Investment Decisions

Drivers of FDI – Special emphasis on emerging

markets
Offshore banking
Forex Management ADR-GDR’s –EU Bonds
 FDI
 Foreign direct investments (FDI) are substantial investments made by a company into a
foreign concern.

 The term is used to describe a business decision to acquire a substantial stake in a foreign
business or to buy it outright in order to expand its operations to a new region

 Foreign direct investment frequently goes beyond capital investment. It may include the
provision of management, technology, and equipment as well.

 The investment may involve acquiring a source of materials, expanding a company's footprint,
or developing a multinational presence.

 Companies considering a foreign direct investment generally look only at companies in open
economies that offer a skilled workforce and above-average growth prospects for the investor.
 Foreign direct investments can be made in a
variety of ways, including opening a
subsidiary or associate company in a foreign
country, acquiring a controlling interest in an
existing foreign company, or by means of a
merger or joint venture with a foreign company.
 A key feature of foreign direct investment is that
it establishes effective control of the foreign
business or at least substantial influence over its
decision-making.
 Types of FDI
Foreign direct investments are commonly categorized as horizontal,
vertical, or conglomerate.
 With a horizontal direct investment, a company establishes the same
type of business operation in a foreign country as it operates in its
home country. A U.S.-based cell phone provider buying a chain of
phone stores in China is an example.
 In a vertical investment, a business acquires a complementary
business in another country. For example, a U.S. manufacturer might
acquire an interest in a foreign company that supplies it with the raw
materials it needs.
 In a conglomerate type of foreign direct investment, a company
invests in a foreign business that is unrelated to its core business.
Since the investing company has no prior experience in the foreign
company's area of expertise, this often takes the form of a joint
venture.
 FDI in India
Relaxed FDI regulations in India now allow 100%
foreign direct investment in single-brand retail
without government approval. The regulatory
decision reportedly facilitates Apple's desire to
open a physical store in the Indian market.
 Advantages and Disadvantages of Foreign Direct Investment
(FDI)
- FDI can foster and maintain economic growth, both in the
recipient country and in the country making the investment.
- Developing countries have encouraged FDI as a means of
financing the construction of new infrastructure and the
creation of jobs for their local workers.
- On the other hand, multinational companies benefit from FDI
as a means of expanding their footprints into international
markets.
A disadvantage of FDI, however, is that it involves the
regulation and oversight of multiple governments, leading to a
higher level of POLITICAL RISK.
 There are many ways in which FDI benefits the recipient nation:

 Increased Employment and Economic Growth

 Human Resource Development
 Development of Backward Areas
 Provision of Finance & Technology
 Increase in Exports
 Exchange Rate Stability
 Stimulation of Economic Development
 Improved Capital Flow
 Creation of a Competitive Market
 Offshore banking
 The term offshore refers to a location outside of one's home country.
 The term is commonly used in the banking and financial sectors to
describe areas where regulations are different from the home
country.
 It involves securing assets in financial institutions in foreign
countries, which may be limited by the laws of the customer’s home
nation—much like offshore investing.
 Offshore locations are generally island nations, where entities set up
corporations, investments, and deposits.
 Companies and individuals (typically those with a high net worth)
may move offshore for more favorable conditions, including tax
avoidance, relaxed regulations, or asset protection.
 Although offshore institutions can also be used for illicit purposes,
they aren't considered illegal.
 Offshore banking is common for companies and high net
worth individuals (HNWIs)
 They may also choose to bank and hold investments in a
specific country offshore if they travel there frequently.
 Supporters argue that they improve the flow of capital and
facilitate international business transactions.
 But critics suggest that offshoring helps hide tax
liabilities or ill-gotten gains from authorities, even though
most countries require that foreign holdings be reported.
 Going offshore has also become a way for more illicit
activities, including fraud, money laundering, and tax-
evasion.
 People and companies can use offshore accounts
to avoid the unfavorable circumstances associated
with keeping money in a bank in their home
nation.
 Most entities do this to avoid tax obligations.
Holding offshore bank accounts also makes it
more difficult for them to be seized by authorities.
 For those who work internationally, the ability to
save and use funds in a foreign currency for
international dealings can be a benefit.
 Benefits and drawbacks of offshore investing.
Benefits
 Favorable tax treatment on your investments, depending on
where you hold your assets. For instance, the Cayman Islands
doesn't impose taxes on income, dividends,or capital gain ,
which means you get to keep more of the money you earn.
 Your assets get a certain level of protection because many
offshore centers are located in places with sound economic and
political systems. And because they're in foreign lands, it's
harder for creditors to seize your assets.
Drawbacks
 If holdings are not disclosed to tax authority, such as the
Internal Revenue Service, (IRS), one can land in serious trouble.
Special Note
 Offshoring is perfectly legal because it provides entities with a great
deal of privacy and confidentiality. But authorities are concerned that
depositers are being used to avoid paying taxes. As such, there is
increased pressure on these countries to report foreign holdings to
global tax authorities.
 For instance, the Swiss are known for their strict privacy laws. At one
point, Swiss banks didn’t even have names attached to bank
accounts. But Switzerland agreed to turn over information to foreign
governments on their account holders, effectively ending tax evasion.
 According to the Organization for Economic Co-operation and
Development,(OECD), 100 countries automatically shared
information about offshore accounts with tax authorities in 2019.
This entailed the disclosure of 84 million accounts worth more than
€10 trillion.
 ADR and GDR
 An American depositary receipt (ADR) or global
depositary receipt (GDR) is a simple way for investors
to invest in companies whose shares are listed abroad
 The ADR or GDR is essentially a certificate issued by a
bank that gives the owner rights over a foreign share.
 It can be listed on a stock exchange and bought and sold
just like a normal share.
 The holder of an ADR or GDR is entitled to all benefits
such as dividends and rights issues from the underlying
shares.
 ADRs are shares of a single foreign company
issued in the U.S.
 GDRs are shares of a single foreign company
issued in more than one country as part of a
GDR program.
 ADR is listed in the US.
 A GDR is typically listed in London or
Luxembourg.
For a real example, let’s look at ICICI Bank. This stock is
listed in India and isn’t available to most foreign investors.
However it has a depositary receipt issued in New York and
traded on the New York stock exchange, which almost anyone
can buy.
The depositary receipt for ICICI is issued by Deutsche Bank.
For each depositary receipt in circulation, Deutsche Bank holds
the equivalent number of India-listed shares on behalf of the
owners of the ADR.
One ADR or GDR does not always equal one share of
underlying stock. And with ICICI, the ADR actually represents
two India-listed shares of ICICI and is priced accordingly.
 Eurobonds
 The term Eurobond refers only to the fact the bond is issued outside of
the borders of the currency's home country; it does not mean the bond
was issued in Europe or denominated in the euro currency. For
example, a company can issue a Eurobond denominated in U.S.
dollars in Japan.
 Eurobonds are frequently grouped together by the currency in which
they are denominated, such as eurodollar or Euro-yen bonds.
 Since Eurobonds are issued in an external currency, they're often
called external bonds.
 Eurobonds are important because they help organizations raise capital
while having the flexibility to issue them in another currency.
 Issuance of Eurobonds is usually handled by an international syndicate
of financial institutions on behalf of the borrower, one of which may
underwrite the bond, thus guaranteeing the purchase of the entire
issue.
 Eurobonds
 The popularity of Eurobonds as a financing tool
reflects their high degree of flexibility as they
offer issuers the ability to choose the country of
issuance based on the regulatory landscape,
interest rates, and depth of the market.
 They are also attractive to investors because they
usually have small face values providing a low-
cost investment.
 Eurobonds also have high liquidity, meaning
they can be bought and sold easily.
Thanks