Foreign Direct Investment

Foreign Direct Investment has risen drastically in the last twenty years in many developing countries, and is currently considered as a source of economic stimulus in these nations (Carkovic  Levine 2002, p.48). The Direct Foreign Investment is mostly from the Asian companies as well as from other countries in the EU. The growth in the Foreign Direct Investment coincides with the reduction in the differences in economic growth of developing and developed countries (Mwilima, 2003, p.54). Libya has also not been left out in the growth of Direct Foreign Investment in its economy.

This paper is interested in analyzing the impact of Foreign Direct Investment in small and medium business enterprises in Libya. Looking at the trend in the recent years, research has shown that there has been increased Foreign Direct Investment by foreign companies in the small and medium businesses in Libya. There has been increased influence of this investment in the business arena in the Libyas economy. This paper will try to explore various roles played by the Direct Foreign Investments and their impacts in the businesses operations.

Research Problem
There has been increased Foreign Direct Investment in the small and medium business enterprises in Libya (Otman Karlberg, 2007, p.246). However, there is no adequate information available that can be used to gauge the performance of these investments in the overall economy of the country. Due to this problem in the country economic planners find it difficult to account for the impacts of these Foreign Direct Investments in the businesses. The information gap has made it difficult for government in planning. The Libya government is not sure whether to encourage or discourage these investments in the economy. This paper will try to bridge the information gap so that the government can have adequate information for national planning. 

Objective of the Research
Broad objective
To determine the Impact of Foreign Direct Investment in Small and medium business enterprises in Libya
Specific objectives
To determine the effect of Foreign Direct Investment in the growth and development of small and medium business enterprises in Libya
    
To determine the major types of business that Foreign Direct Investment has been invested in.
To determine the major countries which are source of Foreign Direct Investment invested in small and business enterprises in Libya
Hypothesis
    
Direct foreign investment has a positive impact in the growth and development of small and medium enterprise in Libya.
Most of direct foreign investment invested in small and medium business is channeled to the industrial sub-sector.
Most of the Direct Foreign Investment invested in small and medium scale business enterprises in Libya originates from EU.

Literature Review
 Direct foreign investment (FDI) is said to play an important role in the growth and development of business in the developing countries (African Development Bank 2004, p.12). Many studies have shown that it provides business access to new technology, cheaper production facilities, and new management skills (Dunning  Narula, 1999, p.26). Foreign Direct Investment is where a firm from one country makes physical investment in another country (Goldstein, 2003, p.14).

Supporters of foreign investments point out that that Direct Foreign Investments gives benefits to both the giving and the receiving countries. They argue that there are usually mutual benefits that accrue from these investments. Opponents of DFI point out that multinationals give stiff competition to business in weaker economies thus forcing the local enterprises out of business.

There has been rapid growth in the FDI in the developing countries, especially in Africa, which is remarkable before FDI was held with suspicion which made many countries to put strict regulations on its use in financing project (Pigato, 2000, p.24). Globalization and trade liberalization have made the FDI to grow in the recent years. The balance of payment data shows that between 1988 and 1990 the annual FDI investment in middle income countries grew from 17bn to 139bn. The East Asia countries attract the highest amount of FDI despite the current financial crisis (UNCTAD 1995, p.15).

Most developing countries have come to a consensus that FDI can be an important resource to the growth and development of weak economies (United Nations Conference on Trade And Development 2002, p 8).  This realization has made many countries to start competing for FDI, which has made these states to set up bodies that encourage the flow of FDI and also lessen the regulations governing FDI in their countries (United Nations Conference on Trade And Development, 1999, p.21).

Libya is a country that had for a long time blocked the FDI flow in its economy, which according to research shows that it affected the economy in a negative way. In the recent years, the country has lifted these regulations and encouraged the FDI flow in the economy, especially in the small and middle level business enterprises.

RESEARCH METHODOLOGY
This chapter will focus on research methodologies adopted by the researcher, which involve data collection methods, procedures, sampling techniques used, population size and the administration of the methodologies. In this view, the researcher shall be able to obtain the required information in a systematic manner.

Research Design
A case study approach will be adopted which will involve intensive analysis of various aspects of FDI and the role they play in small and medium scale business in Libya. The overall purpose of a case study is to obtain comprehensive information about the research object. Its primary advantage is the opportunity it affords for thorough and detailed examination analysis of research problem so that findings can be applied directly to object inquiry. It also allows precise judgments of facts and cause of certain phenomena.

Target Population
It is imperative that the population to be studied before the research is carried out.The research will adopt the method of choosing entrepreneurs of small and mediums businesses through random sampling technique. The target population will be 300 small and medium size enterprises to adequately analyze the impact of FDI in their operations. The sampling size will be based on purposive sampling whereby a sample size of 50 small and medium size enterprises will be used for the study. The sample size is chosen to ensure that adequate information will be obtained for the study. It is meant to enhance convenience, effectiveness and efficiency as well as minimizing chances of errors in data collection and analysis. Also, the research boundaries within the firms and implies that the research will be carried out fairly and easily within the given time limit and financial constraints.

Sampling Techniques and Procedures
Quota sampling method will be adopted in obtaining the sample from each enterprise which is intended to constitute the entire sample required by the researcher, the study will be confined to selected participants to ensure that the research is thorough and has a manageable sample size. Further, it meant to give comprehensive and accurate information collected and therefore makes the sample size a representative of the population under study.

Financial Decision Making

PurposeTo provide a critical review on the development and evolution of different appraisal methods, their significance to a company and the need for the company to revise the existing policy for evaluating future capital projects. RecommendationThe company should use DCF techniques for investment appraisal.
Prepared byManaging Director INVESTMENT APPRAISAL DECISIONS A BRIEF REVIEW

Companies in todays world are always looking at ways to develop and change. This compels the senior management to be faced with a variety of different proposals. This is of critical importance as the companies only have limited resources available with investors only willing to offer limited amounts of finance. The managers are therefore face the need to decide which proposals to undertake. Investment appraisal refers to a process of identifying investments that result in maximizing the profits of a company from its investments, resulting in an increase to the wealth of shareholders.
The has been defined as
The theory of capital budgeting reconciles the goals of survival and profitability by assuming that management takes as its goal, the maximization of the market value of the share holders wealth via the maximization of the market value of ordinary share (Drury 2000)

The investment appraisal decisions usually involve planning for the expenditures required to undertake a project (initial and over its total life), and the revenues a company expects to generate from such investment. Investment appraisal can also be defined as a trade off between current funds for future benefits.
Almost every capital investment project passes through 3 stages of development
Project definition
Financial valuation
Implementation and review.
The techniquesmethods generally used by the managers for evaluating capital budgeting decisions can be categorized into two basic methods

Traditional Non-DCF methods
Payback method.
Accounting Rate of Return (ARR).
DCF methods
Net Present Value method.
Internal Rate of Return.
Discounted payback.

NEED FOR HAVING A CORPORATE POLICY FOR INVESTMENT APPRAISAL
The process of making capital investment decision policy is critical to companies because it has an impact on the availability of resources and shareholders wealth. It is of utmost importance that a company should make best possible use of its resources and make best possible decisions. This is only possible when the financial managers are aware of the risk and uncertainties in the environment. Such decisions necessarily involve an element of risk as there is always some uncertainty relating to the future cash flows of the project and the companys cost of capital.

It is therefore necessary for a company to have a corporate policy for the identification of investment appraisal projects that takes in to account the related risks and expected cash flows associated with the project and provide information that is relevant for decision making.

SIGNIFICANCE OF INVESTMENT APPRAISAL DECISIONS TO A COMPANY
Investment decisions are considered as the most critical aspect when defining success for a company. These decisions affect the future profitability and the availability of resources for a company. If not taken prudently they might endanger the continuity of a company and may exhaust availability of cheaper sources of finance for a company.  The success of many businesses mainly depends on the utilization of resources available to them. The choice of choosing between capital investment projects for a company starts with the objective of adding to the market value of the company by choosing viable investment and financing decisions.

The key responsibility of the financial managers is to select the most profitable choice among all the available capital investment options. This is critical to the companies in two ways first, such decisions have an effect on the operations and profitability of the company in periods beyond current year, secondly one of the major concepts in modern financial managements associates the market value of a company as equal to the discounted value of the future cash flows it expects to yield from its investments in projects.

For organizations, decisions regarding commitment of resources have implications on many aspects of operations in a corporation. Investment appraisal is not only critical to the financial managers but is also essential to people throughout the company.
The investors of a company prefer to get rich not poor, this is why they expect from the managers of the company to invest in every project that is expected to pay more than what it is actually going to cost. (Richard and Stewart 2007)

ANALYSIS OF THE INVESTMENT APPRAISAL METHODS

A) PAYBACK Payback method compares the amount of time a project takes to recoup its initial investment in other words, it is the period of time taken by a project to equate projects inflows to the projects outflows.
The payback method for evaluating investment appraisal projects is one of the most popular techniques used by managers. Payback method is mostly as a first screening method when deciding for investment in a capital project. The payback for a particular project is compared with the companys targeted payback.
This method however has certain drawbacks, such as
The method doesnt incorporate the effect of time value of money when comparing projects.
It ignores the future profitability of projects i.e. cash flows from the projects after it recoups its initial investment are not taken in to consideration at all.

It is unable to distinguish between projects with same payback period.
Payback method should not be used in isolation as it may cause the company to invest in projects that have a negative NPV.

B) ACCOUNTING RATE OF RETURN
This method attempts to calculate the rate of return an investment should yield if it has to be undertaken. If this rate exceeds the companys targeted rate of return the investment is undertaken.
This method provides the financial managers a quick and simple way of calculation and looks at the entire life of a project (investment), however there are certain disadvantages such as
It is based on accounting profits and not cash flows (accounting profits are based on certain cash and non cash income and expenses, or both)
It ignores the time value of money.

C) NET PRESENT VALUE
Net present value differentiate between products, recognizing the concept of time value of money, i.e. 1 received today worth more than a 1 received tomorrow. This is because 1 received today, can be invested by a company in a project that starts earning immediately. The method discounts (present value) the future cash flows that a company expects to earn from a project using it cost of capital. This present value is then compared with the present value of all the cash outflows (initial and subsequent), thus if the discounted value of the future cash flows exceed the required investment, the investment is considered worthwhile.

D) INTERNAL RATE OF RETURN
Internal Rate or Return (IRR) method of investment appraisal attempts to determine the total yield on an investment, by attempting to find a rate that equates the initial cost of an investment with its cash flows in the future years, i.e. it is the rate at which the NPV is zero. IRR is calculated using interpolation and rationalizes accepting the investments for which the IRR exceeds the target rate of return.
IRR is easily understood by both financial and non financial managers, however one of the drawbacks of IRR is that it ignores the relative size of the investment, i.e. two projects with different volumes of initial cash outlay and future cash inflows may have same IRR.

E) DISCOUNTED PAYBACK   
Discounted payback method takes in to account the time value of money and calculates the time for a project to pay for its initial investment based on the present value of the cash flows expected from the project. The method however, cannot estimate how profitable any investment would be.

F) OTHER METHODS
In addition to the techniquesmethods discussed above there are other advanced techniquesmethods for e.g. CAPM, which also account for the risk in an investment before analyzing it viability for the company.

SURVEYS OF CURRENT PRACTICES
Many survey authors and books have expressed concerns over the use, of techniques that do not use discounted cash flows, by the respondents. As Dopuch et al. (1974) states it seems reasonable that a discounting approach to investment analysis is to be preferred over a non-discounting approach.
Further Bierman and Smidt (1993) argued that measures which, do not involve the use of discounted cash flow method can give rankings of investments that are obviously incorrect.

Similarly, they concluded that non-discounting methods are inappropriate and that the net present value rule should be employed in preference to other techniques discounting cash flows. (Brealey and Myers 1991)
In a survey of large UK companies carrying on capital budgeting decisions, it has been noted that there has been a significant increase in the number of companies switching to Discounted Cash Flow (DCF) methods of investment appraisal for evaluating their capital investment decisions. They identified that 75 and 85 of UK firms are now applying Net Present Value (NPV) and Internal Rate of Return (IRR) respectively. (Pike 1996)

A most recent study in UK by Arnold and Hatzopoulus (2000) revealed that DCF techniques have taken over as most widely used techniques by larger firms they reported almost 96 of the firms using NPV or IRR techniques.

Based on the evaluation of the above discussed investment appraisal methods and current practices evident from various survey results it is an obvious step for the company to change its policy of evaluating investment proposals from traditional Pay Back and Accounting Rate of Return methods to DCF methods for investment appraisal as DCF techniques apply discounting arithmetic to the expected future cash slows from an investment to determine whether the investment is expected to earn a satisfactory return for the company.

They also offer a number of benefits over the other appraisal methods.
They explicitly and systematically incorporate the time value of money concept.
They take in to account all relevant cash flows of the project.
Payback method however can be used as the first screening method in conjunction with DCF methods of investment appraisal.

Also based on the discussion above, the company should undertake investment in the proposed project as it has a positive NPV of 5.088 million, with an IRR of 24.02 that is higher than the current cost of capital for the company.

Current Stimulus Package

The current financial crisis that we find ourselves in, today, referred to by many as an economic meltdown or credit crunch, is considered to rival the Great Depression of the last century. The beginnings of this crisis can be traced back to the sub-prime mortgages in the United States. Once considered by financial institutions as one of their more profitable operations, the sub-prime mortgage business started to unravel in the beginning of the year 2007. In February, the Federal Home Loan Mortgage Corporation (Freddie Mac) announced that it will no longer acquire the sub-prime mortgages and related securities with the highest risk levels. Soon after that, New Century Financial Corporation, a leading sub-prime mortgage lender in the United States, started proceedings for protection under the now infamous chapter 11 bankruptcy laws (Wall Street Journal 123).
   
To add to the woes, news came that the Federal National Mortgage Association (Fannie Mae) was facing a crisis too. Before going into further details of the economic turmoil created by the sub-prime mortgage crisis, it is important to understand what exactly sub-prime mortgages are and what exactly did these two corporations, central to the crisis, actually do.
   
Basically, the difference between a prime and a sub-prime mortgage stems from the credit of the borrower. In the United States, a borrower with a FICO score of less than 660 was considered to be sub-prime. Another form of instruments that played a major part in causing the sub-prime crisis is an Alt-A mortgage. A mortgage in which the quality of the mortgage or the underwriting is considered to be deficient is referred to as an Alt-A mortgage. These deficiencies may include the lack of proper documentation, low or no down payment, basically, anything that makes the mortgage more likely to default than a prime mortgage (Brooks and Simon 12).

Edward Pinto, a former credit chief officer for Fannie Mae says that the start of the sub-prime crisis goes back even to 1993 when both Freddie Mac and Fannie Mae started to purchase risky loans and represented them as prime mortgages while they actually were sub-prime or Alt-A mortgages. Fannie Mae has admitted to this practice in a third quarter 10-Q report in 2008 (Wallison 9-13).

It is easy to understand why such a practice is being referred to as one of the principal causes of the financial crisis that the world is in today. The market, particularly, rating agencies and investors, was unaware of the actual number of sub-prime or Alt-A mortgages which had infested the financial system in 2006 and 2007 (Wallison). The majority of these mortgages were in the possession of Freddie Mac and Fannie Mae. As of 2008, the total sub-prime and Alt-A mortgages outstanding was around 26 million, out of which a whopping 10 million were held or guaranteed by Freddie Mac or Fannie Mae. 5.2 million was held by other government agencies while the four largest US banks held or guaranteed 1.4 million of these sub-prime or Alt-A mortgages (Brooks and Simon 12).

The securities issued by these organizations understated the actual amount of sub-prime and Alt-A mortgages that formed the underlying instrument. As a result, credit rating agencies, issued higher ratings to these securities based on the historical rates of default common among prime mortgages. However, since a large part of the mortgages labeled as prime were in fact sub-prime or Alt-A, the actual rate of default was much higher. When these actual rates started to show themselves in 2007, it became apparent that the securities had been wrongly classified and when losses began to show, the investors lost all confidence in the ratings mechanism. As a result they fled the market for mortgage backed securities, even for all sorts of asset backed securities, causing the mortgage backed securities market to collapse in its entirety (Wallison 124).
   
The US government sprung into action under President George Bush and the Housing and Economic Recovery Act of 2008 was passed by the United States Congress on the 24th of July 2008. The act has been primarily designed to allow the US government to address the financial crisis ebbing from the sub-prime mortgages. The act is intended to restore the public confidence in Freddie Mac and Fannie Mae and authorizes the Federal Housing Administration to guarantee 300 billion in new 30 year fixed rate mortgages for sub-prime borrowers. It also authorizes states to refinance sub-prime loans using mortgage revenue bonds. The Act also establishes two new federal entities, the Federal Housing Finance Agency out of the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight.

On the 7th of September 2008, James Lockhart, the director of the Federal Housing Finance Agency (FHFA), announced that Freddie Mac and Fannie Mae were being placed under conservatorship run by the FHFA. The decision received public support by Henry Paulson, the then United States Treasury Secretary and Ben Bernanke, the Chairman of the Federal Reserve Bank.

When these two organizations were first bailed out in September 2008, the Congress had put in place a 200 billion limit, a 100 billion for each as the federal assistance. Last year the Congress revised its estimates and raised this limit to a total of 400 billion. On Christmas eve 2009, the Treasury once again revised its estimates and removed the 400 billion cap for the amount of assistance the government believes will be needed to keep Freddie Mac and Fannie Mae in business.  (Hagerty and Holzer,pp.98-100) 

Many observers believe that when back in 2005, the Senate Banking Committee had adopted tough regulatory legislation which would have led to more auditing requirement and a higher degree of oversight and scrutiny for the two organizations, could have saved America from the sub-prime debacle. However, the legislation was passed out of the committee and never came to vote (Wallison 12).

The issues underlying the Freddie Mac and Fannie Mae debacle are numerous. The companies have already stated that they will only be able to pay the preferred dividends they owe stockholders by further making more borrowings. Even though the companies are still no where near profitable, the Government needs them to prevent foreclosures on default mortgages. The government has directed both the organizations to pursue this loss-incurring strategy and this is the reason why the Treasury had to lift the cap from the limit on financial assistance (Wall Street Journal 123).

As confusing as things already are, the picture gets even more blurry. The outlays on Freddie Mac and Fannie Mae are still not being accounted for as federal outlays, even though the government basically controls both organizations. Even more worrying is the fact that the combined loan of 5 trillion in mortgages that are part of the two companies balance sheet is not being accounted for as part of the national debt (Wall Street Journal 12).

Political critics of the Obama administration are also calling the timings of the removal of the cap a subterfuge. After the 31st of December, the administration wouldve needed the consent of the Congress to increase the exposure of the taxpayers beyond 400 billion (Wall Street Journal).
Another reason behind the removal of the cap is the phenomenon known as rolling the dice. Interestingly enough, this is also being touted as one of the reasons that caused the sub-prime mortgage crisis in the first place. With a multitude of players including the Federal Housing Administration, both Freddie Mac and Fannie Mae and a host of Wall Street banks, all competing for loans to create mortgage-backed securities, the incentive to lower risk measurement standards was very high (Wallison 95-100).

On Christmas Eve 2009, the Treasury also took a lenient view of a key requirement of the 2008 bailout package. The Treasury does not require Freddie Mac and Fannie Mae to shrink their own portfolios of mortgages, which go up to a combined total of 1.5 billion. Consequently, risk taking will increase and the two troubled organizations will again indulge in rolling the dice (Timiraos 45-48).

The crisis in the housing industry and the problems associated with managing Freddie Mac and Fannie Mae were not the only outcomes of the whole sub-prime mortgage fiasco. On the contrary, this was just the beginning of a difficult period for the global economy as the aftershocks from the failure of two Americas biggest financial institutions set off a reaction that toppled banks worldwide and tested governments all over the world.

Bear Stearns, the fifth major Wall Street bank was the first victim. Bear Stearns was one of the banks which had heavily invested in the incorrectly rated mortgage-backed securities. By the time the whole sub-prime mortgage fiasco became public knowledge the crash had already begun and the cash strapped Bear Stearns went running to the Federal Reserve which was able to offer a lifeline in the form of an emergency funding deal in collaboration with JP Morgan Chase  (Wallison 12-14).

While the emergency funding line may have rescued the failing bank from bankruptcy, it was not enough to restore the markets confidence. In short, investors simply retreated. Bear Stearnss stock fell down by more than 45 and lost market capitalization to the tune of around 3.2 billion. The news also had an effect on other financial stocks and markets across the globe experienced a sharp downturn as Wall Street started to wobble. The Dow Jones index went down 194 points and the FTSE Eurofirst 300 index, which comprises of companies from all over Europe, went down 1.1. In both the indexes, the fall was led by the stocks of banks and financial institutions (Craig, McCracken and Lucchetti 56).
   
The Federal Banks decision to come to the rescue of Bear Stearns had a sort of a signaling effect on the financial markets. Market participants believed that in case other banks and financial institutions found themselves in the same situation, and there were signs then that this was very probable, the United States government and its agencies, and perhaps others, would come to their rescue as well (Wallison 45).
   
As the world was soon to find out, this was not to be the case. When Lehman Brothers found itself in troubled waters and unable to find a buyer, the Federal Reserve and the US government stood by while the fourth largest bank on the Wall Street filed for bankruptcy. Had the market participants believed that the government would not rescue any more banks, they might have had perhaps hedged themselves better against counterparty risk and the repercussions of the failure of Lehman Brothers might have been controlled. This is an entire debate and one that is futile for now  (Wallison 45).
   
After the fall of Lehman Brothers, market participants realized that they had to take stock of their counterparty risk and this realization led to the freezing of inter-institution or inter-bank lending. This freeze, many analysts believe, is the actual start of the financial crisis that was to devastate economies across the globe  (Karnitschnig, Solomon and Pleven).
   
Sunday, the 13th of September 2008, proved to be a crucial day for the American financial markets. With the governments refusal to provide a financial backstop for Lehman Brothers, two of the most potential buyers, Barclays PLC and Bank of America dropped out of the picture. On the same day, Bank of America took over another Wall Street giant, Merrill Lynch for 50 billion, buying every share each for a price of 29 (Craig, McCracken and Lucchetti 78).
   
As the negotiations concerning the sale of Lehman fell apart and the news spread, brokerage firms, traders and hedge funds started to gauge their exposure to Lehman and to separate themselves from trades with the unfortunate bank. Lehmans specialists traded in about 200 blue chip stocks and regulators rushed about trying to reassign them to the remaining brokers to facilitate trade on Monday when the New York Stock Exchange would open (Karnitschnig, Solomon and Pleven 98).
   
Other banks and financial institutions also sprang into action and a group of 10 major commercial and investment banks announced that they would form a pool to create their own borrowing facility. Made up of about 70 billion of their own money, would use the pool to try and ride out the looming crisis. Major players in the pool included the Citigroup Inc., Credit Suisse Group and Deutsche Bank AG also reaffirmed their commitment to mitigate the market volatility (Craig, McCracken and Hilsenrath 65).
   
Another cause of concern for Wall Street honchos on that fateful Sunday was American International Group Inc (AIG). Executives at Americas largest insurance giant worked the weekend trying to raise 40 billion they thought were necessary to avoid a downgrade of its credit rating which wouldve proved to be very costly for all stakeholders. 
   
The crisis intensified on Monday as the credit rating of the insurance giant was downgraded and AIG was forced to post 14.5 billion as collateral. The Treasury and the Federal Reserve decided on Tuesday that the consequences of letting a giant such as AIG fall would be too far widespread and could prove to be catastrophic for the American economy. Under the terms of the agreement, the Federal Reserve will lend 85 billion to AIG while obtaining control of 79.9 of its shareholding through equity participation notes, a form of warrants  (Craig, McCracken and Hilsenrath 63).
   
September 2008 will be remembered as the month in which the landscape of Wall Street was changed forever. Two of the largest independent brokerages firms were swept out of the picture while the government was forced to engineer rescues that will allow it to influence and control the housing and insurance industries for the years to come.
   
On 17th February 2009, President Barrack Obama signed the 787 billion economic stimulus package into law. The package is designed to address core issues with investments in healthcare, energy, infrastructure, education and is touted to create or save as many as 3.5 million jobs. The package also contains a variety of tax cuts, approximately amounting to 282 billion. The White House has also promised unprecedented transparency and accountability  (Meckler 91).
   
The US President has the unenviable task of ensuring that stimulus package is enough to put the American economy back on track and the American people back to their jobs. A year into the stimulus package and President Obama is facing lower and lower popularity ratings but remains a staunch supporter of his stimulus package.

According to the Centre for the Study of Financial Innovation (CSFI) (2005), a robust financial regulatory climate exists in London, but when compared to other cities, London was ranked higher than Tokyo, in terms of regulatory efficiency. The study further revealed that London, compared to Tokyo, had a much larger pool of financially savvy, experienced international finance staff and executives, whose first language is English, which also happens to be the worlds primary business language (Mainelli, 2006). A majority of the respondents from the Corporation of Londons survey, also said that despite the active oversight authority in London, regulators there were generally fair, because the Financial Services Authority (FSA) in the UK listens and considers all points of view, before taking action. This Wimbledon effect (Mainelli, 2006, p. 4), was cited by respondents, as being very reassuring. A predictable oversight atmosphere is also conducive to a stress free and stable work environment in London, compared to Tokyo. As a result of this, employees in financial services firms complete more trades per day, compared to their Japanese counterparts (Slater, 2004)

I admit I have a penchant for business and trading.  Not a single day goes by without me reading up on the latest fashion trends and marketing techniques.  Having parents who are trading agents for a shoe company, I have been immersed in the trading and retail industry since I was little.  As such, it becomes second nature for me to spend most of my time navigating around the shopping malls, exhibition centers and fashion shows to help them design shoes.  It was from these early memories that I developed a keen sense of understanding for business and started to dream that one day I can be a successful banker.

I have always seen my success as being hinged on my ability as a manager.  As the boss of a Japanese clothing store on Yahoo Shopping, I have had the challenge and opportunities to not only apply my initiative to harness new technologies but also to develop new management techniques.  It was through this that I was able to not only cost down several of the retail items but I also improved marketing and visibility of the store through the internet and social networks.

Prior to me taking over the business, the retail market in Japan was struggling, particularly for clothes.  The basic operation model is that the seller flew to Japan and brought clothes back to Taiwan.  It was pretty difficult to predict which kinds of clothes would be welcomed by the consumers and thus translated into high costs including the business trip fees and risks of storage, making the prices too high to afford.  Realizing this, I reversed the condition by making use of technology and the Internet. I utilized the tactic of cutting down the profit margin to sell more.

The first step was just like other sellers, I went shopping for the newest fashion in clothes.  However, I used myself as model, putting on the clothes, taking the pictures and then uploading these pictures to the Yahoo Shopper.  By checking my website everyday, I traced the orders of the buyers and control the costs of storage.  Obviously, the competitive power of my store sales and my customer number surged in a short time.  The end was that more and more sellers imitated my operation model.

Through this experience, I feel that I have demonstrated a firm grasp of the cost downapproach as well as my business acumen.  The success I experienced with my store is but the beginning of my journey.  Given the success of my fledgling business career, I decided to embark upon this quest to further hone and improve what talent I had in this field to eventually become the Head of the Treasury Department.  I decided that I needed to get the training and experience that was necessary for me to realize my dream.  I believe that everyone has dreams in different life stages and it is only in the pursuit of these dreams will people never feel regret.  I have seen a childhood dream of mine come true and look forward to setting another benchmark which is getting this MBA.

Management Report

The Export-Import Bank of the United States (EIB) is a governmental export credit agency.  The agency refused to approve of loans and guarantees to three American firms in the process of obtaining contacts to participate in the construction of the Three Gorges Dam in China.  This management report analyzes the decision of the EIB.  It is determined that the decision was an ethical one, as it was based on scientific reports that the construction of the Dam would be an environmental disaster for the people of China.  Contrary opinions are considered through this report.  The fact that the Chinese government acknowledges that the construction of the Three Gorges Dam is environmentally dangerous substantiates the intelligent stance of the EIB.
  
Export credit agencies support domestic firms to export their products or services (Esty  Sesia, 2007, 11).  On the other hand, the International Finance Corporation, an institution of the World Bank Group promotes economic growth in developing countries mostly by investing in sustainable private corporations in these countries without requiring guarantees from their governments (International Finance Corporation, 2010).  Whereas the entire World Bank Group made financial commitments worth only 19.3 billion in the year 2000, export credit agencies around the world make investments worth 100 to 200 billion each year.  Referred to as the driving force of the global economy, these agencies use taxpayer dollars to make it both less risky and cheaper for domestic companies to invest or export abroad.  They do this by providing credit and loans to developing nations so they can buy from rich countries.  They also provide insurance or guarantees to reimburse exporters or banks should they suffer losses in poor countries (Goldzimer, 2003).
    
The Export-Import Bank of the United States (EIB) is a government-owned export credit agency (Goldzimer).  The agency refused to provide loans and guarantees for the construction of the Three Gorges Dam in China (The U.S. Export-Import Bank and the Three Gorges Dam, 2000, 1).  Export credit agencies of Canada and various European nations agreed to finance the project nevertheless (Schucking, 1998).  In this report, we analyze EIBs managerial decision to refuse finance for the building of the worlds largest dam in China (Hvistendahl, 2008).      

EIBs Refusal to Finance Contracts for the Three Gorges Dam 
As China demanded loans and export credit guarantees before foreign contractors could participate in the construction of the Three Gorges Dam, three U.S.-based companies, Caterpillar, Voith Hydro and Rotec Industries were refused guarantees and loans by the Export-Import Bank of the United States.  The Bank was set to refuse all domestic companies for the project, the reason being that the construction of this dam is environmentally hazardous (The U.S. Export-Import Bank and the Three Gorges Dam, 1-2).  Schucking writes that the United States is the only country that has clear cut environmental and social standards for its export credit and investment insurance agencies.  In fact, the chairman and president of the EIB, Martin A. Kamarck would refuse to approve finance and guarantees for the Three Gorges Dam today just as he did back in 1996 (The U.S. Export-Import Bank and the Three Gorges Dam, 2).  Today, even the Chinese government acknowledges the fact that the Three Gorges Dam is an environmental catastrophe endangering millions of lives as it triggers landslides, alters ecosystems and causes various other environmental problems (Hvistendahl).
    
Esty (2003) states that ethical standards must be applied in project finance decisions (6).  Kamarck had made the correct decision to refuse loans and guarantees for the Three Gorges Dam, and Dick Shoemaker, heading the United Automobile Workers at Caterpillar had made a perfectly reasonable statement connecting U.S. taxpayer funds to an unethical project, thereby support Kamarcks decision.  Even the Deputy National Security Adviser to President Clinton had said that the United States does not wish to fund or back a project that raises human rights as well as environmental concerns.  However, Dennis Hastert, an Illinois Congressman did not have ecological and human rights concerns on his mind when he stated that it is best for the EIB to support American companies for the project in China regardless of politics (The U.S. Export-Import Bank and the Three Gorges Dam, 2-3).  As a matter of fact, EIBs decision not to back the construction project had nothing to do with the political relationship between the United States and China.  As Kamarck explained, the EIB was backing several projects in China at the time (The U.S. Export-Import Bank and the Three Gorges Dam, 2).  The decision not to finance the construction project was a matter of principle.  According to Kamarck, the project did not meet EIBs environmental guidelines (The U.S. Export-Import Bank and the Three Gorges Dam, 2).  Had the construction project met EIBs guidelines, the export credit agency would not have refused loans and guarantees to domestic companies seeing that America is a business leader that would always try to strengthen its economy. 
    
Donald Manzullo, another Illinois Congressman, had remarked that EIBs refusal to back the project in China would hurt the American economy (The U.S. Export-Import Bank and the Three Gorges Dam, 9).  His opinion was as uninformed as that of Hastert, given that EIB management has the best interests of the U.S. economy at heart.  In fact, EIB serves to promote American goods and services abroad (The U.S. Export-Import Bank and the Three Gorges Dam, 3).  Mocking the decisions of EIB management must be considered an instance of negative politics.  Regardless of the extent of profits expected by Caterpillar, Voith Hydro and Rotec Industries through their contracts in China, the decision made by the EIB management must be respected (The U.S. Export-Import Bank and the Three Gorges Dam, 2-3).  Despite the fact that the Three Gorges Dam was expected to become a major source of renewable power for an energy-hungry nation, the decision of the EIB management was an informed one, as scientists from around the world had already warned of the dangers of constructing the dam (Hvistendahl). 
    
At the time that the EIB management decided not to support domestic companies to participate in the construction of the Three Gorges Dam, the Chinese government was defending the project (Hvistendahl).  But, the EIB relied on an assessment prepared by its Engineering and Environment Division, according to which the project raised serious questions concerning population relocation, protection of the natural ecology, water qualityandmitigation of the effects of natural disasters (The U.S. Export-Import Bank and the Three Gorges Dam, 6-7).  The United States government took a wiser stance toward the project than the Chinese government at the time.  In the economic sense, hurting the Chinese population to build a dam would reduce the capacity of Chinese human resources, which in turn would hurt the global economy.  Scientists had warned that the dam construction would increase disease and lead to a reduction in biodiversity to boot (Hvistendahl).  Although scientists words fell on deaf ears in China, the United States EIB management made an environmentally and economically sound decision, bearing in mind that all ecosystems are linked and environmental problems in any part of the world tend to adversely affect the entire planet  a fact that is widely known today (Hvistendahl).
    
Indeed, disregard for environmental problems in China would have eventually hurt the American economy.  Had the EIB decided to grant loans and guarantees to domestic companies for their participation in the construction of the Three Gorges Dam, the Chinese people hurt by the construction would have blamed all export credit agencies, including EIB, responsible for the project.  Furthermore, companies based in the United States would have lost countless valuable customers in China had the construction project adversely affected the latters lives.  By making an ethical decision, the EIB had aligned itself with the United States political and economic goal to remain as a political and business leader for developing countries and emerging markets to continue looking up to.  Manzullo and Hastert had a limited view of the American political economy when they criticized EIBs decision to refuse to back the construction project in China. 
    
According to Esty, project finance is meant to increase the value of a project (1).  As the Three Gorges region is a development hub at present, it is a serious mistake to finance a project that is expected to have detrimental effects on society, environment and the economy (Hvistendahl Goldzimer).  The EIB management understood that it would not be adding value to a project by providing loans and guarantees for the Three Gorges Dam.  Rather, in this case, project finance would have reduced the value of the project in question.  The Chinese governments acknowledgement of the fact that the Dam is dangerous is further proof that the project was essentially worthless.  Moreover, all export credit agencies should follow the example of EIB before making decisions to finance projects with the potential to harm the world.   

In this Modern Furniture Company case, there are relative issues to be tackled in order to implement strategic and long-term planning that will enable the company to stand firm amidst all crisis that will come its way.  The primary concern of the Board of Directors and Executive Committee is to ensure the companys long-term survival (CourseSmart, 2010).  The most important aspect of  a companys existence is the proper management of its finances.  It is the responsibility of  Financial Management to allocate funds to current and fixed assets, to obtain the best mix of financing alternatives, and to develop an appropriate dividend policy within the context of the firms objectives (McGraw-Hill, 2008). 

The financial statements of a company are important because these are used by the Management in making decisions.  The analysis of these financial statements however, involves the examination of  relationships among financial elements and making comparisons with relevant information. Ratio analysis is the most common form of financial analysis.  It provides relative measures of the companys conditions and performances (Answers.com, 2009).  To apply the financial statement analysis, let us take into account Modern Furniture Company whose Chief Financial Officer, Al Rosen is taking into consideration stock repurchasing as against cash dividend issuances.  He needs to perform the following calculations before he can made recommendations to the CEO and the Board of Directors. (Data based on the Complete Modern Furniture Company case)

a.) What is the firms PE ratio  The Price-Earnings Ratio (PE) is the measure of how expensive a stock is.  It is a valuation of the companys current share price compared to its per-share earnings. It is calculated as the market value per share divided by the companys EPS (Earnings per share).
                       
PE Ratio    88.00 (market value per share)   4.00  (EPS)
          22  means that  the investors are willing to pay 22 times per dollar of earnings.
    In general, a high PE suggests that investors are expecting higher earnings growth in a company as compared to companies having lower PE ratio (Investopedia, 2010).  But it is important to note that PE ratios are useful when compared to companies of the same industries but it is not useful when compared to companies that belong to different industries.    
b.) If  the firm paid the cash dividend,  what would be its dividend yield and  
dividend payout ratio per share
        
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price.  In the absence of any capital gains, the dividend yield  is the return on investment for a stock (Investopedia, 2010).  Dividend yield is calculated as follows
                                   
Dividend yield    1.60 (dividends per share)  88.00 (price per share)
                    1.80  that a company will payout in dividends in
        relative to its share price.
Dividend payout ratio is the percentage of earnings paid to shareholders in dividends.  The payout ratio provides an idea of how well earnings support the dividend payments (Investopedia, 2010).  It is calculated as follows
              
  
 Dividend payout ratio    1.60 (dividend per share)  4.00 (EPS)
                   40 is the percentage of earnings to be paid to
                shareholders in dividends.
c.) If a stockholder held 100 shares of stock and received the cash dividend, what would be the total value of his portfolio (stock plus dividends)  The total value of the stockholders portfolio is 8,960.00 computed as follows
Market value of stocks (100 shares  88.00)         8,800.00
Add Dividends (100 shares  1.60)                  160.00  
                                     -------------
Total value of portfolio                     8,960.00                                
d.) Assume instead of paying the cash dividend, the firm used the 4.8 million of excess funds to purchase shares at slightly over the current market value of 88.00 at a price of 89.60. How many shares could be repurchased (Round to the nearest share)  The shares that could be repurchased are 53,571 shares computed as 4.8 million divided by 89.60.

e.) What would the new earnings per share be under the stock repurchase alternative The new EPS would be 4.073 calculated as net income which is 12 million divided by outstanding shares less stock repurchased (3,000,000 shares  53,571 shares  2,946,429 shares).

f.) If the PE ratio stayed the same under the stock repurchase alternative, what would be the stock value per share  If a stockholder owned 100 shares, what would now be the total value of his portfolio  Considering PE ratio is the same under stock repurchase alternative, the stock value per share would be 89.606 computed as PE ratio of  22 multiplied by the new EPS which is 4.073, the result is 89.606.  The stockholders total portfolio value would be 8,960.60.
   
From this observations, one can see that  because of the stock repurchased alternative, even though the outstanding shares were reduced, there was an increase in the earnings per share (EPS) and eventually an increase in the market value of the remaining shares.  This kind of decision is very important for the Board of Directors and Executive Committee because from this action, they would be able to intensify their long-term plan strategies that would benefit not only the company but also its Management and employees.  Repurchasing ones stocks is a form of investment in your own company.