This content introduces the concept of international investment appraisal, differentiating it from domestic investment appraisal by highlighting the complexities of foreign operations, currency exchange, and the strategic reasons companies engage in international trade. It then delves into the economic theories of absolute and comparative advantage as frameworks for understanding why countries and companies specialize in certain productions for international trade.
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So it's still going to be about
Yeah.
But this time around we'll be looking at
So in FM we did investment appraisal as
well. However totally different. Yeah.
In terms of focus, you are focused on
local investment. A company investing in
the country, same country where is
operating. So there's no issues about
foreign exchange. There's no issues
about different currencies. Right? But
this time around we want to look at what
does it mean to invest in another
country? How do you appraise such
investment? Yeah. Uh the methods are
going to be similar. The same methods
you've learned the NPV, the IR which we
dealt with in the last class. the modified
modified
duration modified duration and I'm sure
you well okay with those methods yeah
we've dealt with those ones yeah but now
specifically when we're going outside
our jurisdiction when we're going
outside where we are based how do we
appraise such investments that is what
we want to start today yeah but but
before we go into that investment I mean
appraiser itself it's quite important
that you even understand what are we
talking about when we're talking about
foreign operations. Yeah, foreign
operations. Yeah, you probably want to
see it in two ways. Is that you're
talking about you're doing the foreign project.
project.
Likewise, you can actually have
what you will call maybe international
trading. So you can be actually doing
trading which means you are buying and
selling with a company that is in
another country. So
any of these will require you to
understand how international trade work,
how currency flows work and what is the
implication for you as an executive,
what's an implication for you as an
advisor. Yeah. So usually you know that
companies that participate in these two
types of activities generally you call
them multinationals
that's why you hear someone saying oh I
work with a multinational company so
multinational companies are those
companies that have
to put in definition more than 25% of
So if you generate more than 25% of your
revenue from another country different
from your country of origin as a
company, then that means you qualify to
be a multinational company. Yeah. Very
important. Yeah. And the question is why
why do companies go to trade in another
country? Why why would they do that?
which means not necessarily driven by
active trading profit but they looking
more into things that have to do with
the sustainability long-term existence
of the company or it might just be for
international trading
and this is where they want to just make
profit. Yeah. On a short term. This is
on a long time
or this is on a medium short to medium time.
Right? So
So
this is the reason why they do
foreign get involved in the foreign
mission why they become multinationals.
But looking at international trading quickly,
why will companies go and trade in
another country?
Any view? Why do you think a company
would leave United States and say, "No,
I'm going to go and start selling things
in the UK or start buying things in the
UK." Why? Why would a company want to do that?
that?
Fantastic. What you're talking about is
Yeah, because it's possible that the
company just believes that
it's cheaper for him for for that
organization to actually establish their
company in another country or to buy
their resources from that because it's
cheaper or because they can leverage on
so many production they produce so much
in that say China and they're able to
reduce their cost of production because
they are producing so much in that place
and from there they can start sending
across all the other locations where
they are based and with that they're
able to reduce their cost of production
and they are better off. It is possible
Yeah. So probably a company just believe that
that
it is just impossible for me to be able
to produce something
in that country but I have to sell into
that country. So take for instance Apple
will probably not produce anything in Gambia.
Gambia.
However, they are still selling their
product in Gambia. So it's impossible
for them to be able to produce because
it's un it's uneconomical for them to be
able to do so. However, they will still
have to sell because they want to make
money there. So to have varieties and choices
choices
of product in the locations, it might
necessitate the company to to start
selling AC across the existing country.
So they might have to go out of the
current country and go sell somewhere
else. Yeah. And likewise even if you
look at seasonal product yeah um most of
the fruits that you have there are few
of them if there's any that will be
produced in the same country from
January to December take for instance
you take strawberry let's take
strawberry strawberry probably comes out
in Canada maybe during winter and spring
sorry spring yeah so which means after
spring you don't have strawberry but you
still have to eat strawberry even in
winter and in summer right But what
happens? So whatever they've make during
spring, yeah, they sell. However,
there's a place like Australia that will
also be in spring when Canada is in
winter or in summer. So they they go
into another location to get that
product that has an opposite weather and
they can also ship it into another
country that has weather that is not
suitable for that particular product or
whatever they trying to sell. So
that accessibility of choices can also
necessitate a company to start buying
things from another country. So if a
company is selling strawberry in Canada
now during winter they will have to go
to Australia to go and buy because
winter in Canada is like a summer is
opposite in Australia. So those are some
of the reasons and another one you can
think about is me competition because
it's quite important you understand
these basics. Those are the things you
will need when you are having discussion
because at the end of this topic we'll
now start looking at full exam questions
and you'll see how your understanding of
these things have to come because if
you're advising a company to go and
establish another branch in a different
country. You need to be telling the
examiners why should they do that. Is it
because of economies of scale they are
they advising or because you think they
will be able to sell more varieties
there or is it because that item does
not exist in that place and you think if
they go sell as a first time seller they
will make money or is it just because of
competition in that country that you
want to go in there so that you can
drive prices down and probably be um a
low cost or low price get low cost
advantage. Yeah. So
you need to have that basic
understanding and that is why I'm going
through this theoretical part first
before you trying to looking at numbers.
So this is not a paper where you just
focus on calculations alone. Extremely
important you have a full understanding
of the concept of the impact on economy,
the impact on the company and your role
as an executive. So you have to link all
those three together. Yeah. So if on to
those wise
they try to do things internationally
they go into different countries. Yeah.
But all of this you can actually
That is what you call number one is that
you call it two theories which is a
to produce in another country or
even in his own country or whatever he's
doing we can explain those benefit or
reasons either using this area of
absolute advantage or comparative
advantage and what do I mean with that
when you're saying okay company has an
absolute advantage or a company has a
comparative advantage
I will explain it with a typical just an
illustrative example to help you
understand what I'm saying. Let's say
we're looking at a company in Japan.
So we have a Japanese company and you
have an American company US. So
these two countries, they both produce
cars and they produce things.
So let's say Japan will produce 1,800
cars in a year and US will produce 700
in a year. Whereas Japan is producing
650 trends in a year whereas US will
produce 300 signs in a year.
Yeah. So with this example we're saying
our resources raw materials are
available to both countries. So both US
and Japan have the same amount of raw
materials, the same resources and this
production that you are seeing these
figures you are seeing yeah is limited
by the local demand. So this is what
they produce for consumption in their
countries. So this 1,800 cars is used in
Japan, 650 trains used in Japan, 300
trains in the US as what that's what
they need and US need 700 cars. Yeah.
and that's what they produce. So what we
are saying here is two economies. This
is the first economy. This is the second economy
economy
in terms of advantage here.
here.
Obviously Japan has what you will call
because when you look at each production
in isolation separately, you realize
that Japan actually
is producing more than US both number of
cars and number of trains. So you look
at it, Japan has an advantage because
Japan is going to be selling more
product than US. Yeah.
So because of those more units that they
producing that is absolute advantage
because we are not doing any fraction we
are not comparing any ratios to decide.
We're just looking at the absolute units.
that's being produced by each country
and we know that Japan has that. Now
what about comparative advantage? That
is slightly different
and please pay attention slightly
different because here you need to be
to be able to decide which country has a
comparative advantage. Yeah. Is it
Japanese company or an American company?
And this is what you have to do. Let's
look at cars first of all to say okay
yeah what we are talking about when we
talking about compar advantage is just
if Japan decides to focus on cars alone
instead of producing both cars and
trends and US decides to focus on trends
alone would they be better off in their
individual situation such that if a
company is able to focus on where he has
a comparative advantage. He can produce
for himself and at the same time produce
for another country
and where he has his weakness,
he can import that from another company,
another company in another country.
So what you are asking yourself is
should Japan be producing both cars and
trains or should US be producing both
cars and trains? Why don't you identify
your strengths and your weakness? Use
your strength and get someone to cover
up for your weakness. So for you to know
that you need to find out what is the
opportunity cost of Japan deciding to
produce cars alone or trains alone and
what's the opportunity cost of US saying
they want to produce cars alone or
trains alone.
Please pay attention.
So let's look at take for instance
Japan. So let's talk about Japan.
Let's find out where Japan is strong and
where Japan is weak. Is it in production
of cars or production of trains? So what
we're saying is that for cars
1,800 units
yeah of cars because what we are saying
is if they decide not to produce 650
unit of trains, they will produce
additional another 1,800 unit of cars.
That's what we're saying because we're
saying the same units are used to
produce this situation that we have,
right? So, which means for Japan to
it will lose that will be a loss of
because it's trying to focus on cars
alone. So if it does that that means
that the cost of one unit of car for Japan
will be equivalent to
1 * 650ide
And that will give you
let me get my calculator and if you have
So which means
for every one unit of car that Japan is
producing is going to lose 0.36 unit of trend.
Remember where we're going we're trying
to find out where there is comparative advantage.
advantage.
So we know that. So which means if Japan
wants to focus on production of cars the
cost to him the extra cost to him is
0.36 unit of trim. Yeah.
Yeah.
wants to focus on cars alone let's find
out what is the comparative cost to US >> 0.43
>> 0.43
>> I have the same now.
0.43. Yeah. Yeah. Let's look at it. So
we're saying that okay if US want to
focus only on production of cars it
means that they will need to forfeit
production of trains. So and we know
that normally US will produce 700 cars
that is equivalent to 300 trends. So for
a one unit of car that they want to
produce then they will forfeit 300 over 700
700
and that will surely give us
that figure that you have. That's
correct. Yeah. Nice 0.43.
0.43.
So So which means it's going to cost us more
more
than Japan to focus on the car. So if
you look at these two companies in two
different countries
for a product X which is product power
is better produced in Japan because
Japan has a cheaper relative cost when
you're looking at what is going to cost
a US company. So what you are saying
that for this card that we're talking
but what about trend let's see Japan
still has compared advantage because
Japan has absolute advantage earlier on
now we are checking We are looking at
the comparative advantage and we're
still seeing even for cars Japan has a
comparative advantage but what about train
train
what will it cost Japan to produce train
what is the opportunity cost of you know
that would not be against the car so I
want you to do it yeah need to apply yourself
yourself
and let's do for you as well
what do you have
let's look at it quickly Okay, nice. So,
you all are line. So, and you're in
different places. So, I I assume that
you actually did the correct thing. So,
what we're saying is if Japan wants to
focus on production of trains alone,
they will lose 12,800.
So, they're going to lose 1,800
And us similarly will have to stop
producing the of 700 so that they can
produce the 300 trends and that will give
give
700 300 2.3 that's true
2.8.
So you guys are correct for sure. Yeah.
So with this one who has the comparative advantage?
>> USA.
>> US exactly. So which means for train
Japan does not have comparative
advantage. US has a comparative
Is this clear? Because gradually this
little concept we're building it cuz if
you're going to advise a company cuz
you're going to find a question whereby
you have so many concept built in it and
you must be able to start singing those
details out one by one and also when you
are writing your report you are able to
consider everything that needs to be
considered. You cannot advise this
Japanese company now to go and start
selling train in the US. No,
because they are better off focusing on
cars where they have comparative
advantage and absolute advantage than
trying to focus on manufacturing of
trends and selling to their local
country. Even in their Japan as a
country, they should not produce to sell
there. They should use all their
resources to produce the cars where they
have advantage and those extra cars that
they have produced. They can now ship it
out to the US and you're telling the US
company to say produce a lot of trains,
produce all the trains that we need, the
one you need locally of 300 and also
produce the one Japan needs and ship to
them. and you're telling Japan to supply
all the cars both to domestic market and
to the foreign market.
That is the summary all we are talking
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