Essay --

Phase 1 Applied Nursing Research IP1 Can other nurses be effective change agents to improve patient care, and can other nurses do the same. Will nurses learn ideas for change that be more will-receive and support scholarly data? Yes, nurses will make the necessary changes for excellent patient care and high-quality outcomes; through education they will find ways through education to provide evidence that supports the new suggestions. This study will look at the methods that staff nurses and no license personnel can take from an educational setting. That will increase compliance and assist staff to follow standards of care to decrease the number of patients with pressure ulcers. â€Å"Pressure ulcer is localized injury to the skin and/or underling tissue, usually over a bony prominence as a result of pressure or pressure in combination with shear (O’Tuathail, & Taqi, 2011, p. S27).† With the increase in the number of the elderly patient and the increasing number of bedridden patients will increase the number of pressure ulcers. Therefore, as pressure ulcers have a negative impact on health-related quality of life patients require increasing need for hospitalization. Since the retiring of the baby boomers, over the years very little to care for patients that develop pressure ulcers. Patients lay in bed without getting up, without being repositioned or gotten up to the chair. Many patients lay in wet diapers and sheets for hours. Informing the nurse manager the need for identifying pressure ulcers immediately will help improve patient care. â€Å"Documentation is needed when assessing skin condition of patients on admission especially to ensure developing pressure ulcers or decubitus ulcers will not be charged to the care of t... ...ts: Arch intern med. 148(10): 2241-2243. Doi: 10.1001. Arch intern. Retrieved from http://archinte.jamanetwork.com/article Moore, Z., and Cowman, S. (2012). Pressure ulcer prevalence and prevention practices in care of the older person in the Republic of Ireland: Journal Of Clinical Nursing, 21(3/4), 362-371. doi:10.1111/j.1365-2702.2011.03749.x O’Tuathail, C., and Taqi, R.,(2011). Evaluation of three commonly used pressure ulcer risk assessment scales: British Journal of Nursing,20(6): Retrieved from http://content.ebscohost.com.proxy.cecybrary.com/pdf27_28/pdf/2011/GHD/23Mar11/598687.pdf?T=P&P Polite, D., and Beck, C.,(2003). Nursing research: Principles and methods (7th ed.)Philadelphia, PA: Lippincott Williams & Wilkins Pressure Ulcer Scale for Healing (PUSH),(n.d.). Tool for pressure ulcer assessment and monitoring Retrieved from http://www.npuap.org

Philosophy Paper Essay

One of the most heated debates that troubled the church in the Middle Ages was the question of universals. This question goes back as far as Plato’s Forms. It has to do with the relationship between the abstract and general concepts that we have in our minds (what is the relationship between Chair with a capitol â€Å"C† and chair with a small â€Å"c†? ). And from this, two radical viewpoints emerged, realists and the nominalists. The realists followed Plato in insisting that each universal is an entity in its own right, and exists independently of the individual things that happen to participate in it. An extreme form of realism flourished in the church from the ninth to the twelfth centuries. Among its advocates were John Scotus, Erigena, Anselm and William of Champeaux. On the opposite side were the nominalists and they held that universals were just names, and therefore, have no objective status apart from that which is fabricated in the mind. Nominalists, such as Gabriel Biel and William of Occam (see O section), said that the individual is the only existing substance. Unfortunately, their treatment of nominalism removed religion almost entirely from the area of reason and made it a matter of faith beyond the comprehension of reason. 1 And here lies the significance of the French theologian Peter Abelard (1079-1142). Between the two extremes, Peter Abelard proposed a more moderate form of nominalism. Though critical of the idea of the separate existence of universals, he nevertheless believed that resemblances among particular things justified the use of universals for establishing knowledge. More specifically, Abelard proposed that we ground the similarities among individual things without reifying their universal features, by predicating general terms in conformity with concepts abstracted from experience. This resolution (which would later come to be known as conceptualism) of the traditional problem of universals gained wide acceptance for several centuries, until doubts about the objectivity and reality of such mental entities as concepts came under serious question. Thomas Aquinas favored a moderate realism which rejected the view that universals exist apart from individual entities in favor of the view that they do indeed exist, but only in actual entities. 2 Anaximander (Milesian School): Anaximander (610-547/6 B. C. ) was one of the three key figures that comprised the Milesian School (the three prominent figures associated with the Milesian School is Thales, Anaximander, and Anaximenes). Together, they worked on problems concerning the nature of matter and the nature of change, and they each proposed a different material as the primary principal. 3 Anaximander seemed to be quite modern in his view of reality. He believed that the world was cylindrical like a drum, and that the earth rested on nothing. He also invented an undefined non-substance, called the apeiron, a neutral, indeterminate stuff that was infinite in amount. Anaximenes (Milesian School): Anaximenes (546 B. C. ), the other member of the Milesian School, returned back to the idea that everything derives from a single substance, but suggested that substance was air. Though it is likely his choice was motivated by wanting to maintain a balance between the two views of his predecessors, Anaximenes did provide solid grounds for his choosing; first, air, has the advantage of not being restricted to a specific and defined nature as water, and therefore more capable of transforming itself into the great variety of objects around us. Second, air is a more likely source of this variety than Anaximander’s apeiron which seems too empty and vacuous a stuff to be capable of giving rise to such a variety and profusion. 4 Anselm, Archbishop of Canterbury: In (452 A. D. ), twenty-two years after Augustine’s death, Rome fell, bringing on a period of conquest and chaos, and degree of order was ultimately realized through the emergence of feudalism. The church, which had managed to survive the social and political upheaval, gradually assumed responsibilities that previously had been relegated to the civil government. This involvement in government led in turn to the secularization of the church. Bishops became ministers of the state, and church dignitaries became warriors. In the tenth and eleventh centuries, many within the church were so involved with the secular world that a movement led to the emergence of the monastic life as a force within the church. Those who wanted to escape the temptations of the secular world and pursue holiness were naturally drawn to the monasteries and among those who followed was Anselm (1033-1109), the archbishop of Canterbury. The greatest Christian thinker between Augustine and Thomas Aquinas was Anselm (1033-1109). He was born to a wealthy family in northern Italy, whom, to their disappointment, left home in (1056) to fully dedicate his life to God. Following a period of travel, he arrived at the Norman Abbey at Bec, where he took his monastic vows in (1060). Within a few years, he became prior of the abbey, abbot in (1078), and then archbishop in (1093), which he held until his death. His writings range from treatises on logic to an explanation of the divine inner logic of the atonement in Cur deus homo. Anselm stood in the tradition of Augustine and Platonic realism. 5 Following the tradition of Augustine, he held that faith precedes and leads to understanding, and, like many other medieval thinkers he drew no sharp distinction between philosophy and theology. In his famous ontological argument for the existence of God, Anselm presents a defense based on the fact that it is self-contradictory to deny that there exists a greatest possible being. 6 He claims that the more universality, the more reality. And from here it follows that if God is the most universal being, he is also the most real; if He is the absolutely universal being, he is also the absolutely real being, ens realissimum. He has, therefore, according to the conception of Him, not only the comparatively greatest reality, but also the absolute reality. A reality in which no greater can be thought. 7 Aquinas, Thomas: By common consent the greatest philosophical theologian of the Middle Ages was Thomas Aquinas (1225-1274). Everything about him was big. In his later years his voluminous writings, massive in scope, won him the title of the Angelic Doctor. His life was dedicated to the intellectual defense and propagation of the faith, as he understood it. It was during his teaching career (1252) in Paris that Aquinas, being drawn into the critical debates of his day, started battling the objections posed against Aristotelianism and its place in the university. By this time, Plato was known only through the imperfect translations of the Timaeus, the Phaedo, and the Meno. Islamic Jewish thinkers were much better acquainted with Aristotle, and for nearly two centuries they had been wrestling with questions posed by Aristotelianism to religious faith. For Aquinas and his Christian contemporaries the issue was doubly acute. On the one hand, there were questions posed by Aristotle’s way of thinking. On the other hand, there were the answers already given by Islamic and Jewish scholars which were hardly acceptable to a Christian thinker. Aquinas decided to face the problem head on. He made his own study of Aristotle, on whom he wrote extensively. He also made his own study of non-Christian thinkers. He subjected all ideas to rigorous scrutiny, giving due recognition to the truth of ideas, wherever they came from, but giving his own evaluation of every issue, point by point. In all, Aquinas produced about a hundred different writings. His work ranged from philosophical commentaries to hymns. 8 Aquinas’ main works are two massive Summae or compends of theology and philosophy. The Summa contra Gentiles was designed as a textbook for missionaries, and the Summa Theologiae has been described as the highest achievement of medieval theological systematization and is still the accepted basis of modern Reformed theology. In Aquinas’ proofs (what later came to be known as the Cosmological and Teleological arguments), certain facts about nature are compelling evidences of God’s existence. He argues, accordingly, that nothing can adequately account for the fact of motion or change. Rejecting the idea that change or motion is simply an ultimate, mysterious fact of nature neither requiring nor permitting any explanation except God, its Unmoved Prime Mover. Furthermore, in his five arguments, Aquinas suggests that the Christian belief in God is completely consistent with the world as we know it. Aquinas’ arguments, known also as the Five Ways are sometimes referred to as the proofs of the existence of God. But this is not necessarily correct because Aquinas did not try to prove the existence of God by rational argument, but to provide a rational defense for an already existing faith in God. His primary reason for believing in the existence in God is God’s revelation of Himself. Aquinas expects his readers to share the same faith. He does not expect that he will have to prove anything to them first. This point is important because many critics accuse believers of grounding their faith in outdated arguments, such as Thomas Aquinas. It is proper, therefore, to respond to such criticisms by pointing out that they are based on a superficial reading and on a serious misunderstanding of how individuals come to faith. 9 The basic principal guiding Aquinas throughout the Five Proofs is the principal of analogy, which holds the world as we know it mirrors God, its creator. The structure of each of Aquinas’ proofs is quite similar. Each depends on tracing a casual sequence back to its ultimate origin and identifying this ultimate origin with God. The first begins with the observation that things in the world are in motion or change. Second is the concept of causation. The third concerns the existence of contingent beings. The fourth deals with human values, and lastly, is the teleological argument, in which Aquinas explains how the world shows clear traces of intelligent design. Natural processes and objects seem to be adapted with certain definite objectives in mind. They seem to have purpose. They seem to have been designed. Arguing from this observation, Aquinas concludes that it is rational to believe in God. 10 Aristotle: Aristotle’s thought, like his mentor Plato, embodied the concept of arete, which taught that human excellence in all things was an important goal that should direct human purposes. For Aristotle, that excellence ideally exemplified the defining quality of human nature, the pursuit of reason. Attracted by science and believing that the universe could be explained, Aristotle greatly valued the work of Thales of Miletus, and accepted his concept that the physical universe operated rationally and in a way that was knowable to human beings. From Anaximander, Aristotle took the view that a balance of force existed in nature that made things what they were. Aristotle was also knowledgeable about the atomic theory of Parmenides and was intrigued by the question of what was stable and what was changing. Indeed, these Greek scientists had a significant influence on Aristotle’s intellectual search to examine and explain reality. 11 For Aristotle, the world in which we live is the world that we experience through our senses. Unlike those who followed Plato, Aristotle believed that we live in an objective order of reality, a world of objects that exist external to us and our knowing of them. Through our senses and our reason, human beings can come to know these objects and develop generalizations about their structure and function. Truth is a correspondence between the person’s mind and external reality. Theoretical knowledge based on human observation is the best guide to human behavior. And, while human beings have various careers, they all share the most important factor, the exercise of rationality. Reason gives human beings the potentiality of leading lives that are self-determined. Congruent with his metaphysical and epistemological perspective, Aristotle’s ethical theory portrays the good life as that of happiness (eudaimonia). He believed that the ultimate good for the human being was happiness, activity in accordance to virtue. The virtuous life is one in which actions are part of a consciously formulated plan that takes a mean, a middle ground course, avoiding extremes. 12 For example, true courage would be the choice that avoids the extremes of cowardice and rashness. And what decides the right course to take is the virtue of prudence (phronesis). Good is the aim of every action but, given the fact that goods can be ordered in relation to one another, there must be a highest good to which practical wisdom directs us. And if the possession of any good is what makes us happy to some extent, the possession of the highest good is the highest happiness, the ultimate goal of all our actions. 13 At this point, it is difficult to resist the thought that Aristotle’s notion of the intellectual life being the gateway to happiness and virtue is not an shallow one. But, though there are some elements in his presentation that are unclear, this much is clear; that this happiness, which is the possession of the good, is ultimately an act of contemplation, or of  beholding, the good. But to contemplate the good is to enter into union with it. Therefore, if contemplating on god means entering into union with the life of the gods, this is the highest activity of man and his ultimate happiness. The conclusion of the Ethics is one with the Metaphysics, in which the â€Å"divine element† in a man coincides with the â€Å"possession† of god by an act of thought, called contemplation, which is the â€Å"most pleasant and best† we can perform. In Eudemian Ethics, Aristotle says, What choice, then, or possession of the natural goods – whether bodily goods, wealth, friends, or other things – will most produce the contemplation of God, that choice or possession is best; this is the noblest standard, but any that through deficiency or excess hinders one from the contemplation and service of God is bad; this man possess in his soul, and this is the best standard for the soul. 14 With statements like this one can’t help but wonder what Aristotle’s response would have been if he would have had the opportunity to serve the one true God, who is worthy of such adoration and praise. What’s more, Aristotle categorized virtues as either moral or intellectual. Moral virtue, though not easy to define, is a habit by which the individual exercises a prudent choice, one that a rational person would make. Moral virtues tend to moderation, falling between excess and inhibition. They focus on the concrete actions a person performs and the measured sense he has regarding them: â€Å"to feel them at the right times, with reference to the right objects, towards the right people, with the right motive, and in the right way. † A good action thus exhibits due proportion, neither excessive nor defective, but midway between them. This is Aristotle’s doctrine of the mean. Peculiarly, a virtuous action is one that lies between too much and too little. To give another example, in regard to the feeling of shame, modesty is the mean between bashfulness and shamelessness. Not every virtue, however, is a mean, and so not every action is to be measured in this way. Nonetheless, every action should and can at least be measured in its rightness by the virtue of prudence or, in a larger sense, by â€Å"practical wisdom. †15. Furthermore, one of Aristotle’s most significant contributions to the Western world is his Poetics. His earlier works, Physics and Metaphysics contain important statements about art and nature, and Rhetoric, written after Poetics, distinguishes rhetoric as a practical art and has had a strong influence on literary criticism. His Poetics, nonetheless, is particularly important because Aristotle is addressing Plato’s doctrines on ideas and forms he came to disagree with. In Poetics, it was Aristotle’s intention to classify and categorize systematically the kinds of literary art, beginning with epic and tragic drama. Unfortunately, not all of the poetics survived, and it breaks off before the discussion of comedy. Nonetheless, our sense of Aristotle’s method is established. He is the first critic to attempt a systematic discourse of literary genres. 16 Augustine (Saint), of Hippo: One of the greatest thinkers of not only the early church, but of all time is Augustine of Hippo (354-430 A. D. ). His writings laid the foundation not only for Western theology but for later philosophy as well. His three books On Free Will (388-395), set out a doctrine of creation, evil and the human will which was a superior alternative to the type of thinking that had attracted so many to Gnosticism and Manichaean dualism. His response to the Donatist schism in the church set the pattern for the Western doctrine of the church. His writings on the subject of Pelagianism clarified, as no one before him and few after him, the crucial issues in the question of grace and free will. His major theological writings include On the Trinity (399-419), which presented better models for thinking about the Trinity than those of the Greek fathers. Augustine’s book On the City of God (413-416) was a reply to those who blame the church for the fall of Rome, in which it gave both a panoramic view of history and a theology of history in terms of the basic conflict between the divine society and the earthly society. 17 Interestingly, Augustine put forth a theory of time that Bertrand Russell would later pronounce superior to earlier views and much better than the subjective theory of Kant. Augustine’s account of how we can learn language provided Wittgenstein’s starting point for his Philosophical Investigations. In answering skepticism Augustine put forth an argument which anticipated Descartes’ cognito ergo sum without falling into the pitfalls commonly associated with the argument. Furthermore, Augustine believed that philosophical reflection may correct mistaken notions, lead to a grasp of truth, and serve to clarify belief. But rational reflection is not a substitute for the beatific vision of God. For it is the apprehension of God alone which transforms human life and alone satisfies our deepest needs. Though Augustine was deeply influenced by Platonism and Neoplatonism, he never was simply a Platonist. His view of the soul stands in the Platonic tradition, but he repudiated the doctrines of pre-existence and transmigration. Augustine’s view of the transcendent spiritual reality might also be said to have affinities with Plato, but Augustine’s approach was not an attempt to erect an edifice of Christian theology on either Platonic or Neoplatonic foundations. Rather, it was to state the Christian worldview in a theological and philosophical system that cohered as a unified whole. 18 (B) (back to top) Bentham, Jeremy: In nineteenth century Victorian England two contrasting systems were developed by Jeremy Bentham and Herbert Spencer. Utilitarians Bentham and John Stuart Mill applied naturalistic presuppositions in their worldview. Herbert Spencer applied the concept of evolution. And Ernest Mach prepared the way for logical positivism in his strongly anti-metaphysical scientific approach. The antithesis of the Kantian ideal is utilitarianism, an ethical theory founded by Jeremy Bentham (1748-1832). Bentham was a hedonist. Taking the good to be pleasure, Bentham proposed a new model for morality in his principal of utility, which holds that â€Å"Actions are right in proportion to the amount of happiness it brings; wrong as they tend to produce the reverse of happiness. 19 Utilitarianism is a form of consequentialism. The ends justify the means since actions are judged on the results they bring, not on the person’s intentions or motives. For Kant, the end result was not important in determining the rightness of an action, rather, it was motive. 20 In its simplest form utilitarianism teaches that the right action is the one that promotes the greatest happiness. Modern utilitarianism dates from Thomas Hobbes in the seventeenth century, but its antecedents date as far back as (341-270 B. C. ) to the philosophy of Epicurus of Samos. The theory of utilitarianism actually held little influence until John Stuart Mill (1806-1873) who popularized the term and produced the classical Victorian exposition of the doctrine. Mill used the principal of utility to critique all social, political, and religious institutions. Anything that did not promote the greatest happiness of the greatest number was to be challenged and reformed. For this reason social and religious institutions that curtail individual liberty should be reformed. This is necessary, argued Mill, in order for freedom of belief, association and expression to be safeguarded. 21. Different conceptions of happiness separated Mill’s version â€Å"Better a Socrates dissatisfied than a pig satisfied,† which recognized qualitative differences between different kinds of pleasure, from Bentham’s forthright attempt to reduce all questions of happiness to the mere presence of pleasure or pain. Bentham’s version aims to render the basic concepts of ethics susceptible of comparison and measurement, but this was not the goal in Mill’s presentation of the system. 22 A hedonistic utilitarian like Bentham would say that the sole consideration is the quantity of pleasure that an action produces. A problem with this approach, however, (as if it wasn’t obvious) is that it draws no distinction in principal between an evening spent at the bars or one spent having quality time with your spouse. It all depends upon the tastes of the person. Berkley, George: George Berkeley (Irish, 1685-1753) was one of the three greatest British empiricists of the eighteenth century (Locke and Hume being the other two). Though his father was an Englishman, Berkley always considered himself Irish. He was an early subjectivist idealist philosopher, who argued that all qualities of objects exist only in the mind of the perceiver. His famous theory is often summarized, esse est percipi, â€Å"to be is to be perceived,† and is still important to modern apologetics (due to the method he used in demonstrating the necessity of an eternal Perceiver). Berkley’s argument was that the phenomena of visual sensation can all be explained without presupposing the reality of the external material substances. Interestingly, Berkley was also a bishop of an Anglican church, and was the only important philosopher to visit America before 1900. He came hoping to start a missionary training college for evangelizing to the Indian tribes of New England. 23 Berkley disagreed with Locke in that there is a material substance lying behind and supporting perceptions. He also disagreed with his treatment of the representative theory of perception, that material objects are perceived mediately by means of ideas, and the mind does not perceive the material object directly, but only through the medium of the ideas formed by the senses and reflection on them. â€Å"If we know only our ideas,† reasoned Berkeley â€Å"then we can never be sure whether any of them are really like the material qualities of objects, since we can never compare the ideas with them. † For that reason, he denied the ultimate existence of material substance believing that the Spirit is the only metaphysical reality. 24 (D) (back to top) Derrida, Jacques: Jacques Derrida (1930-2004) was a French literary critic and founder of the school called deconstructionism. His (1966) lecture Structure, Sign, and Play in the Discourse of the Human Sciences delivered at Johns Hopkins University, played a significant role in ushering American critics into the era of poststructuralism. Particular influences on his thought include Nietzsche, Heidegger, and Freud. He wrote prolifically, and had a great influence on not only literary criticism but in sociology, linguistics, and psychology as well. Derrida regarded philosophical and literary texts as already containing the seeds of their own deconstruction. This means that in any work the author unwittingly includes contradictions, blind spots, and unjustified assumptions. The main purpose and task of the deconstructionist, according to Derrida, is to simply bring these contradictions to the surface. 25 Beginning in the Victorian Age, a paradigm shift slowly spread throughout Europe that set the groundwork for modern theory. Unlike the revolutionary movements of the Renaissance and Romanticism, which were in part reactionary, this paradigm shift that marked a radical break from the past had little precedent. Nonetheless, it marked a rejection of long-held metaphysical and aesthetic beliefs that most theorists from Plato to Coleridge took for granted. Until the modern period, most of the great Western philosophers have been logocentric in their thinking, and Derrida is one of the ones responsible for this definite break from the past, bringing forth the notion that meaning is never fixed. Dr. Louis Markos, a Christian Professor at Houston Baptist University, made some interesting comments on Derrida in one of his lectures on deconstructionism. He said that Derrida reads the history of Western metaphysics as a continual search for a logos or original presence. This logos is sought because it promises to give meaning and purpose to all things, to act as a universal center. Behind this search is a desire for a higher reality (or full presence). Western philosophy since Plato has simply renamed this presence and shifted this center without breaking from its centering impulse. Even Saussure’s structuralism sought a center, and though he broke from the old metaphysic, he still used its terminology and binaries. Furthermore, Derrida deconstructs all attempts to posit a center or to establish a system of binaries. Instead, he puts in their place a â€Å"full free play of meaning. †26 Democritus (see Leucippus): Descartes, Rene: The first great continental rationalist27 was Rene’ Descartes (Frenchman, 1596-1650). For it was he who defined the terms and laid down the agenda for the continental rationalist school of thought. But in a sense, the world that Descartes produced, by the exercise of pure reason, was a fairly straight forward affair – Descartes does preserve â€Å"the self† in a recognizable form, as well as both â€Å"God† (even though it is not a terribly human sort of God) and the material world in a broadly speaking recognizable form (even though it might be a material world deprived of some of its more vivid and colorful attributes). Nevertheless, the worlds created by the application of the procedure of rationalism start from some self-evident propositions (like Euclid’s geometry) and then carry out processes of absolute, straight forward deduction from these self-evident propositions and what that led to in the case of Spinoza and Leibniz is something very far removed in both of them from the ordinary understanding of the world. To some extant, Descartes, by comparison with them, is in the business of saving the appearances. Whereas both Spinoza and Leibniz say that what the world is really like is very different from what it appears to the ordinary person to be. Nonetheless, there is still in both cases (Descartes and Spinoza and Leibniz) an underlying reality that philosophy can tell us something about reality even if common observation cannot. 28 His two chief philosophical works were Discourse on Method (1637) and his Meditations (1641). His ideal and method were modeled on mathematics. He is sometimes portrayed as the first modern philosopher due to his break with the traditional Scholastic-Aristotelian philosophy and for introducing a new mechanistic science. 29 In refurbishing the medieval proofs for the existence of God he was drawing upon the legacy of the Middle Ages. Like the Medieval philosophers, he was interested in metaphysics, and to the end of his life, Descartes remained a nominal Catholic. But there is a sense in which Descartes represents a new departure. Descartes (so it seems) was interested in God not for his own sake, but the world’s. God is invoked as a kind of dues ex machine to guarantee the validity of our thoughts about the world. 30 Nonetheless, Descartes takes his place as a Christian thinker by resting cognitive truth on the personal truth of God, and laying the blame for error not on God but on the exercise of the human will. Descartes successors eventually lost their reliance for truth. George Berkeley retains it by tracing directly to God all the ideas we receive from outside the mind and Leibniz by making each mind mirror eternal truths in the mind of God. But many Enlightenment thinkers, and many empiricists today who share some of Descartes’ rational ideals or the correspondence theory of truth, talk to truth independently of God as if it were a self-sustaining ideal and as if human reason were a purely objective and impersonal activity. Descartes’ failure was not in the relation he saw of truth to God, but in the lack of relation he saw between man’s rational capacity for knowing truth and his personality as a whole. 31 (F) (back to top) Fibonacci: His real name was Leonardo Pisano (Italian, 1170-1250) but he is better known by his nickname â€Å"Fibonacci† (filius Bonacci), which means â€Å"son of Bonacci. † A striking example of Fibonacci’s genius is his observation that the classification of irrationals given by Euclid in Book X of the Elements did not include all irrationals. Fibonacci is probably best known for his â€Å"rabbit problem. † Leonardo Fibonacci began the study of this sequence by posing the following problem in his book, Liber Abaci, â€Å"How many pairs of rabbits will be produced in a year, beginning with a single pair? †32 The analogy that starts with one pair of rabbits who give birth to a new pair from the first month on, and every succeeding pair gives birth to a new pair in the second month after their birth. Fibonacci shows that this leads to the sequences 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, and so on. As one can see, each term is the sum of the two previous terms. For example, 2 + 3 = 5 and 3 + 5 = 8, and the farther and farther you go to the right of this sequence, the ratio of a term to the one before it will get closer and closer to the Golden Ratio. Additionally, this same principal also applies to that of the Golden rectangle. The connection between the Golden Ratio and the Fibonacci series is fascinating, and is very simple to understand. If you take a Golden Rectangle, and cut off a square with side lengths equal to the length shorter to the rectangle side, then what remains is another Golden Rectangle. This could go on forever. You can just keep cutting off these big squares and getting smaller and smaller Golden Rectangles. Consequently, the idea with the Fibonacci series is to do the same thing in reverse. You start with a square (1 by 1), find the longer side, and then add a square of that size to the whole thing to form a new rectangle. Therefore, when we start with a (1 by 1) square the longest side is one, so we add another square to it. As a result, we have accumulated a (2 by 1) rectangle. Then the longest side is 2, so we connect a (2 by 2) square to our (2 by 1) rectangle to get a (3 by 2) rectangle. As this continues, the sides of the rectangle will always be a successive Fibonacci number, and eventually the rectangle will be very close to a Golden Rectangle. To translate in more illustrative terms, the ratio of two successive numbers in the Fibonacci series, as aforementioned, if divided by each number before it, will result in the following series of numbers; 1/1 = 1, 2/1 = 2, 3/2 = 1. 5, 5/3 = 1. 666, 8/5 = 1. 6, 13/8 = 1. 625, 21/13 = 1. 61538. The ratio that is settling down to a particular value is the golden ratio or the golden number, which has a value of approximately 1. 618034. 33 Fichte, Johann Gottlieb: Johann Gottlieb Fichte (German, 1762-1814) was one of the major figures in German philosophy in between Kant and Hegel. He was regarded as one of Kant’s most talented philosophers, but later developed a system of his own transcendental philosophy called the Wissenschaftslehre. Fichte had immense influence on his contemporaries, especially during his professorship at the University of Jenna, a position he held for five years (1794-1799) before taking up a profes.

Review On The Effects Of Foreign Direct Investment Finance Essay - Free Essay Example

Sample details Pages: 23 Words: 7030 Downloads: 4 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? The removal of cross-border restrictions on international capital flows and the trend toward an integrated world economy has been a substantial progress over recent two decades. Hence, it has increased the growth of foreign direct investment(FDI) activity. Madura and Fox (2007) define foreign direct investment (FDI) as the investment in real assets (such as land, buildings, or even existing plants) in foreign countries. They also find that multinational corporations(MNCs) commonly capitalize on foreign business opportunities by engaging in FDI. They engage in joint ventures with foreign firms, acquire foreign firms, and form new foreign subsidiaries. These types of FDI can generate high returns when managed properly. A substantial investment is required, and thus can increase the risk at capital. It may be difficult for multinational corporation to sell the foreign project when the investment does not perform well as expected. In order to maximize the corporationsà ¢Ã ¢â€š ¬Ã¢â€ž ¢ value, it is significant for MNCs to understand the potential return and risk of FDI and analyze the potential benefits and costs before making investment decisions. 2.1.2 Motives for FDI The reason why firms locate production oversea rather than exporting from the home country or licensing production in the hose country, and the reason why firms seek to extend corporate control oversea by forming multinational corporations have been developed by many scholars. Kindleberger(1969) and Hymer(1976), emphasize various market imperfections in product, factor, and capital markets as the key motivating forces to accelerate FDI. Eun and Resnick (2004) explore some key factors that are important for corporations making decisions to invest oversea. These factors include trade barriers, imperfect labor market, intangible assets, vertical integration, product life cycle and shareholder diversification services. Dunning (1993) interpret four different types of motives for foreign direct investment: resource seeking, market seeking, efficiency seeking, and strategic asset (or capability )seeking. The first motive means that MNCs acquire some particular resources which may mainly cnsist of primary products at a lower cost in the host country than at home. The second motive depends on the expectation of new sales opportunities from the opening of markets where MNCs had no access at before. The third one refers to utilizing the specific comparative advantages of a host economy. The last one is related with long-term strategic considerations such as gaining an significant stake in the market in the long run. To be more specific, Madura and Fox (2007) indicate that MNCs engage in foreign direct investment widely because it can improve profitability and enhance shareholder wealth. In most cases, MNCs utilize FDI to boost revenues, reduce costs, or both. Revenue-related motives include attract new source of demand, enter profitable markets, exploit monopo listic advantages, react to trade restrictions and diversify internationally. Cost-related motives involve fully benefit from economies of scale, use foreign factors, use foreign raw materials, use foreign technology and react to exchange rate movements. 2.1.3 Benefits of FDI It seems unwise to conclude that both forms of geographic diversification are likely to be equally profitable or unprofitable. Errunza and Senbet (1981, 1984) find evidence to support a positive relation between excess firm value and the firms extent of international diversity by using multinational firms only. Focusing on international acquisitions, Doukas and Travlos (1988) and Doukas (1995) document that US bidders gain from industrial and international diversification. Similarly, Morck and Yeung (1991, 2001) find a positive relation between international diversification and firm value. However, they show that industrial diversification and international diversification add or destroy value in the pres ence or absence of intangible assets. Their findings support the view that the synergistic benefits of international diversification stem from the information-based assets of the firm. Christophe and Pfeiffer (1998) and Click and Harrison (2000) find that multinational firms trade at a discount relative to domestic firms. More recently Denis, Denis and Yost (2002), using the Berger and Ofek (1995) excess value measure and aggregate data, show that global diversification reduces shareholder value by 18%, whereas industrial diversification results in 20% shareholder loss. In contrast, Bodnar, Tang and Weintrop (1999), relying on a similar valuation measure, find share-holder value to increase with global diversification. Doukas and Lang (2003) take firms which made foreign new plant announcements during the period 1980 1992 as a sample, regardless of the industrial structure of the firm, they interpret that unrelated foreign direct investments are associated with negative announce ment effects and long-term performance decreases in subsequent years, whereas related investments are associated with positive short-term and long-term performance. Although their findings indicate that both specialized and diversified firms benefit from core-business-related rather than non-core-business-related foreign direct investments, the gains are larger for diversified firms. They conclude that geographic expansion of the firms core business itself is beneficial to shareholder value. In contrast, they find that geographic expansion of the firms peripheral (non-core) business harms firm value and performance. Hence the evidence indicates that the internalization theory is more consistent with the international expansion of the core rather than the non-core business of the firm. That is, the positive synergies from global diversification are rooted in the firms core competencies. Theories of foreign direct investment (FDI) agree on at least one major point: foreign firms mu sh have inherent advantages that allow them to overcome the higher costs of becoming a multinational (Hymer, 1976) These advantages may be tangible, such as an improved production process or a product innovation. They also may be intangible, such as brand names, better management structures or the technical knowledge of employees. Girma, Greenaway and Wakelin (2001) conclude that foreign firms do have higher productivity than domestic firms and they pay higher wages in the UK after their investigation. They do not find aggregate evidence of intra-industry spillovers. However, firms with low productivity relate to the sector average, in low-skill low foreign competition sectors gain less from foreign firms. FDI brings two main benefits to the host country. First, it introduces new production facilities into the domestic economy directly, or may rescue failing firms in the case of acquisition, raising overall output, employment and exports. Second, domestic governments hope that foreign firms will be unable to internalise their advantages fully, and local firms can benefit through spillover. 2.1.4 Effects of FDI Borensztein, Gregorio and Lee (1998) test the effect of foreign direct investment (FDI) on economic growth in a cross-country regression framework by utilizing data on FDI flows from industrial countries to 69 developing countries over the last two decades. The results suggest that FDI is significant for transfer technology, and contribute more to growth than domestic investment. Moreover, they find that the contribution of FDI to economic growth is improved by its interaction with the level of human capital in the host country. However, the empirical results imply that FDI is more productive than domestic investment only when the host country has a minimum threshold stock of human capital. Thus, FDI contributes to economic growth only when a sufficient absorptive capability of the advanced technologies is available in the host economy. In vestigating the effect of FDI on domestic investment, they find that the inflow of foreign capital à ¢Ã¢â€š ¬Ã‹Å"crowds inà ¢Ã¢â€š ¬Ã¢â€ž ¢ domestic investment rather than à ¢Ã¢â€š ¬Ã‹Å"crowds outà ¢Ã¢â€š ¬Ã¢â€ž ¢. FDI support the expansion of domestic firms by complementarity in production or by increasing productivity through the spillover of advanced technology. A one-dollar increase in the net inflow of FDI is associated with an increase in total investment in the host economy of more than one dollar, but do not appear to be very robust. Thus, it appears that the main channel through which FDI contributes to economic growth is by stimulating technological progress, rather than by increasing total capital accumulation in the host economy. Markusen and Venables (1999) develops an analytical framework to assess the effects how an FDI project affect local firms in the same industry. There are two forces for the effect of entry of a multinational firm on the domestic industry. One is a competition effect, under which multinationals displace domestic final-goods producers, and the other is a linkage effect back to intermediate-goods producers, creating complementarities which could benefit domestic final-goods producers. They explore the determinants of the relative strengths of these effects. In circumstances of initial equilibrium with no local production, multinational entry can push the economy over to an equilibrium with local production in both the intermediate and final-goods industries, with a resulting welfare improvement. They then pay attention to endogenise the entry decision of multinational firms. It may now also be the case that multinationals provide the initial impetus for industrialisation, but the developed local industry creates sufficiently intense competition to eventually drive the multinationals out of the market. Hobday (1995) finds initial multinational investments in developing East Asia created backward linkage effects to lo cal suppliers in a large number of situations. There are some examples such as computer keyboards, personal computers, sewing machines, athletic shoes, and bicycles in Taiwan. 2.2 Cost of capital and capital structure Many major firms through the world have begun to internationalize their capital structure by raising funds from foreign as well as domestic sources. As a result, these corporations become multinational not only in the scope of their business activities but also in their capital structure. This trend reflects not only a conscious effort on the part of firms to lower the cost of capital by international sourcing of funds but also the ongoing liberalization and deregulation of international financial markets. If international financial markets were completely integrated, it would not matter whether firms raised capital from domestic or foreign sources because the cost of capital would be equalized across countries. On the other hand, some markets are less than fu lly integrated, firms may be able to create value for their shareholders by issuing securities in foreign as well as domestic markets. Cross-listing of a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s shares on foreign stock exchanges is one way a firm operating in a segmented capital market can lessen the negative effects of segmentation and also internationalize the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. For example, IBM, Sony, and British Petroleum are simultaneously listed and traded on the New York, London, and Tokyo stock exchanges. By internationalizing its corporate ownership structure, a firm can generally increase its shares price and lower its cost of capital. 2.2.1 Definition of cost of capital Eun and Resnick define the cost of capital as the minimum rate of return an investment project must generate in order to pay its financing costs. If the return on an investment project is equal to the cost of capital, under taking the project will leave the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s value una ffected. When a firm identifies and undertakes an investment project that generate a return exceeding its cost of capital, the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s value will increase. It is significant for a value-maximizing firm to try to lower its cost of capital. Madura and Fox (2007) explain that a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s weighted average cost of capital (referred to as Kc ) can be measured as: Kc = [D/(D+E )] * Kd * ( 1-t ) + [E / (D+E)] * Ke Where: D = market value of firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s debt Kd = the before-tax cost of its debt t = the corporate tax rate E = the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s equity at market value Ke = the cost of financing with equity The ratios reflect the percentage of capital represented by debt and equity, respectively. In total the cost f capital, Kc is the average cost of all providers of finance to the firms. A multinational company finances its operations by using a mixture of fixed interest borrowing and equity financing that can minimize the overall cost of capital (the weighted average of its interest rate and dividend payment). By minimizing the cost of capital used to finance a given size and risk of operations ,financial managers can maximize the value of the company and therefore maximize shareholder wealth. According to the different size of firm, international diversification, exposure to exchange rate risk, access to international capital markets and exposure to country risk, the cost of capital for MNCs may different from that for domestic firms. 2.2.2 Costs of capital across countries Madura and Fox (2007) interpret that the reason why cost of capital is different among countries is relevant for three reasons. First, MNCs based in some countries may have more competitive advantages than others not only for the different technology and resources across countries, but also the cost of capital. MNCs in some countries will have a larger set of feasible projects with positive net present value because of the lower cost of capital, hence these MNCs can increase their world market share more easily. MNCs operating in countries with a higher cost of capital will be forced to decline projects. Second, MNCs may be able to adjust their international operations and sources of funds to capitalize on differences in the cost of capital among countries. Third, the different component as debt and equity in the cost capital can explain why MNCs based in some countries tend to use a more debt-intensive capital structure than others. To estimate an overall cost of capital for an MNCs, it needs to combine the costs of debt and equity, and weight the relative proportions of debt and equity. The cost of debt to a firm is primarily determined by the risk-free interest rate in the currency borrowed and the risk premium required by creditors. Risk-free interest rate is determined by the interaction of the supply and demand for funds. Factors include tax laws, demographics, monetary policies and ec onomic conditions can influence the supply and demand then affect the risk-free rate. The risk premium on debt can vary among countries because of the different economic conditions, relations between corporations and creditors, government intervention, and degree of financial leverage. In addition, a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s cost of equity represents an opportunity cost what shareholders could earn on investments with similar risk if the equity funds were distributed to them. This return on equity can be measured as a risk-free interest rate that could have been earned by shareholders, plus a premium to reflect the risk of the firm. According to the different economic environments, the risk premium and the cost of equity will vary among countries. 2.2.3 MNCà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure decision Madura and Fox.(2007) indicate that an MNCà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure decision includes the choice of debt versus equity financing within all of its subsidiaries, henc e the overall capital structure is combined of all subsidiariesà ¢Ã¢â€š ¬Ã¢â€ž ¢ capital structures. The advantages of using debtor equity vary according to the corporate characteristics specific to each MNC and specific to countries where the MNCs establish subsidiaries. They interpret some specific corporate characteristics which can influence MNCsà ¢Ã¢â€š ¬Ã¢â€ž ¢ capital structure. MNCs with more stable cash flows can deal with more debt because their cash flows are constant to cover periodic interest payments. In contrast, MNCs with erratic cash flows might prefer less debt. MNCs with lower credit risk have more access to credit, their choice of using debt or equity can be affected by factors which influence credit risk. MNCs with high profit may be able to finance most of investment with retaining earnings and use an equity-intensive capital structure, while others with small level of retained earnings may prefer on debt financing. The subsidiariesà ¢Ã¢â€š ¬Ã¢â€ž ¢ borro wing capacity may be increase and need less equity financing once the parent backs the debt. Agency costs are higher when a subsidiary in foreign country can not be monitored easily be investor from parentà ¢Ã¢â€š ¬Ã¢â€ž ¢s country. In addition, they also describe the specific country characteristics unique to each host country can influence MNCsà ¢Ã¢â€š ¬Ã¢â€ž ¢ choice of debt versus equity financing and thus influence their capital structure. Firstly, some host countries have stock restrictions which means the governments allow investment only in local stocks. This kind of barrier of cross-border investing, potential adverse exchange rate and tax effects can discourage investment outside home countries. MNCs operated in these countries where investor have fewer stock investment opportunities may be able to raise equity at a relatively low cost, and they would prefer using more equity by issuing stocks. Secondly, according to the government-imposed barriers on capital flows al ong with potential adverse exchange rate, tax and country risk effects, loanable funds do not always flows th where they are needed most and the price of them can vary across different countries. MNCs may be able to obtain loanable funds at lower cost in some countries and they will prefer the debt financing. Thirdly, regard of the potential weakness of the currencies in subsidiariesà ¢Ã¢â€š ¬Ã¢â€ž ¢ host countries, an MNC may attempt to finance by borrowing currencies instead of relying on parent funds. Subsidiaries may remit a smaller amount in earning because they can make interest payments on local debt, and thus reduce the exposure to exchange rate. Conversely, subsidiaries may retain and reinvest more of its earnings when the parent believes a subsidiariesà ¢Ã¢â€š ¬Ã¢â€ž ¢ local currency will appreciate against its own currency. The parent may provide an cash infusion to finance growth in the subsidiaries, and thus transfer the internal funds from the parent to subsidiary po ssibly resulting in more external financing by the parent and less debt financing by the subsidiary. Fourthly, possibility of a kind of country risk is that the host country will temporarily block funds to be remitted by subsidiary to the parent. Thus aubsidiraies may prefer to local debt financing. At last, MNCs make interest rate payments on the local debt when they are subject to a withholding tax. Foreign subsidiaries may also use local debt if the host country impose high corporate tax rates on foreign earnings. Bancel and Mittoo (2004) survey on the cross-country comparisons of managerial views on determinants of capital structure in a sample of 16 European countries: Austria, Belgium, Greece, Denmark, Finland, Ireland, Italy, France, Germany, Netherlands, Norway, Portugal, Spain, Switzerland, Sweden, and the UK. They show that factors related to debt are influenced more, and those related to equity are influenced less, by the countrys institutional structure, especially th e quality of its legal system. They find that financial flexibility and earnings per share dilution are primary concerns of managers in issuing debt and common stock, respectively. Managers also value hedging considerations and use windows of opportunity when raising capital. This evidence strengthens arguments of La Porta et al. (1997, 1998) that the availability of external financing in a country is influenced primarily by its legal environment. Since agency costs of debt are likely to be higher in countries with lower quality of legal systems, this evidence is also consistent with theories of capital structure such as agency theory that assign a central role to debt contracts and bankruptcy law (Harris and Raviv, 1991). They find that although a countrys legal environment is an important determinant of debt policy, but it plays a minimal role in common stock policy. They find that firms financing policies are influenced by both their institutional environment and their intern ational operations. They also show that firms can adopt strategies to mitigate the negative effects of the quality of the legal environment in their home country. For instance, firms in civil-law countries have significantly higher concerns for maintaining target debt-to-equity ratios and matching maturity than do their peers in the common-law countries. Further, they find that firms operating internationally have significantly different views than do their peers in several ways. For example, firms that have issued foreign debt or equity in the sample during the last ten years are more concerned about credit ratings. Firm-specific variables that are commonly used in the capital structure literature to explain leverage also explain cross-country differences in managerial rankings of several factors. For example, large firms are less concerned about bankruptcy costs, and high growth firms consider common stock as the cheapest source of funds and use windows of opportunity to issue com mon stock. These results support the arguement by Rajan and Zingales (1995, 2003), that firms capital structures are the result of a complex interaction of several institutional features as well as firm characteristics in the home country. Their results support that most firms determine their optimal capital structure by trading off factors such as tax advantage of debt, bankruptcy costs, agency costs, and accessibility to external financing. They confirm the conclusions of Titman (2002): Corporate treasurers do occasionally think about the kind of trade-offs between tax savings and financial distress costs that we teach in our corporate finance classes. However, since this trade-off does not change much over time, the balancing of the costs and benefits of debt financing that they emphasize much is not MNCsà ¢Ã¢â€š ¬Ã¢â€ž ¢ major concern. They spend much more time thinking about changes in market conditions and the implications of these changes on how firms should be financed. Lee and Kwok (1988) examine the impact of international environmental factors on some firm-related capital structure determinants which in turn affect the MNCs overall capital structure. They consider international environmental variables of political risk, international market imperfections, complexity of operations, opportunities for international diversification, foreign exchange risk and local factors of host countries, and test agency costs and bankruptcy costs. They find that MNCs tend to have higher agency costs of debt according to Myers definition than DCs. This finding remained unchanged even when size and industry effects were controlled. Though MNCs appeared to have lower bankruptcy costs than DCs, the difference largely disappeared when the size effect was controlled. Quite contrary to the conventional wisdom, the empirical findings showed that MNCs tended to be less leveraged than DCs. This finding remained even when the size effect was controlled. However, when com panies were separated under different industry groups, the results varied significantly. Burgman (1996) directly estimate the effect of foreign exchange risk and political risk on the capital structure of MNCs. Using the foreign tax ratio to classify firms as either MNCs or DCs and controlling for industry and size effects, Burgman finds that MNCs have lower debt ratios and higher agency costs than DCs. Furthermore, international diversification does not appear to lower earnings volatility. To estimate the sensitivity of a firm to foreign exchange risk, Burgman conducts a regression analysis of the stock returns of each sample firm on the returns of an index of U.S. stocks and on the U.S.$:SDR returns. His political risk measure is based on the following ratio: number of low political risk countries to the total number of countries in which the firm operates. Low political risk countries are the top 20 in the country risk rankings provided by Euromoney in 1989. The results of a r egression analysis for his sample of MNCs suggest that the debt ratios of these companies are positively related to both risks. Burgman concludes that this evidence is consistent with the hypothesis that MNCs use debt policy as a tool to hedge foreign exchange risk and political risk. Chen et al. (1997) conducted regression analyses to investigate the effect of international activities (as measured by foreign pre-tax income) on capital structure. They report that even after controlling for firm size, agency costs of debt, bankruptcy costs and profitability, the long-term debt ratios of MNCs are lower than those of DCs. However, within their sample of MNCs, debt ratios increase with the level of international activities. 2.2.4 Segmented capital market A capital market for asset claims is integrated when the opportunity set of investments available to each and every investor is the universe of all possible asset claims. In contrast, a capital market is segmented when certain groups of investors limit their investments to a subset of the universe of all possible asset claims. Such market segmentation can occur because of ignorance about the universe of possible asset claims, or because of transactions costs (brokerage costs, taxes, or information acquisition costs), or because of legal impediments. From an international perspective, market segmentation typically occurs along national borders, a condition wherein investors in each country acquire only domestic asset claims. Grubel, Levy and Sarnat, and Lessard employ a mean-variance portfolio theoretic framework, have stressed the benefits of diversifying investments across national borders, namely the pooling of risks that results from investing in projects that are less than perfectly correlated. Subrahmanyam points out that when segmented capital markets are integrated, in addition to the diversification effect (always positive), there is a wealth effect (possibly negative) which arises out of chang es in the macro-parameters of the risk-return relationship. For the special cases of quadratic, exponential, and logarithmic utility functions, it can be shown that international capital market integration is Pareto-optimal, that is, the welfare of individuals in the integrated economies will not decline, and will generally improve. The positive effect of an expansion in the opportunity set offsets any negative wealth effect. The market reformed and liberalized in developed economies in the 1970s and emerging economies during the second half of the 1980s led to the removal of many barriers. The deregulation and the development of local equity markets allowed the possibility of foreign portfolio investments (FPIs). Overall, FPIs would provide a new source of capital and internationalize the domestic capital markets. Subsequent improvements in risk sharing and risk matching would cause the cost of capital to fall. Errunza and Miller (2000 ) use a sample of 126 firms from 32 countri es, document a significant decline of 42% in the cost of capital. In addition, they show the decline is driven by the ability of U.S. investors to span the foreign security prior to cross-listing. The findings support the hypothesis that financial market liberalizations have significant economic benefits. 2.2.5 Interaction between subsidiary and parent financing decisions In segmented markets the parent and its subsidiaries will generally have different valuation objectives and investment-acceptance criteria. Under some conditions these depend on the international financing mix. Decentralization can be optimal in the sense of global maximization, provided that the parent is unrealistically free, ex-ante, to optimize its percentage ownership in the subsidiaries at the beginning of each planning period. In the case of a two-country firm, the subsidiaries maximands are independent of the parents. But when the parents ownership position is predetermined at a fixed level, as it is normally, the situation is radically different. Market values cannot then be maximized independently and Pareto optimization is required. Michaelà ¢Ã¢â€š ¬Ã¢â€ž ¢s (1974) main result is that, unless agreement can be reached on a compensation principle, the joint ventures cost of capital will be indeterminate. In such circumstances optimal financial planning for the MNC as a whole may be impossible. Concluding remarks draw attention to the attendant possibility that the MNC in this case may be unstable and/or inefficient. 2.2.6 The MNCà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure decision An MNCà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure decision involves the choice of debt versus equity financing within all of its subsidiaries. Thus, its overall capital structure is essentially a combination of all of its subsidiariesà ¢Ã¢â€š ¬Ã¢â€ž ¢ capital structures. MNCs recognize the tradeoff between using debt and using equity for financing their operations. The advantages of using debt as opposed to equity vary with corporate characteristics specific to each MNC and specific to the countries where the MNC has established subsidiaries. Madera and Fox (2007) indicate some common firm-specific characteristics that affect the Macà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure such as stability of Macà ¢Ã¢â€š ¬Ã¢â€ž ¢s cash flows, Macà ¢Ã¢â€š ¬Ã¢â€ž ¢s credit risk, Macà ¢Ã¢â€š ¬Ã¢â€ž ¢s access to retained earnings, Macà ¢Ã¢â€š ¬Ã¢â€ž ¢s guarantees on debt and Macà ¢Ã¢â€š ¬Ã¢â€ž ¢s agency problems. They also point the unique host country characteristics can influence the MNCà ¢Ã¢â€š ¬Ã¢â€ž ¢s choice of debt versus equity financing and therefore influence the MNCà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. These characteristics include stock restrictions in host countries, interest rates in hose countries, strength of host country currencies, country risk in host countries and tax laws in host countries. 2.3 Risk analysis 2.3.1 Country risks With operations under the jurisdiction of a foreign government the firm is also exposed to political risk, therefore it must estimate the potential costs it will face due to unstable governments, regime change and changes in policies. Political risk may be defined as a particular exposure to risk which depends on the actions of a government, and its assessment or analysis for a MNC is a decision-making tool for investing in foreign countries. An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries. Many country risk characteristics related to the political environment can influence an MNC. Madura and Fox (2007) indicate that an extreme form of political risk is the possibility that the host country will take over a subsidiary. In some cases of expropriation, some compensation is awarded, and the amount is decided by the hose country government. In other cases, the assets are confiscated and no compensation is provide d. Expropriation can take place peacefully or by force. They also explore other common forms of country related risks include attitude of consumers in the host country, actions of host government, blockage of fund transfers, currency inconvertibility, war, bureaucracy and corruption. Over recent decades, there has been a significant increase in political risk for MNCs. This is true not only for an MNCs operations in developing countries, but also for those in developed countries. Governments have felt the need to respond to various pressure groups aimed at curbing the power of MNCs. For example, oil companies may face unfavourable legislation designed to pay for the damage to environment. Developing countries may have to respond to populist sentiments or worsening economic circumstances by seeking to renege on contracts signed by previous regimes. Another risk area which has grown in recent years has been the strength of fundamentalist religious groups in a number of economically important regions. Shapiro (1999) and Buckley (2000) argue that government intervention in the economy increases the likelihood of political risk for the MNCs. Proponents of free markets strongly support this view, arguing that government intervention creates a number of inefficiencies in the markets that discourage competition, justify the privilege of state-controlled enterprises, promote unnecessary bureaucracy, and overall stifle initiative. Clark and Marois(1996) and Wilkin (2000) categorise negative political risks as macro and micro risks. Macro political risks are those which affect MNCs in general, whereas micro political risks are those which relate to specific firms in specific countries. Shapiro identifies them as: expropriation; currency and trade controls; changes in tax and labour laws; regulatory restrictions; and requirements for additional local production( 1996:747). Simons framework includes wider societal issues such as public opinion, alliance shifts, revol utions and coups (quoted in Demirag and Goddard, 1994). Expropriation is generally regarded as the most obvious and extreme form of political risk. The realities of the current global economic climate mean that many countries may not resort to such drastic measures, due to the very unfavourable situation that such an action may create for them in the long term. This could be in the form of international economic isolation and cessation of support from the International Monetary Fund and the World Bank. This support is vital for continued economic progress in developing countries, and any cessation of it may mean an even tougher economic environment for these countries. Before commencing operations an MNC should undertake a dispassionate and careful analysis of the political risk of operating in the foreign country concerned. Operations in developing countries may require a more thorough analysis of the costs versus benefits, and a large degree of uncertainty may always be pres ent in starting operations in a developing country. This should be weighed against the perceived benefits and calculated returns on investment. It is important for the MNC to take a calculated and educated view of the situation. There is no commercial activity without risk, and a degree of risk will therefore have to be accepted. Some of the important aspects that need to be looked at are: political stability, or degree of acceptable instability; economic factors; savings, development and social stability; government budget deficits; and transparency and openness of the economy. It must also be recognised that recent developments in terrorism risk are bringing a new dimension to political risks. While terrorism in the past may have been identifiable as a county risk, such as the IRA in the UK, Abu Nidal in Israel and the Shining Path in Peru. There is the growth of terrorist groups in the 21st century who are not associated with a specific nation-state or narrow geographical regi on. The actions of such groups may disrupt a business across a range of activities and locations, rather than simply disrupting operations in a specific country. The most obvious answer when faced with political risk would perhaps be to avoid it completely by deciding not to do business in a particular country, but this has to be balanced against the loss of an opportunity to make a profit, and the more global nature of certain political risks. Given the risks inherent in business generally, it would normally only be the most extreme situations that require avoidance. The decision would most probably be made, on commercial grounds, to accept a degree of political risk and attempt to manage such risk effectively. Political risk, like other risks, may be managed by diversification across various territories. Henisz (2000) shows that multinationals face an increasing threat of expropriation if political hazard in the host country increases. However, the degree of risks depends on the strategic behaviour of the multinational, which may partner with host-country firms that have a comparative advantage in interactions with the host-country government. Harms (2002) estimated the impact of financial risk on equity investment flows which includes the sum of FDI and portfolio investment to developing countries. Using a panel data set of 55 developing countries and the period 1987 to 1995, he find that lower financial risk is associated with an increase in FDI and portfolio investment. On the other hand, Egger and Winner (2005), utilize a sample of 73 countries over the period 1995 to 1999 and find a positive linkage between corruption and FDI. In the presence of excessive regulation and other administrative controls, they propose that corruption may act as a à ¢Ã¢â€š ¬Ã…“helping handà ¢Ã¢â€š ¬? to encourage FDI inflows. Recently, several studies have analysed the relationship between fundamental democratic rights and FDI. Using different econometric techniq ues and periods, Harms and Ursprung (2002), Jensen (2003), and Busse (2004) interpret that multinational corporations are more likely to be attracted where there is democracy. On the other hand, Li and Resnick (2003) argue that competing causal linkages are at work. They find that democratic rights lead to improved property rights protection, which increases foreign investment. Apart from this indirect impact on FDI, increases in democracy may reduce FDI. These studies use pooled time-series analysis, but not all of them account for possible endogeneity of the independent variables while some often focus on very specific indicators such as democratic rights, omitting a broader range of policy-related variables. Busse and Hefeker (2007) explore the linkages among political risk, institutions, and foreign direct investment inflows and show that government stability, internal and external conflict, corruption and ethnic tensions, law and order, democratic accountability of governmen t, and quality of bureaucracy are highly significant determinants of foreign investment inflows. 2.3.2 Exchange rate risks In foreign direct investment (FDI), most firms face exchange rate risk because the exchange rate between the home and host currencies might change in the future. When transactions are contractually finalized (transactions exposure), the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s value might change because of the sensitive exchange rate movements (economic exposure). The importance of exchange-rate variability for domestic and international investment flows has been argued quite a lot. In industrialized economies, the presumed effects of exchange-rate variability have influenced the choice of international monetary regimes. The Smithsonian Agreement was discussed in the early 1970s and again at the time of the Plaza Accord during the mid-1980s. In the early 1990s, the negative implication of variable exchange rates was a theme for designing the Exchange Rate Mechanism (ERM ) operable over currencies in the European Monetary System (EMS). The currency crises within the ERM in September 1992 and Spring 1993 refocused attention on the rationale for limiting short-term nominal exchange rate movements and on the validity of arguments that exchange rate variability is costly and dampens real economic activity. Igawa (1983), Cushman (1985, 1988) and Goldberg and Kolstad (1995) examine bilateral FDI flows between the U.S. and a few of developed countries (U.K., France, Germany, Canada and Japan), they find a positive relationship between exchange rate risk and FDI. On the other hand, Kelly and Philippatos (1982) argue that the investments appeal less when the exchange rate risk is greater. Clare (1992, 1998), Benassy-Quere, Fontagne, and Lahreche-Revil (2001) and Brzozowski (2006) focus on cross-country studies and all find a negative relationship between exchange rate risk and FDI. Benassy-Quere, Fontagne, and Lahreche-Revilà ¢Ã¢â€š ¬Ã¢â€ž ¢s (2001) stud y covers FDI flows from 17 OECD nations to 42 developing countries, finding a negative response to exchange rate risk. Brzozowskià ¢Ã¢â€š ¬Ã¢â€ž ¢s (2006) study covers FDI flows to 32 transition and emerging countries, and shows a relationship not as strong as expected, is still negative. Clareà ¢Ã¢â€š ¬Ã¢â€ž ¢s (1992) study covers the FDI flow from the U.S. to 14 developed and 15 developing countries, and finds a strong negative relationship for each set of countries as well as across the entire spectrum of countries. Clark, Hooper and Kohlhagen, Gotur, Cushman (1983, 1988), De Grauwe, Maskus, and others focus on tudies of the effects of exchange rate risk on trade and find that exchange rate risk reduces trade. However, earlier results (Hooper and Kohlhagen) lend little support to this hypothesis; although Cushman (1988) find significant adverse effects of exchange rate risk on U.S. trade flows. Pick (1990) analyzes the effects of exchange rate risk on U.S. agricultural expor ts to ten different countries and estimate a model which incorporates exchange rate risk. but it also shows that exchange rate risk is not always important. His results suggest that the exchange rate risk was not significant in the seven developed markets, but significant to determine U.S. agricultural exports. Anderson and Garcia ( 1989) examine the effects of exchange rate uncertainty on bilateral soybean trade flows and finds that imports for Japan, France, and Spain are sensitive to short-term variations in nominal bilateral exchange rates. Madura and Fox, R.(2007) suggest that the exchange rate risk from financing with bonds in foreign currencies can be reduced by using one of the alternative strategies. MNCs may be able to offset their exposure to exchange rate risk by issuing bonds denominated in the local currency. Alternatively, the MNC might obtain debt financing in its home currency at a lower interest rate, but it will not be able to offset its earnings in the foreign currency. Recall that countries where bond yield are high tend to have a high risk-free interest rate and that a high risk-free interest rate usually occurs where inflation is high. Also consider that the currencies of countries with relatively high inflation tend to weaken over time. Thus, it is difficult for MNCs consider obtain long-term financing. Issue debt in the local currency and reduce exposure to exchange rate risk, or issue debt denominated in its home currency at a lower interest rate but with considerable exposure to exchange rate risk. Neither solution is without problems. 2.3.3 Interest rate risks Madura and Fox (2007) interpret that higher interest rates tend to slow the growth of an economy and reduce demand for the MNCà ¢Ã¢â€š ¬Ã¢â€ž ¢s products. Lower interest rates often stimulate the economy and increase demand for MNCà ¢Ã¢â€š ¬Ã¢â€ž ¢s products. Normally, an MNC will not use a maturity that exceeds the expected life of the business in that country. Madura and Fox (2007) indicate that the MNC is exposed to interest rate risk when it uses a relatively short maturity, or the risk that interest risk will rise, forcing it to refinance at a higher interest rate. It can avoid this exposure by issuing a long-term bond (with a fixed interest rate) that matches the expected life of the operations in the foreign country. The disadvantage is that long-term interest rates may decline in the near future, but the MNC will be obliged to continue making its debt payments at a higher rate. There is no perfect solution, but the MNC should consider the expected life of the business and the yield curve in the per annum rate for bonds of differing maturities. The difference is shaped by the demand for and supply of fund at various maturity level in a countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s debt market. 3. Methodology 3.1 Reseach methods and data (not be finished) Here, this dissertation use the second data gathered from the companies and research based on other scholarsà ¢Ã¢â€š ¬Ã¢â€ž ¢ research. 3.2 The International Capital Asset Pricing Model(ICAPM) Madura and Fox (2007) indicate that the International Capital Asset Prcing Model (ICAPM) can be regarded as more formal treatment of the cost of capital elements than mentioned before. This model is an international extension of the Capital Asset Pricing Model (CAPM). The CAPM addresses a single currency area and single financial market where there are no restrictions on financial transactions. The ICAPM extends this analysis to multiple currency areas and multiple financial markets. Both these two models seek to answer the question what discount rate should be applied to the future cash flows of a particular project. Kj = Rf + ÃŽÂ ²j ( Rm à ¢Ã¢â€š ¬Ã¢â‚¬Å" Rf ) Where: Rf = risk free rate of return Rm = market return ÃŽ = beta of a particular share or a project The application of the CAPM model and the ICAPM model presents considerable practical problems for an MNC. The company first has to find a like project of a similar risk class to identify an appropriate beta. Highly correlated measures of return can produce very different betas. There is a problem of meaning. Why a beta is particularly high or low or why it changes is not easy to explain. Selecting the appropriate beta may well not be easy. A final critique is that the model is not complete. The application of the ICAPM or any discount cash flow model does not account for the role of real options in investments. Capital asset pricing theory suggests that the cost of capital should be genrerally lower for MNCs than domestic firms. MNCs have a greater opportunity to diversify across different financial markets. The systematic or non-diversifiable element of their investment should be lower. However, invest abroad is risky, more risky than domestic investment. The non-systematic part of risk may therefore reasonably be expected to be greater. MNCs diversification opportuniti es may be limited because different market is possible, but the product and demand for the product is fairly narrow. The extensive use of derivatives by MNCs is an attempt to lower such risk. It is hard to say an MNC will have a lower cost of capital than a purly domestic firm in the same industry. However, this discussion can be used to understand an MNC may attempt to take full advantage of the favourable aspects that reduce its cost of capital. Don’t waste time! Our writers will create an original "Review On The Effects Of Foreign Direct Investment Finance Essay" essay for you Create order