily with explaining international trade:
           Adam Smith: Theory of Absolute Advantage (1776)
           Heckscher-Ohlin: Theory of Factor Endowments (early
            20th century).
Early FDI Theory: 1960s
   Monopolistic Advantage Theory of FDI:
       Proposed by Stephen Hymer (1960, Ph.D. thesis,
        MIT).
   Hymer suggested specific firm monopolistic
    advantages over their competition in foreign
    markets provided firms with the incentive
    engage in FDI.
       Monopolistic advantage would allow firms to generate
        above average profits.
       Monopolistic advantages resulted from:
           superior production skills, patents, marketing abilities,
            capital size, management skills, or consumer goodwill
            on brand names.
International Product Life Cycle
   Proposed by Raymond Vernon (1966)
   Vernon’s theory explains the “timing and location” of FDI
     Initially, firms undertake production in their home markets
      which are generally the highest income countries.
           Control and risk avoidance are important here.
       During the next stage, the firm will begin to export, first to
        other high income countries and eventually to others.
       As the product matures and becomes standardized, the
        firm’s competitive strategy shifts from product advantage
        to securing a cost advantage.
           In this stage the company is forced to seek lower cost
            production sites to remain competitive.
            This involves establishing manufacturing facilities overseas
            (FDI).
   Thus, Vernon suggest that firms undertake FDI at a
    particular stage in the life cycle of their production.
 International Product Life Cycle

The U.S. and
other
          Quantity


                                    exports
developed                                                           imports
countries




                     New product   Maturing product     Standardized product
Developing
countries
          Quantity




                                                                      exports

                                              imports



                     New product   Maturing product     Standardized product
Eclectic Explanation of FDI
   The eclectic approach attempts to identify possible
    motivating factors affecting a firm’s decision to
    engage in FDI.
   Some of these factors focus on various market
    imperfection and include:
       Trade barriers
       Imperfect labor markets
   Other motivating factors include:
       Existence of Intangible assets (referred to as the
        internalization theory of FDI)
       Vertical integration
Trade Barriers
   Trade barriers are factors which discourage the
    physical movement of goods and services from one
    country to another.
       Thus they have a potential negative impact on exporting
        and importing.
   Trade barriers arise from:
       Government policies, such as:
         Tariffs and quotas

       Natural factors, such as:
         Distance and ensuing transportation costs

   FDI is seen as a strategy for circumventing these trade
    barriers.
Trade Barriers and FDI: Examples
   1977: In response to U.S. import quotas on
    Japanese televisions, Japanese TV manufacturers
    opened production facilities in the U.S.
       Matsushita, Sony Corporation, Hitachi, and Sanyo Electric
        Company
   1980s: In response to the 1981 voluntary restraint
    agreement between the U.S. and Japan Japanese
    automobile manufacturers established production
    facilities in the U.S.
       Honda and Nissan in 1982 and 1983. Toyota, Mazda, and
        Mitsubishi in the mid-1980s.
   2000: In response to high transportation costs,
    Haier Corporation (China) established a $40 million
    refrigerator manufacturing facility in South Carolina.
Imperfect Labor Markets
   Refers to firms locating in foreign countries because
    of under-priced labor costs (relative to its
    productivity) in those foreign countries.
     Why is labor under-priced in certain countries?

     Because labor cannot move freely across national
       borders to take advantage of higher wages
       elsewhere.
   Imperfect Labor Markets explains FDI investment in:
     Manufacturing (China, Mexico, Eastern Europe)
           Nike in China.
       Services (India; call centers).
           United Airlines in India.
Labor Market Costs Around the World
(2003)         Country   Hourly Cost
Persistent wage
differentials acrossGermany     $31.25
countries is often  U.S.        $21.98
noted as one of the Japan       $20.09
major reasons MNCs
invest in FDI in
                    Korea       $10.28
developing nations. Taiwan       $5.84
China about 1/4 the Mexico       $2.48
cost of labor in    China        $0.60
Mexico.             Indonesia    $0.22
Internalization Theory of FDI
   Suggests that firms possessing valuable intangible
    assets (e.g., technology, managerial talent, brand
    loyalty) will use their own subsidiaries, rather than
    “local” host country firms to capture returns.
       Why?
        Avoids misuse of assets by local partners
        

       Avoids sharing technology.

       Insures full control.

   These firms “internalize” their foreign activities.
       Through strategies involving either wholly owned
        subsidiaries or controlling interest in joint ventures.
   This is Apple Retail’s strategy (see Appendix 3).
Vertical Integration Theory of FDI
   Some firms engage in FDI to stabilize a critical
    supply chain (of inputs).
       Provides these firms with the potential for a low-cost
        competitive advantage.
       E.g., In 1996, Dole Food Company purchased Pascual
        Hermanos, the largest grower of fruit and vegetables in
        Spain.
       Referred to as backward (or downstream) integration.
           Majority of FDI involve backward integration
   Firms may also engage in FDI to promote
    distribution, product sales and service to final
    buyers.
       E.g., Automobile manufacturing companies establishing car
        dealerships in other countries (over 1,000 Honda
        dealerships in the United States).
       Referred to as forward (or upstream) integration.
Political Risk and FDI
   Defined: Refers to the potential losses to a
    foreign firm resulting from adverse political
    actions taken by host governments.
   These adverse political actions include:
       Changes in operating regulations affecting foreign
        firms (see Appendix 9; Coca-Cola in India).
       Expropriation (confiscation) of the foreign firm’s
        assets by the host government.
         Cuba expropriated $1 billion worth of US
           businesses in 1960 (US oil refineries, including
           Texaco and all US banks including, First
           National Bank of New York)
Three Political Risk Components
   Transfer Risk
       Uncertainty regarding cross-border flows of capital (i.e., the
        repatriation of profits).
          Imposition of capital controls, changes in withholding
           taxes on dividends.
   Operational Risk
       Uncertainty regarding host countries policies and behavior
        with regard to firm’s operations.
          Changes in environmental regulations, local content
           requirements, minimum wage laws, and corruption.
          See Appendix 10 for a discussion of bribery

   Control Risk
       Uncertainty regarding control or ownership of assets
            Changes in restrictions on maximum ownership by non-resident
             firms, nationalization of foreign assets.
Assessing Political Risk
   Political risk is potentially one of the biggest risks
    that global firms face.
     Firms must constantly assess and manage
      political risk. What are some external sources for
      doing so?
   Corruption Indexes
     http://www.transparency.org/ (no fee)
   Country Analysis
     http://www.state.gov/countries/

     http://library.uncc.edu/display/?dept=reference&format
      =open&page=68
   Political Risk Indexes
     http://www.countrydata.com/ (fee based)
Managing (Hedging) Political Risk
   Geographic diversification
       Simply put, don’t put all of your eggs in one
        basket.
   Minimize exposure
       Form joint ventures with local companies.
           Local government may be less inclined to expropriate
            assets from their own citizens.
       Join a consortium of international companies to
        undertake FDI.
           Local government may be less inclined to expropriate
            assets from a variety of countries all at once.
       Finance projects with local borrowing.
Insuring Against Political Risk
       Political risk insurance provided by:
         The Overseas Private Investment Corporation (OPIC), a
          U.S. government organization.
         OPIC offers insurance against:
            The inconvertibility of foreign currencies.
            Expropriation of U.S.-owned assets.
            Destruction of U.S.-owned physical properties due to war,
             revolution, and other violent political events in foreign
             countries.
            Loss of business income due to political violence
         Political risk insurance is available for investments in new
          ventures and expansions of existing enterprises
         Visit: http://www.opic.gov/
Appendix 1: Impact and
Importance of FDI on
Developing Countries
FDI Dominates Developing Countries’
Capital Inflows
FDI is also More Stable than Equity
and Short-Term Debt
Appendix 2: Data on US
Inward FDI by Year and
Country
  Inward FDI: To the United States
                            Foreign Direct Investment in the United States,
                                             1997-2006 (p)

                (in billions
              of U.S. dollars)
                                                     $321.3 B
                   $350
                                          $289.4 B
                   $300

                   $250
                                   $179.0 B                 $167.0 B                                 $183.6 B
                   $200                                                                $133.2 B

                   $150 $105.6 B                                                              $109.8 B
                                                                   $84.4 B
                                                                             $64.0 B
                   $100

                    $50

                      $0
                           1997    1998    1999      2000   2001   2002      2003      2004   2005   2006
                                                                                                      (p)
Source: Bureau of Economic Analysis, International Transactions Account Data
FDI Investment in the US by Country
           Foreign Direct Investment in the United States by Leading
                            Countries, 2005- 2006 (p)
                   $29.0 B $29.7 B        $29.7 B
        $30,000                                        $27.0 B

        $25,000
                                                                     $18.1 B         $18.0 B
        $20,000                                                                $16.2 B
                                                                 $14.1 B
        $15,000
                                                    $7.1 B
        $10,000                  $4.4 B
         $5,000

              $0
                     United        France      Netherlands        Japan        Germany
                    Kingdom
                                             2005     2006 (p)

Source: Bureau of Econom ic Anlaysis, International Transactions Accounts
Appendix 3: Apple Retail


   Apple Retail has used a wholly owned
   subsidiary arrangement when engaging
   in FDI. The following slides discuss
   this.
Wholly Owned: Apple Retail
   Apple’s retail store strategy has been to enter a
    foreign country under a wholly owned structure.
       All Apple Retail stores are company owned (Apple
        leases the space).
       Apple currently has 21 foreign retail stores (9 in the UK,
        7 in Japan, 4 in Canada, and 1 in Italy).
       Apple used this wholly owned strategy because it feels it
        “is able to better control the customer retail experience
        and attract new customers.”
       Apparently Apple has no plans to change this strategy
        (see email message from Apple next slide).
       Visit: http://www.apple.com/retail/storelist/
Apple’s Attitude Towards Partnering!
April 18, 2007
Hello Michael:

“We own all of our Apple retail stores and have no plans for
  franchises or partnering.”

We have 21 stores outside the U.S. (7 in Japan, 9 in UK and 4
 in Canada and we opened our first store in Italy) out of a total
 of 177 stores open today.

Best regards,
Joan Hoover
Director, Investor Relations
Apple
Appendix 4: Starbucks


   Starbucks use of a joint venture in
   Japan is discussed in the following
   slide.
Joint Venture:
Starbucks in Japan
   Starbucks entered Japan under a joint venture
    arrangement in 1995.
   The joint venture was with Sazaby League, a Japan-
    based retailer and restaurant operator.
        The two formed a new company: Starbucks Coffee
         Japan
     The joint venture issued stock in Japan and raised
       about $120 million for financing its stores in Japan.
     Stock now trades on the Osaka Stock Exchange.
     First Starbucks opened in Japan in 1996.

        As of January 2007, there were 666 Starbucks
         locations in Japan
     Visit: http://www.starbucks.co.jp/en
Appendix 5: Involvement of
Private Equity and Hedge
Funds in Cross Border M&A
Cross Border A&A by Private Equity
and Hedge Funds
Appendix 6: A review of
Investment Policies Affecting
FDI
    As the following slides reveal, governments
    have liberalized their investment policies in
    recent years. This liberalization has allowed
    FDI to acccelerate.
Regulatory Changes, 1992-2005
Regulatory Changes, 2005, by Nature
and Region, %
Appendix 7: Cross Border
M&A Activity: 2005
Compared to 2002 and the
Ten Largest M&As from 1998
to 2003
Cross Border M&A: Now and Previous Peak
 Top 10 Cross-Border M&A Deals
 1998-2003
Year ($ b) Acquirer                  Home Target                  Host
2000   202.8 Vodafone AirTouch       U.K.      Mannesmann AG      Germany
             PLC
1999    60.3 Vodafone Group PLC      U.K.      AirTouch           U.S.
1998    48.2 British Petroleum Co.   U.K.      Amoco              U.S.
2000     46 France Telecom SA        France    Orange PLC         U.K.
1998    40.5 Daimler-Benz AG         Germany   Chrysler Corp.     U.S.
2000    40.4 Vivendi SA              France    Seagram Co. LTD    Canada
1999    34.6 Zeneca Group PLC        U.K.      Astra AB           Sweden
1999    32.6 Mannesmann AG           Germany   Orange PLC         U.K.
2001    29.4 VoiceStream Wireless    U.S.      Deutsche Telekom   Germany
             Corp                              AG
2000    27.2 BP Amoco PLC            U.K.      ARCO               U.S.
Appendix 8: Motivation for
FDI from the Standpoint of
US and Japanese Firms
    The models used to explain the reason
    behind US and Japanese FDI differ.
    The following slides discuss this.
Impact of FDI on US Firms
   Early FDI studies concentrated on the impact of
    FDI on the value of American firms.
       Rugman (1980) postulated a firm could maximize its
        value by internally employing its intangible assets
        through FDI, rather than licensing the technology to
        foreign producers.
       Fatemi (1984) used event study methodology and found
        positive cumulative abnormal returns of multinational
        firms around the date of international expansion.
       Doukas and Travlos (1988), using event study
        methodology, showed that shares of U.S. firms
        expanding into a new country experience significant
        positive abnormal returns at the announcement of FDI.
       Thus, booth studies concluded that U.S. firms engaged
        in FDI because of the positive impact on shareholder
        wealth.
Japanese Firm FDI
   As multinational corporations in other industrialized nations
    also participated in global FDI, the important question
    became whether the shareholder wealth American FDI
    theory was applicable to their companies.
   The Japanese have long contended that the Japanese
    model of FDI is different from the American model.
       Kojima (1973) argued that Japanese firms invest abroad not to
        maximize shareholder wealth because of because of
        monopolistic advantages, but instead to seek low-cost labor or
        other production factors such as natural resources.
       Ozawa (1979) expanded this argument by suggesting that the
        main driving forces of Japanese FDI were macro-economic in
        nature, because Japan had poor natural resources and the
        Japanese economy relied heavily on exports.
       Recent empirical evidence (Yamada, 1996; Blonigen,1997
        and Lee, 1999) has tended to support the argument that
        Japanese MNCs behave differently from their counterparts in
        the Western world when engaging in FDI.
Appendix 9: Case Study of
Political Risk

   The following political risk case study is of
   Coca-Cola in India. It shows how sudden
   changes in the political environment can
   adversely affect a foreign firm
Coca-Cola and India: Background

   From the 1950s into the
    early 1970s, Coca-Cola had
    operated successfully in
    India as the country’s
    leading soft drink company.

   However, by the mid-1970s,
    the political environment in
    India towards non-resident
    firms had changed
    dramatically.
Coca-Cola in India: 1974-1977

   From 1974 to 1977, India’s socialist government
    (lead by the Janata Party) engaged in a four-year
    campaign against multinational firms in general and
    Coca-Cola in particular.
   In the case of Coca-Cola, the Indian government
    claimed that the company was taking more money
    out of the country then putting in and was adversely
    affecting its domestic soft-drink industry.
Coca-Cola and India: 1978 -
   In 1977 the government demanded that Coca-Cola turn over its
    secret drink formula and sell 60% of its operations to Indian
    investors or face expulsion.
     Under India’s Foreign Exchange Regulation Act, foreign
       companies were required to reduce their equity stake in India to
       40% if they wished to remain in India.
   A year later, after unsuccessful negotiations with the India
    Government, Coca-Cola left India.
   In 1989, Pepsi entered the Indian market under an arrangement
    whereby the Indian Government held 100% of the shares of
    Pepsi India.
     Pepsi also agreed to export $5 of locally-made products for every
       $1 of materials it imported
   In October, 1993, Coca-Cola returned to India, after the Foreign
    Exchange Regulation Act was revised in its favor.
Appendix 10: Bribery and
Global Business

   These slides discuss the issue of
   bribery and global business, with focus
   on the 1977 US Foreign Corrupt
   Practices Act
Influencing Governments and Global
Business
   Influencing government officials can take one
    of two very opposite forms:
       Legitimate (and legal) lobbying
           Company (and spokespersons for companies) talking to
            government policy makers for the purpose of presenting
            their positions and having governments enact legislation
            favorable to their company (or industry).
       Bribery
           Paying government officials for favors.
The U.S. Position on Bribery
   In 1977, the United States Congress passed the
    Foreign Corrupt Practices Act (FCPA).
       Passage in part resulted from Lockheed Martin
        Corporation’s bribery of Japanese Government in early
        1970s.
       FCPA makes it illegal for U.S. companies to bribe
        government officials or political candidates in other
        countries.
       A corrupt payment is defined as one made to influence an
        official's decision.
       Guilty U.S. firms are subject to fines of up to US$2 million
        per incident. Officers, directors, employees, and agents are
        subject to fines of up to US$100,000 and/or imprisonment
        for up to five years.
Other Countries’ Position on Bribery
   The Organization for Economic Cooperation and
    Development (OECD) was created in 1960 for the
    purpose of promoting market economies and
    democratic governments.
       One assumed condition of an efficient market economy is
        that the “playing field” is fair and open.
       Bribery is not consistent with this.
           http://www.oecd.org/home/
   In 1999, OECD member countries agreed to a
    Convention Against Bribery of Foreign Public
    Officials in International Business Transactions.
       This OECD Convention would make it a crime to offer,
        promise or give a bribe to a foreign public official in order to
        obtain or retain international business deals.