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09/13/2014

Introduction

Establishment of a business in a foreign land depends on strict evaluation and analysis of various factors inclusive of; the barriers to entry in the foreign nation, the legal systems, customer base, potentiality of growth, economic performance, and the cultural framework of the natives there. Failure to scrutinize such factors might impact success of the business negatively (Schill, 2014). This paper discusses the factors that a regional bank needs to consider before expanding into a foreign nation, China for this case. It uses Union Bancshares (UNB), a Californian based regional bank as an example.

Possible challenges in the new environment

This may be analyzed in three perspectives; educational discrepancies, cultural differences, and other social demographics. Culture refers to the values and norms held by members of a given society; the good and the bad defined by a society. Cultural conflict is felt a great depth in the work place, if the workers therein are from different ethnic origins. For UNB to ensure it gains a positive reputation in the public sector, the company’s management will need to employ workers from diverse cultural setups. Despite this move being positive in some way, the conflicts arising in the work place due to differing cultural expectations might hamper work progress negatively leading to poor performance. Another challenge is education level of potential employees within the locality within which the company plans to establish itself. Specific technical personnel might be inadequate in China compelling UNB’s management to outsource workers from far geographical locations, this is a costly process.

Legal and political environments

The legal systems in China are flexible rather than static. This poses a great challenge to foreign investors since laws regarding foreign investors might change negatively at the time of their investment. In People’s Republic of China, laws governing the business sector are made in the National People’s Congress (NPC) and the judicial system is vested with the power of ensuring all parties comply. When making a foreign direct investment, the first step is to describe in detail the pros and cons of the business to China’s economy, if the pros exceed the cons then the business is listed under the permitted category as long as all other factors have been fully satisfied. China is a politically stable nation despite its long term poor relation with Taiwan. This is a positive indicator for UNB since business operations are not likely to be disrupted due to political clash.

Government involvement in the private sector

A comparison to the US business practice is made to gauge the level with which the government intervenes in private businesses in People’s Republic of china. The chart below is used to illustrate this concept;

As is evident in the illustration, the Chinese government involves itself in business practice than the US government does; this may be due to regulatory reasons. It is both advantageous and disadvantageous to firms that plan to invest in Chinese economy such as UNB; it is advisable for such a firm to weigh both sides. Too much government involvement might mean harsh and stricter regulatory measures. This makes it hard and expensive for the business to run its operations. The level of profits that the firm makes is divided in accordance with some agreed percentage, reducing the level of business proceeds.

Type of economic system in China

There are four types of economic systems; traditional economy, command economy, market economy and mixed economic system. China has a mixed economic system (Naughton, 2007); a combination of both command and market economic system. In a command economic system, the government has full control of vital resources that determine business operations; this system is an advancement of the traditional economic system where no centralized regulation of businesses and resources exist. A command economic system arises when resources in a given economy increase with time creating the need to establish a federal government to control use of the resources. In China, a traditional economic system existed until 1949 when a command economic system was adopted.

The Korean war of 1952 to 1956 had a negative impact on the economy that later resulted in modification of cultural framework of the natives in a bid to cushion the poor economic performance (Cultural Revolution), this occurred in 1968 to 1976. The result was an increment in the nation’s economic resources and adoption of market economic system in 1980 (Drabek and Mavroidis, 2013). From 2005 to date, a mixed economic system has been witnessed. Growth of GDP in each economic system is presented below from 1952 to 2004.

China’s involvement in international trade

As Wang (2011) notes, China is the second largest economy globally by GDP after the US. The country is a major player in international trade, dealing mainly in importation and exportation. Australia is the main trading partner with exportation and importation firms there forming a bulk of the country’s foreign investors. The government is involved in this kind of business mainly through regulatory functions; it sets and monitors taxation, nature of imports and exports and formulates policies that ensure good business practice. China’s encouragement of importation and exportation businesses will help UNB’s investment. UNB will be the facilitator of foreign exchange services, financial consultation, and money lending services, and other banking services for foreign investors, not only from Australia but across the globe.

Presence of UNB in China will influence its investment plans in other developing nations in the East. China acts as a central ground upon which other investors from developing nations such as Taiwan, Kazakhstan, Cambodia, Malaysia, Pakistan, Thailand, and Vietnam converge for business transactions. China is the central source of supplies in these nations, and a major consumer too owing to its ever growing population. For a banking institution therefore, it will be easier to identify the probable developing countries to invest banking services in when in China through a thorough scrutiny of market information there. The image below strengthens the central location of the ‘economic powerhouse’, China, which is surrounded by many developing nations with investment opportunities for UNB;

China is involved in regional integration efforts; it supports the come-together of nations in facilitating regional trade and other developmental factors. It is a member of the Asia Cooperation Dialogue (ACD) of which Laos, Japan, South Korea, Pakistan, Thailand, Vietnam, Cambodia, India, Indonesia, Myanmar, Philippines, Singapore and Brunei are member states. The purpose of ACD is to foster collaboration of the member states through intertwining of their political, economic and educational plans. Additionally, it is in place to ensure the previously separate regional organizations in the East such as ASEAN and SAARC are integrated together. This is a clear demonstration that China is in full support of regional integration.

The chosen location

A number of reasons make China the best investment destination for a regional bank like UNB: the well performing economic sectors, a factor that will ensure many business participants enter Chinese market, banks in this case acting as intermediaries of money transfer between buyers and sellers; political stability, a factor which reflects internationalism, the idea of encouraging foreign investment in its land with minimal legal restrictions; the good relation of China with the West, makes UNB, a US based banking institution the confidence of successful investment there since it would possibly face minimal legal restrictive measures like standardized taxation; and the high population of China that projects a large customer base for banking investors.

Overall assessment as a manager

Expansion of banking services to a foreign land requires heavy financial investment; in such a case, business risks are bulky too. As a manager of UNB regional bank, it would be advisable to assess the following areas before making a final investment decision; risk level, benefit of the investment to all the stakeholders, and the best entry mode. Risk is one characteristic of entrepreneurship; however, to assure success of a business, it is advisable that the risk level be as low as possible. Given the economic stability and high market performance of Chinese economy, investing in China is associated with minimal risks. This investment will be beneficial to all the stakeholders since an increased income for the company will mean a higher dividend ratio for the shareholders. To achieve the set objectives as a company, a joint venture presence in the foreign nation would be much suitable than Greenfield operations, it reduces the risks even further.

Advising an MNC on Latin America investment plan

A Multinational Corporation (MNC) is a large firm with global operations. To facilitate its financing in Latin America, assessment of foreign currency risk should be considered as an important factor for the company’s management. Foreign exchange rates are never static; they keep changing from time to time in accordance with world economic performance. 1 Chinese Yuan equals 0.16 US dollars. This figure may increase or decrease with time. To succeed in its foreign investment plans, the MNC’s management should put in place measures that monitor performance of the dollar and enter Latin American market at the time when the exchange rate is at its lowest. This will ensure that the company faces minimal financial milestone.

Swap and Exchange-traded fund are the two foreign exchange instruments that the MNC may use to minimize foreign exchange risks. The latter are open ended investment companies that are capable of being traded daily while Swap is an exchange between two parties over a given period of time. Both instruments help cushion the risk associated with currency fluctuation.

References

Drabek, Z., & Mavroidis, P. C. (2013). Regulation of foreign investment: Challenges to international harmonization. Singapore: World Scientific Publishing Company.

Naughton, B. (2007). The Chinese economy: Transitions and growth. Cambridge, MA: MIT Press.

Schill, S. (2014). The multilateralization of international investment law.

Wang, L. (2011). Foreign direct investment and urban growth in China. Burlington, VT: Ashgate.

XE: (USD/CNY) US Dollar to Chinese Yuan Renminbi Rate. (n.d.). Retrieved from http://www.xe.com/currencyconverter/convert/?Amount=1&From=USD&To=CNY