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Foreign Investment

29 Dec 2016Economics Essays

The company should definitely decide to import its products to Australia. This move will increase the company’s consumer base, thereby increasing sales and profits. However, the company should be well-prepared to make this move since failure will mean that it will incur large losses in terms of capital and opportunities. Because the company has no experience with foreign investment, careful decision-making must be made.

Before deciding to expand the company’s business in the direction of Australia, the company must first learn the language of foreign investment. There are many significant terms used to refer to companies with foreign investments. Others are used interchangeably, but the terms do have technical definitions.

International business is a term used to refer to a “business whose activities are carried out across national borders” (Ball, McCulloch, Frantz, Geringen, Miller, 2005, p. 6). This term applies to international trade and foreign manufacturing and the service industry. The domestic operation of such company in a foreign country is referred to as foreign business.

The terms that are often used interchangeably are multi-domestic company, global company and international company. The term international company refers to both a multi-domestic company and global company. A multi-domestic company is one which has multi-country affiliates. Each affiliate formulates its own business strategy based on market needs. On the other hand, a global company “attempts to standardize and integrate operations worldwide in all functional areas. There is some debate as to whether foreign ownership should be required for a company to be considered global. (Ball, et.al., 2005)

International business is different from domestic business because the company has to deal with three environments: domestic, foreign and international. The term environment refers to all forces internal and external to the business. There are a number of external forces which affects the business and all of these forces are uncontrollable on the part of the business. The internal forces are the ones which the business can control. These forces are used by the business to adapt to the external forces. Although no business is completely unaffected by international forces, domestic business are less affected by it. The interaction of the forces in these three environments can best be illustrated through the International Business Model (Ball, et.al., 2005).

The domestic environment refers to all the “uncontrollable forces originating in the home country” (Ball, et.al., 2005, p. 20). The foreign environment are also these same forces but they originate from the foreign country were the company has business. The similarity in the forces can lead to opposite forces acting on the business, leading to a dilemma for the company in terms of choosing to adapt to one force and not the other. It can often lead to a choice of the lesser of two evils.

International forces can be the interactions between domestic forces and foreign forces or foreign forces originating from different foreign countries. Because of this and as shown by experience of other international companies, decision making is much more complex. Another cause for the complexity of the decision-making in international business is the persity of culture. This is why executives who are experienced in foreign investments are in high demand. Managers often make mistakes by ascribing their own preference and reactions to the foreign country to disastrous results. This is called the self-reference criterion. (Ball, et.al., 2005)

There are many reasons why a company may choose to invest in a foreign country. These reasons are the creation of new market, Preferential Trading Agreements, faster rising economy and improved communication. Of course, the ultimate of all these is to increase the profits of the company. (Ball, et.al., 2005)

It is clear that the motivation of company in deciding to export to Australia is the creation of new markets. Because of this the company must be careful in estimating the market potential of exporting to Australia. The company must determine there is sufficient market potential to justify the cost of exporting to the said country. GDP is often used as an indicator to estimate the market potential in a country; however, the company should look at other indicators or perform a more detailed market analysis since the GDP is not very accurate gauge of market potential.

One of the reasons why companies invest in foreign countries is the use of such foreign country as a test market. This reason may become relevant to the company. Thus far, the company has marketed its product domestically. The company can use Australia as its test market, in preparation for making more foreign investments in the future. The trend in trade is towards globalization. The company can decide to join this trend as this is one good way of expending their market. Some may even say that it is inevitable for a growing company to become international. Sooner or later, the domestic market will become too small for such company and it will turn outside for its expansion.

Australia is not one of the major trading partners of the United States. This is one of the drawbacks of choosing to invest in Australia since there are many benefits associated with investing in a major trading partner. However, this does not mean that the company can no longer take advantage of the benefits of trading with other countries that are considered major trading partners, such as favorable business climates, lack of strong cultural objection to buying the company’s products, experienced import channel members who will handle the company’s exports, availability of foreign exchanges and transportation facilities and lack of local pressure in importing products from countries who are major trading partners (Ball, et. al., 2005). These advantages can also be present in Australia, as well.

On the other hand the low export level of products from the United States in Australia can be an indication that there is a hindrance or block in trading with the country. The company should look into the existence of barriers to trade.

Despite the presence of such barriers, the company can still decide to export its product to Australia. This decision will depend on the company’s ability to work around the barriers. Moreover, the situation of the company may be different from those who chose not to trade with Australia. One source of such difference is the company’s product. Australia is known for its enthusiasm for extreme sports. In fact many of those who excel in extreme sports, of which skateboarding is one, comes from the country. The company may have chosen to export its products in Australia for precisely this reason.

Therefore, the decision to export or not in Australia is not dependent on the lack of high levels of exports from the United States to the country or the existence of trade barriers. The company will need to consider it unique situation. There is also the possibility that companies of the United States have not taken advantage of the market available in this country, which means that there are more opportunities for the company in terms of lack of competitors from the United States.

One other choice that the company must face is whether to manufacture the products domestically and export the finish products or to manufacture the products in the foreign country to be marketed there as well. The latter approach is often resorted to by big companies for many reasons, mostly because of either the proximity to raw materials or to lower cost of production. Choosing the latter approach would be more risky on the part of the company because it will entail more capital investment. This approach should only be resorted if the company is certain that it will minimize cost, thereby increasing profits.

References

Ball, McCulloch, Frantz, Geringen, Miller (2005). International Business, 10th Edition. McGraw-Hill Companies.

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