Consideration of Direct Foreign Investment

FDI

One of the main benefits that Blades would get from foreign direct investment in Thailand is an operating hedge. The company is currently buying components from Thailand that are priced in baht, and selling to an importer in Thailand who is paying in baht. To an extent, this forms something of an operating hedge, but the components are going to the U.S. first, creating foreign exchange exposure. FDI would help to reduce this exposure. In addition, FDI could potential help reduce the company's political risk, at least if it retains a strong local partner. In many countries, a local partner is essential to reducing political risk and Thailand is no exception.

A third potential advantage is that FDI would give the company long-term exposure to Thailand at a relatively low price. Blades would also enjoy whatever first move advantages might accrue. Lastly, the company would gain a manufacturing foothold in Asia, something that could be scaled up should demand in Asia grow rapidly. Southeast Asia is a large market, but Thailand is sufficiently well-connected to China that it might be able to sell goods in that market as well. In addition, Blades would gain significant knowledge about operating in Asia in general, knowledge that could be transferred to other, future operations on the continent.

2. If Blades undertakes FDI now, it gains first mover advantage. By solidifying a market position, the company would be able to essentially block out competitors. Blades would gain the ability to have a strong market share as well. However, the tradeoff is that there is considerable financial uncertainty. In particular, the Thai economy may deteriorate and this would adversely affect demand conditions. If Blades does not undertake foreign direct investment in Thailand, then it has the ability to exit the market quickly if it becomes unprofitable. At this point, the market looks too volatile. No market has been able to sustain long-term growth in rollerblades and Thailand does not look especially promising. There are limited venues for rollerblading given the lack of public green space and the rather hazardous road conditions in Thailand. Without strong evidence that rollerblades are on a long-term growth trajectory, I do not think that Blades should get into the Thai market. The company needs to retain the ability to exit this market quickly should the Thai economy -- or just rollerblade demand -- turn south rapidly.

3. I do not believe that Blades should renew its agreement with the Thai retailer for the next three years. The deal exposes Blades to significant exchange rate risk. The company's deals with the Thai supplier should be in dollars, putting the currency risk on the Thai company. The current deal would force Blades to find ways to produce at a low enough price to be profitable. If the baht weakens, then the amount of baht that the retailer pays Blades will be worth increasingly less over the coming three years. It may be very difficult to supply these rollerblades at an acceptable level of profit when the revenue is steadily declining.

The tradeoff is that Blades might lose the Thai contract. This is currently worth a substantial amount of money, and there are other competitors that might be willing to enter the Thai market Blades' place. So there is risk that this revenue stream could disappear if Blades is unwilling to make a long-term deal. However, if the terms of the 3-year deal are the same as the current deal, it is too risky for Blades to sign this deal and I would recommend against it.

4. The Thai government should view the establishment of a subsidiary by Blades as positive. If they are viewing the issue rationally, Blades is likely to create jobs. In addition, Blades is likely to introduce new and valuable technology to the company as well. This would benefit Thailand in the short and long run. However, Thailand has a high level of corruption, so government officials may be more concerned with the benefit to themselves than to the country as a whole.

There are two views with respect to purchasing an existing company or starting a new one. If a subsidiary is purchased that would have otherwise gone out of business, the Thai government should view it favorably as new jobs would be created. However, if the local partner does not have equity, the Thai government may prefer to favor a company that does have some Thai ownership. A firm with 100% foreign ownership is less likely to benefit the Thai economy than one with Thai ownership, particularly where technology transfer is concerned.