International Business
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Discuss the pros and cons of a US based domestic company aggressively investing in emerging economies. You may use a particular company (by name) and a particular emerging economy (by name) to provide your examples.
The pros of a US based companies investing in an emerging economy include: broader reach of products and services, cheaper labor, potential for higher growth, and diversification of investment portfolio. Toyota has heavily invested in the US and as a result we have rewarded Toyota. As a nation purchasing millions of their vehicles Toyota has expanded their reach by investing in the US. In the case of Levi’s, the jeans company, they have invested in Mexico and used Mexico to make their products. The main reason for them investing in Mexico is because of their cheap labor and minimal labor laws. General Motors and Volkswagen have invested millions of dollars in China over the past decade. Their investment over the past decade has paid off so greatly that other automobile companies have followed suit. General Motors and Volkswagen achieved higher growth in China and diversification of their portfolio’s.
The Cons include Political Risk, Economic Risk, Currency Risk, and culture risk. An example of Political Risk is the relationship of Coca-Cola and Venezuela. In 2014, there were protests in Venezuela affecting Coca-Cola earnings report. Political Risk could evolve with companies like Levi’s since US-Mexico relations have become shaky. Coca- Cola has also been involved in Greece and their operations have been threatened with economic risks. This is due to the health of Greece’s economy, over the years Greece has been very close to defaulting as a nation. Coca-Cola is also a great example of a company dealing with Culture Risk. Coca-Cola is based in many different cultures and they tailor their business model to the market they are penetrating. This enables them to keep foreign business based on their evolving cultural and religious beliefs.
In the context of international business, what is meant by the term “political risk”? In general, how do MNCs analyze this risk? Which countries are considered the most and least risky and why? How are the integrative, protective and defensive techniques MNCs used to respond to political risks? Give examples of how business might use these techniques.
Political Risk is a risk associated with a firm entering a foreign territory. They key factor to political risk involves any action that is government or politically-based that affects the way the firm operates.
Most Multinational Corporation use experts usually in country they intend of entering or with individuals with special qualifications that relate to analyzing political risk. They are well trained in politically and economic analysis. Hong Kong, New Zealand, Australia, and Switzerland are examples of countries with minimal risk. The countries with the most risk associated would include Russia, Venezuela, India, Brazil, and any country with heavy terrorist ties. Political risk is said to be on the up rise. The countries with lower political risks tend to be multi-cultural, stable economically, and have a low amount of terrorists events. Countries like Brazil have little faith in economic state and political leadership. Russia has a multitude of sanctions and links to terrorism causing investors to look elsewhere.
Many MNC’s use hedging and Joint ventures as ways to minimize risks. Hedging can be done by purchasing insurance that protects the corporation from potential political risks. Another way to hedge political risk would be bet against your investment. For instance, if XYZ company invested in Japan. An efficient way to hedge would be to buy put options against a major Japanese index fund. This can offset the investment as a whole in Japan. Joint Ventures are very common when expanding to an emerging market. They manage risks by working with the local government and local businesses. One example of Joint Venture would be a tire company who wants to invest in Australia. They could identify and set up a joint venture with a large rubber manufacture who supplies rubber to local