Financing Foreign Investment

Opening Case 14: Failed US-Vietnamese Joint Ventures

Since 1994, US companies have established joint ventures with Vietnamese businesses on everything from auto factories and cola bottlers to power plants and steak houses. American partners include Chrysler, Ford, Proctor & Gamble, Citibank, Caterpillar, and Nike. Many factors - more capital, less political risk, and local marketing expertise among others - favored US-Vietnamese joint ventures. However, many American investors are forsaking their enterprises because of heavy losses. Consequently, US investment in Vietnam dropped from $635 million in 1996 to $117 million in 1999. Investors from several other countries, such as Taiwan, Korea, and Japan, have also lost heavily in Vietnam.

A key example of a failed joint venture is American Rice. Its multimillion-dollar effort to build a rice business in the Mekong delta - one of the first and most prominent US ventures in Vietnam - had collapsed in 1998. American Rice's local partners had become enemies, the police threatened to put its employees in prison, and the Communist Party attacked the situation as the latest example of American imperialism. Many US companies in Vietnam today realize that they share all of American Rice's problems - poor legal protection, hostile joint-venture partners, heavy bureaucracy, and differences in culture. Because of its importance, let us review the case.

In early 1994, American Rice set up a joint venture with an influential local partner to sell Vietnamese rice overseas. With American Rice hungry for supply and Vietnam desperate for customers, the venture seemed ideal for both sides and for millions of struggling Vietnamese farmers. But what started as a partnership quickly became a contest. The local partner refused to grant American Rice permits for exports and charged the company new fees that doubled the costs of the joint venture.

A few months into the new venture, American Rice received permits to export only 30,000 tons, well below the 120,000 tons agreed upon. In 1995, American Rice won a contract to sell the government of Iran $100 million of rice at the highest-ever price for Vietnamese rice. The Vietnamese government, however, forced American Rice to give about half of the Iran contract to local exporters. American Rice's radical rice-buying program stirred further controversy. Rather than buying from pricey state-owned brokers or traders, American Rice purchased straight from the growers, thereby cutting costs and delivering higher prices for the farmers. Thus, many rice farmers were delighted, but the government was not pleased and said to American Rice: "We gave you a license to sell rice, not to start a social revolution."

In October 1996, the government announced that it was launching a probe of the American Rice venture. Investigators questioned the entire staff and combed through stacks of company receipts. The government concluded that American Rice had "materially" violated its investment license and the laws of Vietnam, and caused serious damage to its Vietnamese partner. When the report was leaked to the local press, American Rice became a lightning rod for anti-Americanism. After incurring more than $3 million in losses, American Rice closed its Vietnamese venture in early 1998. No wonder, then, that in March 2000, Moody's Investor Service "pointed to the country's hesitance to allow further foreign participation in the economy" as a threat to progress.

Source. Robert Frank, "Withdrawal Pains: Americans Once Again Land in a Quagmire," The Wall Street Journal, Apr. 21, 2000, pp. A1, A6.

Multinational companies (MNCs) first decide on the nature of their needs for funds, and then they seek the funds from many available sources. In addition to the investment in fixed assets, a foreign investment project may require additional current assets such as accounts receivable and inventories. Consequently, MNCs must consider various sources of funds for their overseas projects and the decision variables that affect the selection of particular sources.

This chapter examines three major sources of funds for foreign investment: (1) internal sources of funds, (2) external sources of funds, and (3) sources of funds from development banks. First, MNCs may use internally generated funds such as profits and depreciation charges. If internal sources of funds are insufficient, they may obtain their capital from sources within their home country and/or in foreign countries. In addition to these internal and external sources of funds, development banks provide MNCs with a variety of financing sources.

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