Leasing: It May be Right Abroad Even When It is not at Home
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Leasing can ease investors' concern over expropriationand open the road for the multinationalenterpriseto investin almost everycountry whereit is welcome. Furthermore,governmentsof developing countrieswhich solicit direct foreign investment usually offer concessionsto the foreign investors in severalways. One of suchbenefitsis makingavailablegovernment-owned land and/or buildings to the foreign investor through leasing at bargain prices. In countries where such benefits do not exist, the multinational' corporationmay still minimize its initial investment by seeking a lease on the landand buildingsthroughlocal privatesources. In leasing equipment and machineryin a developingeconomy, however, there is a very good chance that a substantialportion of the required merchandisewill not be locally available.The multinationalfirm can often solve this problemby purchasingthe necessaryequipmentelsewhere,selling it to a local leasingfirm, and leasingit back. Leasingsimply reducesthe riskof expropriationof company assetsby the foreign government.Should an expropriationtake place, only the subsidiary'scurrentassetswill be in danger, and currentassetscanbe kept at a minimumlevel throughshiftingof fundsto more reliablesubsidiaries.Moreover, a low level of assets should not be a problemfor the subsidiary,since it can make use of its parent company'sreputation as guaranteesfor lease payments. At the same time, after the lease termshave expired, the parent company may find it suitableto purchasethe leased machineryand equipment at substantiallylower prices than their actual marketvalue. This action is permissibleon many occasionsbecausemany countrieslack laws and regulationsregardingleasing. Also, since in many developing countriesthe tax laws and their enforcementareratherlethargic,the lessee might be able to enjoy maximumlease payment deductions as well as being able to purchasethe machineryand equipmentafter the leasehas runout. The important point is that a locally-basedlessor usually does not need to worry about his own government"expropriating"his assets. He thus needs to add little to his leasing chargeto cover that risk. But if the client is not a local citizen, then the riskof purchasingratherthan leasingby the client might very well be great enough that the client would be willing to pay substantiallyto eliminateit. In other words, the lessorcan providea riskreductionserviceat very little cost (or risk) to himself. Devaluation A second unique risk involvedin internationaloperations is currency devaluation.Devaluationof local currencyis not limited to developingeconomies and is ratherwidespreadamong all countries. Due to recentstatesof flux in the currencyexchange market and internationalmonetary imbalances, devaluationhas become an even largerthreatto the operationsof the multinationalcorporation. 88
It is possible to reducethe cost of a devaluationif the purch
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