DIVESTMENT DECISIONS
DIVESTMENT DECISIONS
In much of the preceding discussions we showed that firms should consider decreasing their commitments to certain areas in order to free resources for a better fit with corporate objectives. It is now common to read that a firm is terminating its ownership in an investment in a foreign country, usually involving the sale of operations that have poor performance prospects compared to alternative opportunities.
Studies of the divestment experience conclude that most firms might have fared better had they been more experienced and developed divestment specialists. There has been a tendency to wait too long by trying expensive means of improving performance. Local managers, who fear loss of their own positions if the MNE abandons an operation, propose additional capital expenditures. In fact, this question of who has something to gain or lose is a factor that sets apart decisions to invest from decisions to divest. Both types of decisions should be highly interrelated and geared to the company's strategic thrust. The idea for investment projects typically originates with middle managers or with managers already employed in foreign subsidiary operations who are enthusiastic about collecting information to accompany a proposal as it moves upward in the organization. After all, the evaluation and employment of these people depend on growth. They have no such compulsion to propose divestments. These proposals typically originate at the top of the organization after upper management has tried most remedies for saving the operations.42
Divestments may occur by selling or simply closing facilities. The option of selling is usually preferred because the divesting firm receives some compensation. But if a firm considers divesting because the outlook for the country's political-economic future is poor, there may be few potential buyers except at very low prices. In such situations, there may be a tendency to try to delay divestment in hope that the situation improves. If the situation does improve, the firms that waited out the situation are generally in a better position to regain markets and profits than firms that forsook their operations in the country. For example, many international firms divested their South African operations during the late 1980s primarily because South Africa's policy of apartheid caused political unrest within South Africa, trade embargoes by foreign investors' home country governments, and consumer pressure outside South Africa to divest. As more firms attempted to divest, there were fewer buyers (usually wealthy white South Africans) who were able to buy facilities even at lower prices. By the early 1990s, the dissolution of apartheid laws brought a renewed positive outlook to South Africa's future. Firms that remained in South Africa during the turmoil of the 1980s (such as Hoechst, Crown Cork & Seal, and Johnson Matthey) were able to move much faster in the early 1990s at increasing their South African business than firms that had abandoned the market.43
A firm cannot always simply abandon an investment either. Governments frequently require performance contracts that make a loss from divestment greater than the net value of the direct investment. Furthermore, many large multinational firms fear adverse international publicity and difficulty of reentering a market if they do not sever relations with a foreign government on amicable terms. During the early 1990s, several foreign investors (including Occidental Petroleum and Email and Elders) sought to take losses and leave the Chinese market, but the Chinese government made their departures slow and expensive.44
In much of the preceding discussions we showed that firms should consider decreasing their commitments to certain areas in order to free resources for a better fit with corporate objectives. It is now common to read that a firm is terminating its ownership in an investment in a foreign country, usually involving the sale of operations that have poor performance prospects compared to alternative opportunities.
Studies of the divestment experience conclude that most firms might have fared better had they been more experienced and developed divestment specialists. There has been a tendency to wait too long by trying expensive means of improving performance. Local managers, who fear loss of their own positions if the MNE abandons an operation, propose additional capital expenditures. In fact, this question of who has something to gain or lose is a factor that sets apart decisions to invest from decisions to divest. Both types of decisions should be highly interrelated and geared to the company's strategic thrust. The idea for investment projects typically originates with middle managers or with managers already employed in foreign subsidiary operations who are enthusiastic about collecting information to accompany a proposal as it moves upward in the organization. After all, the evaluation and employment of these people depend on growth. They have no such compulsion to propose divestments. These proposals typically originate at the top of the organization after upper management has tried most remedies for saving the operations.42
Divestments may occur by selling or simply closing facilities. The option of selling is usually preferred because the divesting firm receives some compensation. But if a firm considers divesting because the outlook for the country's political-economic future is poor, there may be few potential buyers except at very low prices. In such situations, there may be a tendency to try to delay divestment in hope that the situation improves. If the situation does improve, the firms that waited out the situation are generally in a better position to regain markets and profits than firms that forsook their operations in the country. For example, many international firms divested their South African operations during the late 1980s primarily because South Africa's policy of apartheid caused political unrest within South Africa, trade embargoes by foreign investors' home country governments, and consumer pressure outside South Africa to divest. As more firms attempted to divest, there were fewer buyers (usually wealthy white South Africans) who were able to buy facilities even at lower prices. By the early 1990s, the dissolution of apartheid laws brought a renewed positive outlook to South Africa's future. Firms that remained in South Africa during the turmoil of the 1980s (such as Hoechst, Crown Cork & Seal, and Johnson Matthey) were able to move much faster in the early 1990s at increasing their South African business than firms that had abandoned the market.43
A firm cannot always simply abandon an investment either. Governments frequently require performance contracts that make a loss from divestment greater than the net value of the direct investment. Furthermore, many large multinational firms fear adverse international publicity and difficulty of reentering a market if they do not sever relations with a foreign government on amicable terms. During the early 1990s, several foreign investors (including Occidental Petroleum and Email and Elders) sought to take losses and leave the Chinese market, but the Chinese government made their departures slow and expensive.44
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