A

Presentation
On
Blades Inc. Case (Direct Foreign Investment)

UNDER THE SUBJECT OF
International Finance Management

Under The Guidance of
Prof. Sushil Mohanty

Team Member
Sagar Nariya
Kishor Bhayani
Last year, Blades Inc., has been exporting to Thailand in order to
supplement its declining US sales.
To diversify internationally and to take advantage of an attractive
offer by Jogs Ltd., a British retailer, Blades has recently begun
exporting to the UK.
Jogs will purchase 2,00,000 pairs of Speedos, 80 per pair.
Blades suppliers of the needed components for its roller blade
production are located in the US, where Blades incurs the majority of
its cost of goods sold.
Blades also imports components from Thailand (Low price of rubber
and high quality)
Currently, inputs sufficient to manufacture a pair of roller blades cost
approx. 3000 Thai Baht per pair of roller blades
The Thai Baht, which had been pegged to the dollar, is now a freely
floating currency and has depreciated substantially in recent months.
Recent levels of inflation in Thailand have been very
high. So that the economic condition in Thailand are
very highly uncertain.
Ben Holt believes that this is a perfect time to either
establish a subsidiary or acquire an existing business in
Thailand.
Although Holt has also considered DFI in the UK,
because the components required to manufactures are
roller blades are more expensive in the UK than US.
So the growth potential is limited, he believes the Thai
roller blades market offers more growth potential.
Blades can sell its products at a lower price but generate
higher profit margins in Thailand that it can in US.
Because the Thai customer has committed itself to
purchase fixed number of Blades product only if it
can purchase Speedos at discount from the US price.
Blades has managed to generate higher profit
margins from its Thai exports-imports than in the US.
DFI may become more expensive both because target
firms will be more expensive and for that Baht may
appreciate.
The Thai retailer has expressed an interest in
renewing the contractual agreement with Blades.
Holt believes that Blades could charge a higher price
for its products if it establishes its own distribution
channel
Q.1) Identify and discuss some of the benefits that
Blades Inc., could obtain from DFI.
Ans:
Since Blades growth potential in the United States is
limited, it could utilize Thailand in order to attract new
sources of demand, especially since the growth potential
in future years is high.
Blades is able to generate higher profit margins in
Thailand than in the U.S.
Raw materials are less expensive in Thailand than they
are in the U.S.
Q.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?
Ans:
If Blades undertakes the direct foreign investment now, the initial outlay required
will be relatively low due to the recent economic conditions in Thailand and due to
the depreciation of the baht. However, if economic conditions do not improve
within the next year, Blades may not generate the expected return on its Thai
investment and may have to sell its Thai operations at a loss.
If Blades waits until next year to make its decision, economic conditions may have
improved and there may be less uncertainty associated with the investment.
Furthermore, Blades competitors may already be established in Thailand next
year, which would make it harder for Blades to gain market share there.

Q.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?
Ans:

If Blades renews the agreement with the Thai retailer, it will have to maintain the
relatively low prices it charges the Thai retailer. It may be able to charge higher
prices by establishing its own distribution channels.
However, if economic conditions in Thailand continue to deteriorate, the
agreement would be an advantage for Blades, as it guarantees the sale of a
minimum number of products sold each year.
Q.4) Assume a high level of unemployment in Thailand and a unique
production process employed by Blades, Inc. how do you think the Thai
Government would view the establishment of a subsidiary in Thailand 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 Thailand?
Why?
Ans:
Given a high level of unemployment in Thailand and a unique production
process employed by Blades to manufacture roller blades, the Thai
government would be faced with a tradeoff if Blades would like to
establish a subsidiary in Thailand. On the one hand, locally owned
businesses in Thailand may lose business because of the new competition,
which may increase the level of unemployment in Thailand.

Conversely, if a firm such as Blades acquires an existing business in
Thailand, the level of unemployment in Thailand may be reduced if the
firm employs local labor. Furthermore, if the Thai government requires
Blades to share its technology, other Thai firms may benefit. Thus, the Thai
government would probably be more supportive of firms that acquire
existing firms.