Risks and return considerations for companies investing in foreign markets

Since the past few months, the telecom service provider Uninor has been under scanner on eligibility criteria for allocation of 2G spectrum, by the former telecom minister of India. India’s Department of Telecom (DoT) has imposed a penalty of Rs 6.35 crore for not complying with the roll-out obligations, of which Uninor has been directed to pay Rs 3.8 crore by the telecom tribunal TDSAT, following the company’s petition challenging the penalty imposed by the DoT. The cancellation of licences or even the imposition of penalties could severely hurt cash flows of Uninor and of some other telcos which were issued similar notices.

Uninor is a joint venture between reality firm Unitech and telecom firm Telenor of Norway, of which the Norwegian government is a major shareholder. Telenor’s acquisition of 67.25% stake in Unitech Wireless of India was funded with a Rights issue in October 2008. Telenor’s share price had dropped by 25% on the announcement day and by 45% over the month. The negative market reaction could have stemmed from the fact that India was an unknown market for Norwegian investors and they had doubts regarding the future returns from investments in India. Now, with India’s Supreme court monitoring the 2G scam investigations, their future is increasingly looking uncertain. Till date Uninor is reported to have invested around Rs 9,000-10,000 crore and set up 30,000 towers.

This brings us to the question why do companies invest overseas and what are the risks and the expected returns for investing in the foreign markets.

Some of the key reasons for which companies choose to invest overseas are to gain access to new markets, to obtain superior or less costly access to the inputs of production (land, labor, capital, and natural resources) than at home or to build strategic assets, such as distribution networks or new technology. Diversification into uncorrelated markets may result in reduction of risks.

A point to be noted is that the cost of capital for investors of a company that invests in a foreign land is different from the cost of capital for investors of a company investing in its own stock market.  This is due to the fact that the investors investing in a foreign country are exposed to risks such as exchange rate risk, political, sovereign and expropriations risks. The dividends can be paid to these investors only after the generated cash is repatriated to the home country. During war or unrest there could be possibility of expropriation in a foreign land. As such, the parent company may not be able to repatriate interests, dividends, or royalties it earned abroad, send home the funds held in a foreign bank account opened by a branch office. Sovereign risk or transfer risk refers to the possibility of the cash generated in the foreign country being blocked when the reserves of hard currency in the host country are low. Such risks can typically be insured by private or government insurance companies.

In case of Telenor, the cost of capital for evaluating an investment in India is likely to be different from the cost of capital for an Indian firm, let’s say Idea cellular evaluating a similar investment in India. The returns from the investment of an Indian firm in India are likely to be strongly correlated with the Indian market index since there are common factors that affect all Indian firms in similar ways. On one hand exchange rate risk, political, sovereign and expropriations risks increase the riskiness of the Norwegian investment. On the other hand, the same project may yield benefits of diversification of risk for Telenor, if the returns from the Indian project are essentially uncorrelated with the returns on the Norwegian market portfolio.

The return on equity for an Indian firm making an investment in India can be calculated by using a beta (the non-diversifiable risk of a company) obtained by regressing returns from a portfolio of stocks in the same industry on the Indian stock market index. Beta is the product of the relative volatility of a security's returns and the correlation of the security's returns to the market's returns.

For the Norwegian firm, the company would first forecast the cash flows from operations in India. It would then take into account the effect of intra-firm transactions, which will be affected by international taxation, transfer risks and remittance Policy. At the same time, the discount rate by which the cash flows will be discounted will be different for domestic company & a foreign company. For the foreign company the discount rate will take care of the exchange rate risk, country risk, political, sovereign and expropriations risks. At the same time the beta used for calculation of the discount rates will also be different, to account for correlation with the market.

Due to the inherent riskiness of overseas investment, investors may have a home bias and would expect higher returns on the cost of capital if the target acquisition is funded with investors’ money.

An Year off from Job - Mid Career B School Program

'The pen is mightier than the sword' said the English author Edward Lytton. Taking a cue from this famous adage, it would not be out of place to say that in today’s world 'The net is mightier than the jet'. Having completed a reputed program for senior executives from the top Business School in UK and now exploring career options in India, I feel that blog would be a great medium of expression for reaching out to people and sharing my thoughts with those who might be interested in reading this. 
Since the last one year many people have approached me to find out what the Sloan experience has been like, with the obvious question at the back of the mind 'Is it worth investing a huge  sum of money for a one year management program at a mid career stage in life?'. Honestly it is difficult to have a cookie cutter answer to the question because a whole lot of it depends on what a person aims to achieve in that one year and how he or she is able to leverage on the learning while building on the past professional experience. I will attempt to pen down the aspects that a person may want to consider before taking the decision to go in for a mid life academic retooling.

The reason that people opt for mid career management programs is primarily because they want to explore different career options such as the option of changing industry or job function or else reaching a higher level within their existing careers, exploring entrepreneurial options or expanding their existing business. These could be people who have harboured the ambition of going to the best B schools earlier on in life but could not do so, due to some reason or the other. Some who feel monotony setting in their current jobs are desirous of acquiring the skills that will help them to enhance their career growth prospects and make a transition to a different function or a different industry or to the next higher level. For such folks, a one year management program is generally the most favoured option, considering the opportunity cost i.e. forgone salary and repayment of loan, particularly when the candidate is not on a company sponsored sabbatical. 

While considering the choice of the program, aspirants may want to look at the ones that offer insights into the best and current business practice and research, helps in building a global network, offer a diverse peer group and a good brand name. After attending the Sloan program, I can easily vouch for the fact that such programs help to widen one’s knowledge horizon, challenge one’s thought process, encourage lateral thinking and may ignite the passion for entrepreneurship. It is a riveting experience to hear from and interact with the top business leaders in the world, to understand and appreciate their views on policy and business matters. We learn to work in diverse groups consisting of people with different backgrounds, from different countries with different work cultures. The program is so engrossing that at times the means looks more important than the end. It involves a lot of hard work and before one realizes, the year gets over and one returns with the hope to get the opportunity to put into use the knowledge acquired during the year.

The other side of the coin to be considered is the placement options available after completion of the program. Here I must say that a lot of patience, determination & clarity is needed for chalking out the future career path. Prospective candidates are expected to have a mature mindset as the program prepares people for long term success. Such program cannot be looked upon as a short cut route to make quick bucks.

Unlike the MBA campus recruitments, the campus recruitments for mid career program are limited and very few in number. So it is advisable that the location in which a person wants to work is taken into account while selecting a B school program. Residing in the same geography in which a person wants to work gives visibility to the market and the recruitment scenario.

One has to be aware of the fact that recruitment consultants work on company mandates and they are likely to position a candidate only they see a great fitment of your profile with the requirement in hand. So consultants may not be the best route to take if one is looking for a change in industry or function.

In B schools a substantial emphasis is placed on networking. In order to effectively network it is crucial to understand the sector in which the person wishes to work & network accordingly. While for some it may yield quick results, for others it could be a long time before one gets good leads, contacts or references. It would be good to know the number of self sponsored alumni who could make a successful transition. Contacting alumni could be a good way to know how to go on about making the desired change.

Finally a candidate should not discount or rule out the possibility of joining back the same company as the one in which the person worked prior to joining the program. This is due to the fact that if one is looking for a change in function, it is easier done in a company where the person has worked before. After all it is easier to convince people with whom one has worked before than convincing a different set of people in a new environment.

With all these considerations, I believe, a person can make an informed decision to take up a mid career academic program.