International Business Environment
International Business Environment
International Business Environment
Now days all sectors are being internationalised with motives of global concentration, global
synergies and other strategic global motivations therefore manager to increase the value of the
firm should take appropriate financing decision by acquiring an appropriate amount and mix of
funds procured at competitive cost of capital and then allocating these funds in various assets
which basing on sound analysis, are expected to generate returns greater than the cost of
acquired funds. Those financing decision and or investment decision can be done through cross
borders.
As the business firm which may be government owned or private firm can operate in the global
environments which are dynamic and turbulent, therefore the change in global business
environment can be opportunities or threats to the firm depending on the impact to the
performance of the firm.
Those environment factors which influence the performance of the firm but can not modified
by the given firm they called external factors and can easily identified using PEST Model.
P-Political
E-Economic
S-Social
T-Technological
Political: A country's political system and government policies affect the economic, social and
political environment e.g the government economic policies such as fiscal policies and
monetary policies have an impact on the market conditions, the funding environment etc
which in turn have bearing on the organisation. Therefore, while assessing the performance of
an organisation managers should consider political system such as political processes, political
parties and their ideologies, political stability , maintenance of external relationships with other
countries, attitude of government on globalisation and privatization etc.
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Economic: Economic factors refer to the macroeconomic factors that will shape the broader
economic environment within which the firm operates. They represent the financial condition
of the external environment within which the organization must operate. These factors include
GDP,taxes, exchange rates, interest rates, inflation, unemployment, trade factors and tariffs as
well as monopolistic practices.
Social: Social factors refer to factors such as changing demographic patterns, changing
consumer tastes and preferences, attitudes of society towards business and its management,
expectations of society from business, views towards customs and traditions, disposable
income levels, age and health of population and educational levels.
Technological: Technological factors take into account the that technology has on the way an
organization makes and delivers its goods and services. In addition to looking at present
technology, organisations also need to look at upcoming technology and how will affect the
current way of business. Technological factors affecting an organisation include rate of change
and new development in technology, patents granted and diffusion of technology.
With internalization of companies, various opportunities and threats are brought by above
factors leading to different financial and business strategies by the firm
Financial markets: These are the markets where by the financial instruments are bought and
sold. Depending maturity of financial instruments which are traded there are two types of
financial markets:
1. Money market
2. Capital market
Relevant financial market issues impacting business and financial strategy.
• Access of capital: refers to the need that small businesses have for loans or investment
money, so they can grow. With internalization ir is now easy for companies to access
capital from different parties of the world. Not only in form of debt, but also in form of
equity.
• Minimization of transaction cost- With the growth in technology, investors can access
information easily so that can easily know what is happening in other economies and
make timely decisions.
• Economic integration-when countries located in a particular geographic area agree to
reduce and or remove trade barriers, there will be free flow of goods or services and
factors of production among each other. This will stimulate financial market as well as
economic growth among member countries.
Major effects in developing countries that have resulted the globalization of financial markets
1. Increased competition
2. Expansion of product base
3. Expansion of customer base
4. Increase usage of information technology
5. Increased unemployment
6. Increase of market efficiency
Multinational corporations (MNCs)
A firm can have one or more goals such as sales maximazation, survival, profit maximization
keeping employee turnover at minimum etc. Despite all these goals, there is a need for a
single financial objective as leads to clear decisions and harmonizes several roles to unified
objective.
The most widely accepted financial objective of the firm whether operating in local or
foreign environment is to maximize the value of firm for its owner that is to maximize
shareholder wealth through increase the current market price of their shares.
Reasons of why the wealth maximization is taken as central goal of the firm in finance
1. Wealth maximization is based on cash flows and not profits- in contrast to profits, cash
flows are exact and explicit and therefore avoid ambiguity associated with accounting
profits which is subjected to judgment and estimates
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2. Wealth maximization consider future prospects- to value the company the expected
future cash flows are discounted to obtain the present value whereas profit is historical
in nature which fails to display the growth potential by using current profit figure to
project future growth
3. Wealth maximization considers time value of money- to determine the value of the
firm the future cash flows are discounted at appropriate discount rate for the given
period of time to represent their present value.
4. Risk-variability of return is not displayed in profit figures but wealth maximization
consider the element of risk. Wealth maximization principle considers the risk and
uncertainty factor while considering the discounting rate. The higher the uncertainty,
the higher the discounting rate and vice-versa. Two firms with identical profits may
exposed different risk scenarios and hence different value before the eyes of
shareholders.
5. Wealth maximization presents a longer-term view relative to other goals such as
profit. Accounting profit tends to be shorter oriented and can be achieved by the
manager at the cost of long-term sustainability of the business.
MNCs and Agency problem
As it is the case with domestic corporations, agency problem for MNCs is also caused by
separation of ownership and control. Managers of MNCs may make decisions that are contrary
to the maximazation of long-term shareholders wealth which is is the central goal of the
firm. With MNCs managers are having more room to pursue their own interest rather than
interests of the shareholders.
These situations result to conflict of interests between managers of MNCs and central goal of
MNCs hence amounting to agency problem
MNCs should incur costs to make sure the agents (managers) make decisions which are
consistent to the owners (principals) which is shareholders wealth maximization
Usually agency costs for MNC are larger than agency costs for a purely domestic corporations
due to the following reasons:
1. Comparative advantage:
The increase in multinational business can generally linked to the classical theory of
comparative advantage. This theory argues that countries should specialise in producing
products which result to comparative advantage. When a country specialises in the
production of some products, it will not produce other products, making trade between
countries is unavoidable. This is achieved become competitive through modernisation and
technical improvements to the product or to the production process.
4.Deregulation
Strict regulations within an economy make it difficult for growth of global business and
MNCs. Relaxations of these regulations attract foreign investors.
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Global companies have some significant advantages over local businesses. Below are
opportunities associated with global business:
The financing tactics which minimise this risk include: high gearing, minimize intra-group
sources of finances, maximize finance from local sources, avoid parent group guarantees,
have the subsidiary partly owned by local shareholders
There are various ways/methods on how the company can go global, but all in all safety of
capital to be involved should be a priority
1. Exportation
This involves selling goods and/ or services abroad
Advantages:
Advantages
• Minimum investment
• Minimum political risks
• Host country's company may become more innovative and productive
Disadvantages
This involves granting rights and provision of technology to a foreign entity to produce
particular product in exchange for fees or some other benefits. It obligates a firm to provide
its technology (copyrights, patents , trademarks or trade names in exchange of fees or some
specified benefit. The right is always is granted for a specified period.
Advantages
Joint venture is defined as shared ownership in a foreign business. A foreign business unit
that is owned partially by the parent company is termed a foreign affiliate such as sharing
ownership and risk with a local partner. A foreign unit that is 50% or more owned and
therefore controlled by the parent is typically designated as foreign sub8. A joint ventu6 is
therefore a foreign affiliate but not a subs9
Advantages
• Political risk is increased rather than reduced if the wrong partner is chosen
• Local and foreign partner may have divergent view about cash dividends
5.Acquision of existing business
Firms frequently acquire other forms on foreign countries as means of penetrating foreign
market
Advantages
Franchising is the practice of using another firm's successful business model. In this case
multinational company allow an individual to sell its product in specific country and the
company receives fees plus a periodical royalties and return.
Advantages
• Binding agreement
• Little room for creativity
• Failure of franchise may cost other franchises
• Sharing profit with the franchisor
REVIEW QUESTIONS
QUESTION ONE:
In deciding whether to invest abroad management must first determine whether the firm
has sustainable compete advantage that enables it to compete effectively.
Required
Discuss the financial market issues relevant to multinational companies willing to invest in
less developed countries
QUESTION TWO
It is claimed that agency costs for MNCs are larger agency costs for purely domestic firms.
Justify this claim by explaining possible agency costs which are incurred by MNCs
QUESTION THREE
METL Group, Tanzanian home grown with presence in eleven countries in Africa appoints
highly qu6 and technically trained managers. The group decided to expand its operations
after realising that Tanzanian market has matured. It is group's policy to invest in its people
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and infrastructure. It also takes advantage of availability of cheap materials other factors
of production although there is strong domestic competition from other giants such as
Azam group, METL has focused on producing the products which it do better than that of its
rivals. The market segment chosen by METL does not necessitate sophistication of products
given the nature of customers it services.
Required
Using MELT as a case study discuss factors for the growth of global business and MNCs
QUESTION FOUR
Required
Using examples, discuss any four other determinants that may be an attraction to FDI to
country like Tanzania