Reference no: EM132952520

Consideration of foreign direct investment For the last year, Blades plc has been exporting to Thailand in order to supplement its declining UK sales. Under the existing arrangement, Blades sells 180 000 pairs of roller blades annually to Entertainment Products, a Thai retailer, for a fixed price denominated in Thai baht. The agreement will last for another two years. Furthermore, to diversify internationally and to take advantage of an attractive offer by Jogs Inc., a US retailer, Blades has recently begun exporting to the United States. Under the resulting agreement, Jogs will purchase 200 000 pairs of 'Speedos', Blades' primary product, annually at a fixed price of $80 per pair.

• Blades' suppliers of the needed components for its roller blade production are located primarily in the United Kingdom, where Blades incurs the majority of its cost of goods sold. Although prices for inputs needed to manufacture roller blades vary, recent costs have run approximately £70 per pair. Blades also imports components from Thailand because of the relatively low price of rubber and plastic components and because of their high quality. These imports are denominated in Thai baht, and the exact price (in baht) depends on prevailing market prices for these components in Thailand. Currently, inputs sufficient to manufacture a pair of roller blades cost approximately 3000 Thai baht per pair of roller blades.

• Although Thailand had been among the world's fastest growing economies, recent events in Thailand have increased the level of economic uncertainty. Specifically, the Thai baht, which had been pegged to the dollar, is now a freely floating currency and has depreciated substantially in recent months. Furthermore, recent levels of inflation in Thailand have been very high. Hence, future economic conditions in Thailand are highly uncertain.

• Ben Holt, Blades' financial director, is seriously considering FDI in Thailand. He believes that this is a perfect time to either establish a subsidiary or acquire an existing business in Thailand because the uncertain economic conditions and the depreciation of the baht have substantially lowered the initial costs required for FDI. Holt believes the growth potential in Asia will be extremely high once the Thai economy stabilizes.

• Although Holt has also considered FDI in the United States, he would prefer that Blades invest in Thailand as opposed to the United States. Forecasts indicate that the demand for roller blades in the United States is similar to that in the United Kingdom; since Blades' UK sales have recently declined because of the high prices it charges, Holt expects that FDI in the United States will yield similar results. Furthermore, both domestic and foreign roller blade manufacturers are relatively well established in the United States, so the growth potential there is limited. Holt believes the Thai roller blade market offers more growth potential.

• Blades can sell its products at a lower price but generate higher profit margins in Thailand than it can in the United Kingdom. This is because the Thai customer has committed itself to purchase a fixed number of Blades' products annually only if it can pur- chase Speedos at a substantial discount from the UK price. Nevertheless, since the cost of goods sold incurred in Thailand is substantially below that incurred in the United States, Blades has managed to generate higher profit margins from its Thai exports and imports than in the United Kingdom.

• As a financial analyst for Blades plc you generally agree with Ben Holt's assessment of the situation. However, you are concerned that Thai consumers have not been affected yet by the unfavourable economic conditions. You believe that they may reduce their spending on leisure products within the next year. Therefore, you think it would be beneficial to wait until next year, when the unfavourable economic conditions in Thailand may subside, to make a decision regarding FDI in Thailand. However, if economic conditions in Thailand improve over the next year, FDI may become more expensive both because target firms will be more expensive and because the baht may appreciate. You are also aware that several of Blades' UK competitors are considering expanding into Thailand in the next year.

• If Blades acquires an existing business in Thailand or establishes a subsidiary there by the end of next year, it would fulfill its agreement with Entertainment Products for the subsequent year. The Thai retailer has expressed an interest in renewing the contractual agreement with Blades at that time if Blades establishes operations in Thailand. However, Holt believes that Blades could charge a higher price for its products if it establishes its own distribution channels.

Holt has asked you to answer the following questions:

Problem 1. Identify and discuss some of the benefits that Blades plc could obtain from FDI.

Problem 2. Do you think Blades should wait until next year to undertake FDI in Thailand? What is the tradeoff if Blades undertakes the FDI now?

Problem 3. Do you think Blades should renew its agreement with the Thai retailer for another three years? What is the tradeoff if Blades renews the agreement?

Problem 4. Assume a high level of unemployment in Thailand and a unique production process employed by Blades plc. How do you think the Thai govern- ment would view the establishment of a subsidi- ary in Thailand by firms such as Blades? Do you think the Thai government would be more or less supportive if firms such as Blades acquired exist- ing businesses in Thailand? Why?