Term Paper: International Business What Information

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[. . .] " ("Mitigating Risks for Foreign Investments in Least developed countries") Business risks and operational risks can be reduced slightly but they are also dependent upon the policies of the host country. ABH can attempt to negotiate with the government of the host country to ensure that these risks can be minimized. These negotiations must take place before the foreign business decides to set up operations in the foreign country.

Discuss the potential advantages and disadvantages of ABH investing in a single currency area compared with a non-member.(12 Marks)

As we stated above fluctuations in currency and exchange rates can prove to be a major risks for foreign investment. The advantages associated with the use of a single currency include; limited transactions, a decrease in the transaction time, and advantages associates with a stable currency and stable exchange rates. Transactions are limited because ABH will only have to convert a single currency. This limitation on transactions also reduces transaction times. There are also advantages that can be realized if the currency and exchange rates are stable. For instance the American dollar has a very stable exchange rate which is beneficial to companies that are engaged in foreign investment in the United States. A stable currency enables businesses to make important business plans for the future.

The disadvantage of a single currency is that if the currency is unstable or the exchange rate fluctuates the business can suffer great financial losses. It also makes it difficult for the company to break even. In addition, an unstable currency can limit the company's ability to make future business plans.

In the context of this case and drawing from empirical literature discuss the motives for foreign direct investment other than to reduce transport cost.(25 Marks)

There are many reasons why a company may choose to engage in foreign direct investment. In the case of ABH electronics and based on empirical literature the motive for foreign direct investment is to expand the business into a new market, to partner with other businesses in the same industry, to contribute to the economy of the host country, to lessen expenses associated with taxes, to take advantage of the benefits associated with a single currency and to realize additional profits. ("Mitigating Risks for Foreign Investments in Least developed countries")

Exposing the ABH to a new market is imperative if growth is to occur within the company. The products that ABH produces could be beneficial to people and other businesses within these European markets.

Exposing a company to a new market can also encourage a company to research and develop new products for that particular market.

Another motive that ABH may have for foreign direct investment is the opportunity to collaborate with businesses in the same industry. The formulation of a joint venture will give ABH the opportunity to share its expertise with the company in the host country. In addition, the company in the host country can learn various business strategies from the foreign country. The host country can also instruct the foreign country on the various cultural differences that may exist between the host country and the foreign country. Understanding cultural differences is imperative because the foreign company will have to learn how to manage employees that may not share the same work ethics or cultural beliefs. Together these companies can work together to create products and services that will improve their industry.

One of the primary reasons that most companies engage in foreign direct investment is to contribute to the economy of the host country. ABH can contribute to the economy of the host country by creating new employment opportunities and contributing to competition within the market. Reducing unemployment rates is an endeavor of most countries around the world and ABH has an opportunity to contribute to this goal with Foreign Direct Investment.

Creating competition in the market is also important because it allows consumers to purchase a high quality product at a low price. Competition is an essential component in any economy. Competition helps to weed out companies that do not have the best interests of consumers at heart and that do not create quality products. ("Mitigating Risks for Foreign Investments in Least developed countries")

ABH may also have motives to reduce their tax expenses and to take advantage of the benefits associated with a single currency. In some cases companies that engage in foreign direct investment are exempt from paying taxes. This is done primarily in countries that are experiencing severe economic challenges. They may also want to take advantage of the benefits of a single currency that were mentioned above. ("Mitigating Risks for Foreign Investments in Least developed countries")

Finally, ABH may be motivated by the idea that they can make additional profits through engagement in foreign direct investment. Making a profit is the bottom line of any business entity. Through the use of foreign direct investment ABH can ensure that profits will be realized. ("Mitigating Risks for Foreign Investments in Least developed countries")

Evaluate the hedging strategies available to ABH and recommend one of them to ABH (22 Marks)

Hedging strategies are often used as a type of insurance against risks associated wit fluctuating interests rates, exchange rates, equity prices and commodity prices.

What is hedging? Why do companies hedge?")

There are several strategies that ABH can use to hedge the risk they face from foreign investment. These strategies include but are not limited to distressed securities, aggressive growth and emerging markets.

The purchase of distressed securities at deep discounts will allow the company to realize profits that other institutions can not because they can not afford to purchase these instruments at below investment grade securities. In doing this the company is able to hedge some of the risk associated with foreign investment. ABH can also attempt a strategy of aggressive growth by investing "in equities expected to experience acceleration in growth of earnings per share." (About Hedge Funds) Aggressive growth strategies hedge by shorting equities when earnings expectations are low. The final strategy that is available to ABH is emerging markets. This type of investment involves investing in emerging markets that have high inflation and suffer from volatility. (About Hedge Funds) believe that ABH should choose the distressed securities strategy because it has a low to moderate rate of volatility. (About Hedge Funds)

Works Cited

About Hedge Funds. http://www.magnum.com/hedgefunds/strategies.asp

How Partnerships Work. National Council for Public-Private Partnership. http://ncppp.org/howpart/index.html

Mitigating Risks for Foreign Investments in Least developed countries" 2000. Ministry for Foreign Affairs.

What is hedging? Why do companies hedge?. http://www.finpipe.com/hedge.htm

Valof Josep. 2003. Anatomy of A Joint Venture Agreement. http://nanosft.com/igc/jva.html [END OF PREVIEW]

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