EuroDisney – Foreign Direct Investment Decision

Walt Disney Co., riding high on its resounding success in creating resorts in Tokyo and Orlando, had long planned to enter the European market. Plans to build a Disney park in Europe were first discussed in the 1970's, yet construction did not begin until the 1980's at the location just outside of Paris and it was first opened in 1992. In considering where to locate a European theme park, Disney had much to consider. While some have argued that a theme park in Spain would have more easily transitioned from the red ink to profitability, Disney stood by its decision.

Overall project costs were significantly higher in France. The initial investment for a theme park in Spain was estimated at $1.4 billion, opening a theme park near Paris was expected to cost $2.4 billion. Additionally, while the government in Spain was motivated to offer financial assistance by an unemployment rate of 16%, France was unwilling to provide any aide for the project. The team assigned to evaluate the expansion looked at both qualitative and quantitative factors to make their final decision recommendation. Major contributing factors that were considered largely included culture, weather, cash flow/ net present value, and potential risks. In the end, Disney went with France based on a higher net present value (NPV) calculation. The results of this decision were initially mixed due to the fact that the organization had hoped for a near 100% occupancy rate which failed to materialize. Sensitivity analysis had accounted for this possibility, however the actual occupancy rate fell on the lower end of estimates.

It is very challenging and critical for organizations to accurately estimate cash flows for proposed business ventures. If an MNC is unsure of the estimated cash flows of a proposed project, it needs to incorporate an adjustment for this risk. The accuracy of this calculation may determine whether or not a project succeeds or fails. In order to account for variation MNCs have utilized a number of techniques.

International managers have several tools available to estimate cash flows including the risk-adjusted discount rate, sensitivity analyses, and simulation. The challenge is to understand how the many variables might impact cash flows. Variables that must be considered for variation include: exchange rates, inflation, financing, blocked funds, salvage value, prevailing cash flows, government incentives, and real options. While the risk-adjusted discount rate may be useful for smaller and less risky endeavors, it often fails to account for the diversity and variety of fluctuations of variables. Similarly, sensitivity analyses can be useful, but largely fails to truly prepare MNCs for potential eventualities.

By utilizing simulation methodology, MNCs can calculate a wide-range of potential variables to evaluate. Computer models can utilize the inputted range of each variable and randomly select value’s to determine the net present value (NPV). The computer randomly generates results that give management a perspective on the maximum and minimum possible rate of return based on estimations and chance. The major advantage of simulation is that the MNC can examine the range of possible NPVs that may occur.

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Income Tax - A Graphical History

Cause and/or Effect

During the current economic stimulus debates, much has been made of the cause versus effects of monetary and fiscal policy. When assessing the results of tax increases during the 1990s, for example, some have reasoned that the economy grew despite or even because of them. The argument continues by claiming that recent tax cuts have resulted in unemployment rates surging to levels unseen in the past quarter century. These claims, oversimplify a complicated and dynamic set of variables, none of which we are capable of isolating.

You must keep in mind that tax cuts do not happen in a box. We do not have the ability to singularly isolate all variables in the real world. We cannot accurately say whether it was monetary policy that caused a particular gain or fiscal policy or even foreign policy. Perhaps one of the infinite other variables caused a gain or loss. Or consider that a certain period of time might have been made worse from action as opposed to having introduced nothing at all. For example, it has been cited that recent tax cuts have resulted in surging unemployment rates. One must consider, relative to what? Had we increased taxes at that time, what would have been the result? The answer is that we do not know precisely. We are forced to use some amount of logic and common sense. We cannot rely on historic measurement if we cannot isolate the variables.

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Wal Mart (WMT) Down 17% YTD Despite Solid Performance

Direct Foreign Investment

The objective of any organization is to maximize shareholder wealth. According to Madura (2008), “MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth” (p. 370). There are many opportunities to profit from the marketplace and these doors often open in foreign nations. These profit opportunities can be broadly grouped into either revenue or cost-related incentives. Aside from the immediate potential for gain, organizations, like individuals, may consider themselves more effectively diversified if they are invested abroad. Diversification, in the form of both suppliers and consumers, will enhance the organizations most important objective. There are many incentives to direct foreign investment and international diversification. Organizations should work to become more international, however, they must be well aware of the potential pitfalls in the markets in which they invest.

Economic conditions in the United States have led to the devaluation of the dollar in recent years. The cheap dollar, coupled with stock prices driven lower by psychological factors, left many otherwise profitable American companies vulnerable to foreign competitors looking to buy cheap assets. In one such notable transaction, InBev, a Belgian brewer, took control of the American behemoth Anheuser-Busch, a proud American brand. According to Anheuser-Busch.com, “The transaction creates significant profitability potential both in terms of revenue enhancement and cost savings” (p. 4). Clearly, the stakeholders in this transaction see potential gains in the form of both cost and revenue effects. While Anheuser-Busch will retain much of its American image, the ownership has shifted to foreign shareholders. This particular case exemplifies the need for organizations to consider the affect of their brand name in their market. As McDonalds moves into markets throughout the world, they have retained their unique American image. Organizations may attempt to leverage their distinctive identity or they may determine to conform to a national standard where they conduct business. Many factors will determine the method each organization utilizes in order to enter foreign markets.


References

Anheuser-Busch InBev (2008, July 13). InBev and Anheuser-Busch Agree to Combine.
Retrieved on February 4, 2009 from http://www.anheuser-
busch.com/Press/PressImages/FINAL%20PRESS%20RELEASE.pdf

Madura, J. (2008). International Financial Management (9th ed.). Ohio: Cengage
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