Investment Aftercare Explained: A Guide for FDI Practitioners and Policymakers on How to Grow and Retain Investors by unknow

Author:unknow
Language: eng
Format: epub
Tags: Political Science, General
ISBN: 9781000469929
Google: eKZMEAAAQBAJ
Publisher: Routledge
Published: 2021-11-29T10:20:09+00:00

6.2 Why do foreign investors divest?

Reasons why foreign investors divest can be internal firm-specific factors and external factors, ranging from changing market conditions to abrupt changes in tax policies. Internally, the common justification made by foreign investors, at least publicly, is the financial challenge – where the company’s investment returns do not meet the expectations of its shareholders. Disappointing investment returns can have many causes, but are generally presented as the subsidiary failing to achieve the desired profitability in the desired timeframe. This can be due to operational challenges, such as suppliers being more expensive than expected, difficulties in securing appropriate talent or unexpected local charges that increase operational costs. It could also be a function of poor forecasting or poor management.11

Another related internal factor is the firm’s capacity to innovate, and hence its ability to deliver and maintain strong financial performance. This is often a critical determinant of divestment decisions. British academics Palitha Konara and Panagiotis Ganotakis analysed a large sample of foreign subsidiaries in Spain and found that “foreign subsidiaries are less likely to be sold off when they are characterized by high levels of product innovation performance, human capital or have introduced organizational innovations.”12 They note that those companies that orient their efforts towards exporting were “more likely to be divested to other foreign buyers whereas subsidiaries with domestic-market oriented capabilities were more likely to be divested to domestic buyers.”13 As mentioned in the introduction, the ownership of the buying company is relevant to the long term performance of the company, with foreign investor purchases producing better economic results for the host economy.

External factors can also play a significant role in any decision to divest. For instance, a study in the US asked MNCs operating abroad the reasons why they may divest and found that changing market conditions, such as exchange rate volatility,14 featured high in the reasons to leave a country. In addition, institutional problems in the host country can hinder efficient economic transactions. For instance, the changes and development of political institutions in a host country can quickly alter the business environment in which firms make decisions about the scope and organisation of their foreign operations.15

Other reasons involve policy changes by the host government that make the business environment less attractive to foreign investors. Consider the case of China, which has, for decades, been a haven for foreign companies seeking access to low-cost labour. As the Chinese government has sought to shift its economy towards a more consumption-driven one, this has led to a significant increase in wages. Such a shift in public policy, and the consequent higher wages, has negatively affected FDI inflows and business retention across many Chinese provinces.16 Furthermore, firms divest in response to political instability, institutional weaknesses and the ineffectiveness of intergovernmental organisations.17 Interestingly, even when profits are strong in a host country, firms with foreign operations and subsidiaries are highly sensitive to non-economic conditions, such as the country’s political environment. Indeed, these firms will even forego profits when the political situation in a host country is considered to be too unstable or too risky.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.