Social Responsible Investment

SRI is a new fashion for investors. In SRI non-financial factors are the basis for considering the profit. It is an ethical conviction for investors in choosing their investing position. According to Bloomberg News, the SRI fund increased by 20% in 2011. It indicate SRI is becoming the new fashion for investors.

The SRI funds have relatively higher initial charges, but since they are quite restrictive about the companies they invested in, they have performed relatively poorer than other types of funds. Another thing is that SRI directly involving in banking industry is a conflict of interest. Because cutting out firms with unfair or unsafe labour and poor environmental records will screen out vast firms banks invest in. there is no guarantee that banking system will do SRI investment without interest conflict.

And how well the SRI can hedge the financial crisis? The SRI invests in companies with restrictive option and profitability is not primary concern of the investment so that SRI cannot perform well compared to other investments. Thus, to what extent can we expect SRI to outperform when the market going down?

In my opinion SRI is a controversial term itself. Social and responsible standard is too restrictive to diversify the portfolio and outperform the market. It is difficult to do both socially responsible and profitable based on narrow investment choice. From a practical prospect, how can you ensure the managers of so-call SRI funds to give up the investment opportunity just because it is not socially responsible, especially when they have done time-consuming and costly quantitative and qualitative analysis? And will the SRI bring about good profitability when the investment choice is so restrictive and narrow and portfolio diversification is so difficult to do?

Why SRI is a fashion when it is nonsense obviously? To answer this question is beyond the financial scope. Like the theory of Global warming promoted by political organizations rather than meteorologist, SRI is a political issue rather than financial one. And also like so-called global warming, SRI is just a point created by politicians from where to expand and diffuse their influence in economy. SRI is an investment? Yes, but just for politicians, not us.

The shareholder wealth and the financial crisis

It is self-evident that financial crisis damages shareholder value severely and the depreciation of shareholder value is the result of financial crisis. But is the relationship between shareholder value and financial crisis that simple? One opinion is that the over emphasis of shareholder value is a catalyst of financial crisis.

In the case of JP Morgan, as reported by BBC news it also encountered credit crunch and shareholder value loss like any other finance companies in the crisis of 2009. Last Friday it suffered a loss of 20 million dollars in derivative business. The reason for JP Morgan involved in the loss is that the managers of JP Morgan invested lots of money in high risk derivative trading. But if looking insight the investment, it will be found the high-risk investment was encouraged by the board, the representation of the shareholders. In order to make more profit and create more shareholder value, the manager of JP Morgan chose to invest in high risk derivative trading. The purchase of shareholder value has served as a catalyst of high risk speculation. It seems that emphasis of creating shareholder value leads to misbehavior in the financial crisis and harms the shareholder value at last.

M&A and shareholder value

According to Angwing (2007), the M&A during 1996-2011 increased by more than $23.4 trillion. The scale of M&A is getting greater and becoming the major way of expanding business nowadays. The argument is raised up along with the rapid growth whether the M&A can create shareholder value. In the case study of Time Wanner and AOL the shareholder value is harmed by the M&A deal. At first the shareholder price was leveled up to $334.75 by the M&A deal, but one year later the loss from the M&A deal was up to $98 billion, which accounted for 97%of shareholder value.

Another case is Lenovo and PC business of IBM in 2005. The M&A deal helped Lenovo to expand its business overseas. The M&A deal made Lenovo the third greatest PC manufacturer in the world. But Lenovo did not stop the continuous loss from the PC business and the loss in 2006 was up to $21million loss. The overseas market share also was harmed by the M&A deal.

Overall 80% of M&A deal turned out to be profit loss 3years later. The M&A is quite a risky deal, but why still so many companies go to M&A every year? Actually, M&A is a means to build up controlling power in market for companies. Via M&A companies can become more influential in the market and this gives companies a power to affect the market price and seek a monopolistic position in market. It generates the high expectation for shareholder value that a monopolistic position will create more values. In the short term the M&A harms the shareholder value. But if the M&A deal can bring about an influential power even a monopolistic position for the companies, the M&A is still beneficial for shareholder value in long term.

FDI in India

The Indian government revealed that FDI from Pakistan was allowed. It is a signal for growing relationship between two countries.

The decision may not cause an immediate increase of FDI from Pakistan, but it does show that the two countries are going to a new level of trade and economic development. It is part of the trade normalization process. The Commerce, Industry and Textiles minister of India Anand Sharma commenced that procedure making is underway and will come out soon. As relationsip is growing warm, the opening up in investment will cut down the illegal trade by estimated 10 billion.

Governments hope the opening up in investment will bring about greater confidence in bilateral relationship. Economic development can solid the base for further trust as the economic tie between countries can keep close corporation.

The banks are keen to open new branches to expanse their own business. The progress of allowing banking services is going forward. New discussion has been initiated and a plan for setting up India-Pakistan council for better developing FDI is on progress.

Besides, the FDI in retail chain is argued in public. The FDI in India decreased for recent years. In 2011 the investment declined by $14bn. Besides, the Indian retail sector is going through a messy situation. The low efficiency and slumping growth rate force the government to take reformation in this sector. The FDI boost in the sector can help change the situation and bring more employ opportunity.

But the reformation will harm the small vendors in the business. Overseas companies will compete over the vendors and the small shops will have to close down and many people will lose their jobs. Also the local farmers is at the stake as the overseas companies will press down the price and squeeze the profit for framers. But it is good news for the customers as they will enjoy the premium service provided by overseas vendors.

Overall, FDI growth in India is a good sign for this developing countries. The capital inflows with FDI can help the countries boost their economy and create more jobs. Capital and jobs always are good element for developing economy. The FDI in retail sectors should be encouraged. Except for IT industries, other business industries in India are going through a slump developing. The FDI in these industries can change the low efficiency and messy management situation. It is going to have cost. The traditional management and developing pattern will be inevitably changed. Small vendors and local suppliers will harm. But the cost is worth in term of the benefit brought about.

If the FDI from neighbor country which has disputes in relationship, the FDI is not just good for the economy but also for the political stability in the region. FDI from Pakistan will enhance the cooporation between countries and solid the base for peace. The meaning of FDI is further than economic developing.