Response to Classmates Discussions
kingstonman41
Week6-DiscussionForum1.docxWeek 6 - Discussion Forum 1
SundayAug 2 at 10:52am
Foreign investment is so different from domestic investment because the organization faces risks relative to political issues, foreign exchange rates, environmental variations, taxation, and social deviations (Block et al., 2019). All of these topics and more should be considered by C-level leadership when expanding internationally. Political issues consist of corruption and control in governmental regulations, sometimes requiring a licensing agreement or joint venture to establish an international extension with locals in charge of operations. Fluctuations in foreign exchange rates can contribute to gains or losses depending on the valuations driven by supply and demand (Block et al., 2019). Regulations regarding environmental disposals, production, operation, and taxation differ by region, creating significant risk of closure, monetary fines, and/or loss in reputation. Differences in culture and social compliance in the workplace is necessary for a successful expansion.
Mitigating environmental risk through using a local business lawyer or accountant to navigate and file necessary documents, registrations, and obtain permits is one step C-level management can follow (Morello, n.d.). Foreign exchange rate fluctuations cannot be avoided. Finding a banking institution with locations both domestically and internationally can assist with conversions, lending, and cash transfers between the parent and subsidiaries (Morello, n.d.). Political risks can be costly and significant to an organization seeking expansion in a new country. Leaders can study the successes and failures of prior business ventures into the region under consideration (Morello, n.d.). Working with the MIGA (Multilateral Investment Guarantee Agency) under the World Bank provides strategic avenues to navigate the proper channels for success (Morello, n.d.).
References
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management (17th ed.). https://www.vitalsource.com (Links to an external site.)
Morello, R. (n.d.). Strategies That Mitigate International Business Risks. https://smallbusiness.chron.com/strategies-mitigate-international-business-risks-43016.html (Links to an external site.)
TuesdayAug 4 at 1:58pm
As a consultant, it would be my job to provide insight into important decisions the CEO is contemplating. In this situation, it's essential to understand domestic and international expansion and their similarities and differences. Domestic development is when companies focus on growing in domestic markets. International markets concentrate on developing new territory throughout the world. With that in mind, an expansion for any company can be difficult regardless of if it's domestic or international. It's critical to understand what this specific company needs and wants from growth because not all businesses need to expand in new cities. Domestic and international expansion have many things in common; however, the most obvious is the expense. On the other hand, international growth calls for a lot more preparation because of the new culture, rules, and language that comes with different countries. “Trade Start” explains that “It is important to remember that the way you operate your business will be determined by the culture of the market you are entering, not yours” (p. 1). While domestic and international expansion is hard, growing domestically is less stressful because it's more familiar than foreign countries.
Foreign investment differs from domestic investment for many reasons—first, the types of governments that may be encountered. The United States is a mixture of capitalism and socialism, and other countries may not have that same mixture, which can make it difficult to adjust to these practices. With different government comes different politics; some countries may require bribes or other unethical actions that will put the company at risk. Also, the exchange rate from U.S.D to another currency, along with the import taxes, can have an impact on how successful the company will be overseas. All these ideas need to be considered because it’s not something domestic business handles regularly. While these are focused on money and getting the company’s foot in the door, some factors need to be considered once the store is up and running like marketing, price, and culture. If the country doesn’t have equality between men and women, advertisements need to be adjusted. Rates will need to be adjusted from current markets to ensure competitiveness with other companies in the market.
C-Level executives are the members in charge of specific units in the company; therefore, they should all be concerned with domestic and international expansion. C-level executives should be considered with more things internationally than domestically. For example, the financial aspects of international growth entail obtaining capital through the international finance corporation (IFC). Also, there is a licensing agreement that should be considered; for example, what if taxes are raised? Or imports are banned? Lastly, the exchange rate, and how to borrow money with little to no transaction fees when converting the money from one currency to another. In addition, C-level executives should also concern themselves with possible political and government rules, regulations, and policies because this directly influences certain factors that control the success of a company.
While there are risks with international expansion, there are ways to mitigate those risks to help executives be successful if the choice is made to expand. (Morello, 2019) explains, “Consider banking with an institution that has branches and a business presence both in the United States and in the country where your business will do business” (p. 1). This can help limit cost when switching to U.S.D. because this is no longer the strongest currency. Another way to mitigate risk is to do research not only on the country the company is looking to expand to, but also why other companies failed. What mistakes did they make? For example, did they not have enough suppliers? Was the government too corrupt? Was war or terrorism apart of the failure, and are we equipped to support these situations?
Reference
Morello, R. (2016, October 26). Strategies That Mitigate International Business Risks. Small Business - Chron.com. https://smallbusiness.chron.com/strategies-mitigate-international-business-risks-43016.html.
TradeStart. (2019, May 9). Differences Between Domestic and International Business. http://www.tradestart.ca/domestic-vs-international (Links to an external site.).
TuesdayAug 4 at 2:49pm
International businesses have generated higher profit margins than their domestic counterparts driving a lot of businesses to expand internationally. The international expansion of U.S. firms has promoted economic development and international trade (Block et al., 2019). As a result, more and more firms are considering international expansion and before making that decision it is important to understand the different factors involved in expanding internationally compared to domestic expansion. As CEO you must consider that when domestic firms do business in other countries it exposes them to foreign exchange risks. “In today’s global monetary system, exchange rates of major currencies fluctuate freely and on occasion are volatile” (Block et al., 2019 p. 677). Foreign exchange rates can be influenced by different inflation rates, interest rates, and government policies between countries. This risk can be mitigated by hedging in the forward exchange markets, in the money markets, and in the currency futures market (Block et al., 2019). Another risk to consider is that large foreign direct investments are often subject to political risk which is often the predominate deterring factor. Governments in foreign countries are able to implement policies that negatively impact foreign investors. However, operating internationally would allow us to raise funds in both the domestic and foreign capital markets. These factors should all be considered by C-level executives when making the decision of whether the firm should expand internationally or not. Should they decide to move forward there are ways to mitigate risks they would be exposing the firm to. I already mentioned that the foreign exchange currency risk could be mitigated by hedging in the forward exchange markets, in the money markets, and in the currency futures market. We can also mitigate the risk of negative political policy influence by thoroughly analyzing the proposed country’s political stability and foreign policies before entering the market. Lastly, if there is an opportunity with a domestic firm, we could enter the market via a joint venture (Hargrave, 2020). Should we decide that international expansion is the strategic course of action for our firm then I strongly suggest we take these steps to mitigate our risk exposure.
References:
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management (17th ed.). https://www.vitalsource.com (Links to an external site.)
Hargrave, M. (2020, July 16). How and When to Set up a Joint Venture (JV). Retrieved August 04, 2020, from https://www.investopedia.com/terms/j/jointventure.asp
