Essay Instructions: Consideration of Direct Foreign Investment
For the last year, Blades, Inc., has been exporting to Thailand in order to supplement its declining U. S. sales. Under the existing arrangement, Blades sells 180,000 pairs of roller blades annually to Entertain-ment Products, a Thai retailer, for a fixed price de-nominated in Thai baht. The agreement will last for another 2 years. Furthermore, to diversify internation-ally and to take advantage of an attractive offer by Jogs, Ltd., a British retailer, Blades has recently begun ex-porting to the United Kingdom. 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 States, 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 com-ponents 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 3,000 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. Spe-cifically, the Thai baht, which had been pegged to the dollar, is now a freely floating currency and has de-preciated 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’ chief financial officer ( CFO), is seriously considering DFI 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 DFI. Holt believes the growth potential in Asia will be extremely high once the Thai economy stabilizes.
For the last year, Blades, Inc., has been exporting to Thailand in order to supplement its declining U. S. sales. Under the existing arrangement, Blades sells 180,000 pairs of roller blades annually to Entertain-ment Products, a Thai retailer, for a fixed price de-nominated in Thai baht. The agreement will last for another 2 years. Furthermore, to diversify internation-ally and to take advantage of an attractive offer by Jogs, Ltd., a British retailer, Blades has recently begun ex-porting to the United Kingdom. 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 States, 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 com-ponents 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 3,000 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. Spe-cifically, the Thai baht, which had been pegged to the dollar, is now a freely floating currency and has de-preciated 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’ chief financial officer ( CFO), is seriously considering DFI 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 DFI. Holt believes the growth potential in Asia will be extremely high once the Thai economy stabilizes.
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:
1. Identify and discuss some of the benefits that Blades, Inc., could obtain from DFI.
2. Do you think Blades should wait until next year to undertake DFI in Thailand? What is the tradeoff if Blades undertakes the DFI now?
3. Do you think Blades should renew its agreement with the Thai retailer for another 3 years? What is the tradeoff if Blades renews the agreement?
4. Assume a high level of unemployment in Thai-land and a unique production process employed by Blades, Inc. How do you think the Thai government would view the establishment of a subsidiary in Thai-land by firms such as Blades? Do you think the Thai government would be more or less supportive if firms such as Blades acquired existing businesses in Thai-land? Why?
