Book Report: Risks of Trading and Investing

Pages: 9 (2591 words)  ·  Bibliography Sources: 5  ·  Level: College Junior  ·  Topic: Business  ·  Buy This Paper

SAMPLE EXCERPT:

[. . .] This allows a purchaser to avoid transaction costs, while offering investors in the foreign country a security from the flexibility of exchange rates (EconomyPoint.org, 2006).

Despite the advantages of the fixed exchange rate, there are also heavy disadvantages to the fixed exchange rate. When one of the countries involved experiences a trade deficit, the foreign currency will have a higher demand, thus giving it a greater strength than that of the domestic country. Involving oneself in a fixed exchange rate agreement could also create a vulnerability to imported inflation (EconomyPoint.org, 2006).

The other option that two countries have when transacting is to use the flexible rate of exchange. This is the same rate that individuals will often use when trading small amounts of currency for one another. This rate is specifically calculated based solely on the supply and demand of that specific currency on the market. The benefit of using a flexible rate of exchange is that it protects against any imported inflation. The unknown of what a foreign country's exchange rate is at the time of transaction will always benefit one party over another, as one will end up with the stronger currency and one will end up with a weaker currency (EconomyPoint.org, 2006).

4.1 Potential Risks for XYZ Company

Currently, no economically strong countries are using the fixed exchange rate other than those that are using the euro and the Chinese Yuan, so there currently are not realistic options in using this method. Using the flexible exchange rate would most likely be what the American to Ecuadorian interactions would use (Ecuador.us, 2009). Within the last year, the Ecuadorian currency has not changed its value to the American dollar, which displays that risk for transacting in or with Ecuador could be quite small.

5.0 Analysis of Exporting

Because America has already become familiar trade partners with Ecuador in terms of oil and petroleum products, it would be a bit simpler for the company to penetrate the industry. Exporting products from Ecuador would help the Ecuadorian economy, as oil has played a significant part of their economy for nearly four decades (Ecuador.us, 2009). For the reason that Ecuador has an agreement in place with America, the legalities of which XYZ Corporation must uphold have already been established and must simply be reviewed before exporting from or investing in the country.

5.1 Analysis of Foreign Direct Investment

To use direct foreign investment would also be a quite simple process, considering that International Investment Agreements have already been established. Ecuador thoroughly welcomes and encourages direct foreign investment into their economy (HipEcuador.com, 2007). Directly investing would uphold our company's required economic responsibility through the hiring of Ecuadorian's at local facilities.

5.2 Assessment on Using Exporting/Foreign Direct Investment

America has already invested billions into Ecuador's oil and petroleum industries for a number of decades. It would be a significant business opportunity for XYZ Corporation to be involved in both the export of and the direct foreign investment of Ecuadorian oil and petroleum products. As the export would provide a quick result and the direct foreign investment has potential to yield in the future, a combination of the two would provide the most potential for our company.

6.0 Political Risks

In order to determine political risk, it is important to analyze Ecuador's political past, determine if it is possible mistakes will be repeated, and identify if current politics may affect the business. Ecuador is one of the least politically stable countries in Latin America. It has had eighty six governments and seventeen constitutions written in a period of 159 years of independence. A handful of the elections had been arranged, nullifying the purpose of the voting process. In the late 1940s through the 1960s, Ecuador finally saw democratic stability with four democratic politicians, but saw dictatorship throughout the 1980s. Upon the death of the dictator, Jaime Roldos Aguilera, Ecuador saw a restoration of their government, but it is still a bit unstable. Political Scientist John D. Martz stated that his opinion of the vulnerability the government has to transition types of government, "little reason to believe that the fragile democratic system in Ecuador had been strengthened, nor that the historic pattern of instability had been fundamentally reversed or modified (U.S. Library of Congress, 2011).

The main conflict between the rivalries that the political parties have are in development projects, however, it is most often in argument of road construction; the oil and petroleum would only minutely be affected.

7.0 Conclusion

XYZ Corporation, an American company, is already involved in the manufacturing and wholesale of oil and petroleum. In these two industries, Ecuador has a lot to offer XYZ Corporation. The country has been a generous exporter of oil and petroleum to the United States for almost four decades. Before XYZ Corporation decides whether or not to generate business in Ecuador, it must ensure that it is capable of upholding their ethical, economical, and legal responsibilities to Ecuador and its people. Next, Ecuador will want to look at any trends or patterns Ecuador has in its trading practices and how they may be able to protect against imports and foreign investment. Fortunately, International Investment Agreements play a large part in protecting Ecuador and America against controversies, reasonable expropriation compensation, and agreement enforcement. The risk that XYZ Corporation has with exchange rates appears to also be of little risk. With the falling economy, America and other countries have experienced a weakening in their individual currency

References

Carroll, A.B. (1991). The pyramid of corporate social responsibility: towards the moral management of organizational stakeholders-balancing economic, legal, and social responsibilities. Retrieved January 14, 2011 from http://findarticles.com/p/articles/mi_m1038/is_n4_v34/ai_11000639/pg_2/

Ecuador.us. (2009, December 21). Ecuador economy, Ecuador exports, Ecuador business.

Retrieved January 15, 2010 from http://www.ecuador.us/business.htm

EconomyPoint.org. (2006). Rate of exchange regime. Retrieved January 13, 2011 from http://www.economypoint.org/r/rate-of-exchange-regime.html

EcuadorExplorer.com. (2009). Ecuador foreign trade. Retrieved January 13, 2011 from http://www.ecuadorexplorer.com/html/trade.html

Godiwalla, Y.H., & Damanpour, F. (2006). The mncs global ethics and social responsibility: a strategic diversity management imperative. Unpublished manuscript, University of Wisconsin, James Madison University, Whitewater, Wisconsin. Retrieved from http://www.cluteinstitute-onlinejournals.com/PDFs/2006435.pdf

Hill, C.W.L. (2007). International business: competing in the global marketplace. McGraw-Hill

HipEcuador.com. (2007, May 23). Ecuador settlement of dispute and international foreign investment agreement. Retrieved January 13, 2011 from http://www.hipecuador.com/html/business/invest_ecuador/ecuador_investment_agreement.htm

U.S. Library of Congress. (2011, January 6). Ecuador. Retrieved January 15, 2011 from http://countrystudies.us/ecuador/56.htm

Workman, D. (2009, March 17). Top U.S. imports and exports with Ecuador in 2008.Retrieved

January 13, 2011 from http://www.suite101.com/content/top-us-imports-exports-with-ecuador-in-2008-a103220 [END OF PREVIEW]

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