The Ruritanian Project Coursework Example | Topics and Well Written Essays - 2000 words

The Ruritanian Project - Coursework Example The country is currently politically stable. Governments have been democratically elected for the last twenty years. There are two major political parties in Ruritania. The country is about to go for polling in next couple of months. Recent opinion polls suggest that the present Government currently enjoys a 7% lead over the other major party and this view has remained reasonably stable. So if the incumbent government stays in power, it will continue the reform works. The other major party is also committed to democratic principles and a market based economy. They intend to increase both corporate and personal taxation to provide additional funding for their proposed social expenditure (Case Study). The currency of the country was deregulated nearly twelve years ago. Though there was initially a sharp depreciation of the currency, the currency has gained stability against major international currencies during the past three or four years. There has been a speculation that the government will peg the currency with a major currency as a first step for joining the euro. Ruritania is currently negotiating for membership of the European Union and hopes to join in about 2014 (Case Study). In this case, our company wishes to set up a manufacturing in the country in order to utilize the low cost labor and access the local market. We are going to discuss various long term and short term financial issues and underlying theories that are likely to influence the investment decision (Case Study). Foreign Direct Investment as a Strategic Decision of the Firm FDI refers to the reassignment of the capital, managerial and technical assets of a firm from the dwelling country to the host country. It is a type of international finance which consists of lending and portfolio investments. It is unlike lending because it demands ownership. Also it is different from portfolio investment since it entails control of financed actions over administration. There is no united theory associated to FDI. Basically, three levels of analysis have been differentiated by theories based on conventional trade and location theories, theories based largely on industrial organization economics, and theo ries are based on the theory of the firm and center on the competitive advantage of the firm. Customary international trade theories have been enlarged to FDI with regard to the international movement of factors of production. Examples incorporate such extensions of the international trade theory, as factor endowment theory that includes factor mobility (Helpman, 1984, pp. 451-471) and specific factor models (Markusen & Venables, 1998, pp. 183-204), which both are delegates of the new trade theory. They are valid in the context of FDI, as they let imperfect competition and product differentiation. Also traditional location theory stresses on the least-cost location of production as the best location of the firm. Macro-economic investment theories include Dunning's developmental model of international investment. The theory relates the determinants of outward and inward investments to the developmental stage of the state. According to the model, outward investment beats the inward in vestment as the country grows. The ongoing shift from negative to positive on net investment depends on a country's factor endowments, politico-economic system and its interdependencies with the world economy (Dunning 1993). Vernon pioneered the product life cycle theory in the mid-1960s, but expanded it later to a clearly oligopolistic understanding. The theory elucidates the geographical course of locating the manufacturing units in the four broad stages of development. In the first phase, new products are launched by a firm griping technological headship in