14 Feb., 2000Group #31 Surviving in an ISI Business Climate How the Functional Areas of Firm Strategy Must Be Adjusted or Aligned to Survive in a Business Climate Characterized by ISI Policy

14 Feb., 2000Group #32 ISI Toolbox Industrial Policies –State Owned Firms –Mixed Enterprises –Require Govt. Purchases From National Firms –Pressure Foreign Firms to Increase Local Content –Direct Government Investment in Key Industries International Instruments –Tariffs on Final Goods –Quotas on Imports –Exchange Rate Overvaluation –Import Licenses

14 Feb., 2000Group #33 ISI Toolbox (cont.) Fiscal and Monetary Policy –Subsidies for Cheap Inputs –Subsidies for Public Transportation –Tax Breaks in Production –Preferential Interest Rates –Accommodating Monetary Policy

14 Feb., 2000Group #34 Strategies to Survive Under ISI Finance Operations Marketing Legal Human Resources Take Advantage of Low Interest Loans (Leverage) Negotiate Favorable Tax Treatment Use Short-term Horizon to Evaluate Projects Use Transfer Pricing to Avoid Taxes and Profit Repatriation Restrictions Plan Obsolescence to Take Advantage of Short-term Tax Benefits (e.g. Build a Factory and Plan to Abandon It When Tax Benefits Run Out) Match Market to Import/Export Restrictions Price Below Transfer Price (i.e. Dumping) Target Govt. Prioritized Industries Hire a Local Lawyer with Connections Choose Most Beneficial Type of Entity Political Lobbying Bribes Train Local Staff (Nationals) to Take Over Roles of Ex-patriots at Much Lower Wages Joint Venture Licensing Smuggling

14 Feb., 2000Group #35 Key Foreign Investment Risks: Rapid Change in the Rules of the Game Sudden Nationalization of Industries –Venezuelan Oil & Chilean Copper Unexpected Restrictions on Expatriating Profits Foreign Currency Convertibility (Mexico, Brazil) Political Regime Change –Loss of Your Allies –You’re Perceived as Previous Regime’s Darling –More Changes in Economic & Legal Rules –Eventual Retreat from ISI

14 Feb., 2000Group #36 Discussion Questions Under ISI, which Latin American countries would make the most/least attractive investments? Which industries would you invest in? What’s your optimal investment strategy?

14 Feb., 2000Group #37 Possible Answers Under ISI, which Latin American countries would make the most attractive investments? –Largest, most advanced economies, w/ sufficient local demand for your product But these economies are the most able to develop their own industries, and least willing to let you in (e.g., Brazil’s protection of its computer industry) –Countries within free trade zones Mexico’s Maquiladoras Fiat’s Argentine & Brazilian automobile plants

14 Feb., 2000Group #38 Possible Answers Which industries would you invest in? –Capital Intensive Projects such as Public Transportation? Manufacturing? Telecom? But such investments might lead to losses w/ sudden regime change –Or Offshore Banking for the Region’s Wealthy? What’s your optimal investment strategy? –Joint venture, joint venture, joint venture!

14 Feb., 2000Group #39 QUESTIONS?