Unit 1 IP: International Financial Markets 1 Deveye Hademeon American Intercontinental University Unit 1 Individual ProjectFIN630-1203A-05: Global Financial Management Project Type: Unit 1 Individual Project June 10, 2012
Unit 1 IP: International Financial Markets 2 AbstractThe necessity to maximize shareholders’ shares and corporate wealth becomes since the 1980’sthe driven force that pushes companies to operate in the global market, making investments incountries out of the borders of their homes. Many firms have been interested in makinginvestments in developing countries in the Middle East, in Africa, in South America to name fewof the regions around the world that have become investment grounds. The Europeans countrieshave never been of the rest, as since the creation of the European Union (EU) and theinstauration of the common currency, European nations became and continue to be the center ofbusiness expansion for American firms interested in having branches and subsidiaries in the oldcontinent.
Unit 1 IP: International Financial Markets 3 Global expansion or being present in the international market becomes the main objet ofbusiness plan for companies throughout the world. In fact, a firm operating in it home countrywill implement a plan to extend its business to different other countries in the necessity toincrease its shareholders and market shares. This is the case of Acme Manufacturing Company,Inc. a metal or steel manufacturing firm with headquarter in Denver, Colorado. After its recentdomestic acquisitions of about 10 other American companies between 2001 and 2010, the firm isinterested in expanding its businesses internationally. The international expansion program of theU.S. multinational consists in creating a “Greenfield” oversea in either a country within the EUor in another country non member of the EU. The development over the following lines willexplain what the creation of a “Greenfield” is about, making a comparison of the advantages anddisadvantages of this investment in a developed country like Germany or in a developing countrylike South Africa. The result of the comparison will lead to a choice to contribute to thecompany’s success.Germany: A Country Member of the EU. Covering a total of 138 thousand square miles of territory, Germany is located in CentralEurope between the Alps, the North European Plain, the North Sea, and the Baltic Sea. Acountry member of the European Union, Germany shares its borders with others like Denmark,Poland, the Czech Republic, Austria, Switzerland, France, Belgium, Luxemburg, and theNetherlands. Advantages about expanding operations to Germany include the country’seconomical strength in both the European and the world’s economy. Known as “…the hub ofglobal scientific and technological developments Germany’s economy ranks fourth in terms ofnominal GDP and fifth in terms of purchasing power, being the world’s second largest traderboth in terms of imports and exports.” (Economy Watch Content, 2010) Germany’s GDP is
Unit 1 IP: International Financial Markets 4evaluated at $3.56 trillion with a GDP per capita of $43,741 and a GDP growth evaluated at 3.06percent based on the 2011 estimation by the International Monetary Fund (IMF).Demographically, Germany is the largest populated country within the EU with a total of 82inhabitants that provide a workforce of over 45 million qualified people in different industries.These advantages are related to the fact that the country’s economy is “…a social marketeconomy characterized by a highly qualified labor force, a developed infrastructure, a largecapital stock, a low level of corruption, and a high level of innovation.” (Devol & Wong, 2010)There exist many trade agreements between Germany and the rest of the world to include theUnited States, China, Japan, the United Kingdom, and African countries especially its oldcolonies, as a member of the World Trade Organization, the G-20, the G-8, and the ACP-EU thatallows free trade between the member countries of the EU and countries of Africa, the Caribbeanand Pacific islands. There are innovations in every sector to include energy, transport, andinfrastructure in the necessity to motivate investment and job creation. The other advantage is thestrength of the euro in the world financial market, where although certain member nations of theEU are facing financial crisis, that currency still stands strong face to the American dollar. As acommon currency of the European market, “…the euro is trading more than 8 percent above theaverage against the dollar since its 1999 creation even after Spain, Greece, Italy and Portugal slidinto recession.” (Mnyanda & McCormick, 2012) Also operating in Germany offers theadvantage to access the whole EU market based on the Schengen Convention that is designed tobe a simple liberalizing measure to promote trade and integration between different nationalitiesand to allow the free movement of European citizens across national borders. It’s necessary tomention the political stability of Germany and the union, stability based on the fact that thenation members are old democracies far to experiment a political instability like it’s the case in
Unit 1 IP: International Financial Markets 5many developing countries ruled upon dictatorship. As a member of the European Union it hasbeen developed to function as a single market through a standardized system of laws whichapply to all member states, guaranteeing the freedom of movement of people, goods, servicesand capital. It maintains a common trade policy, agricultural and fisheries policies, and aregional development policy that benefit multinationals to operate across many national borders. Nevertheless an expansion to Germany carries some disadvantages in that the country’ssoil is relatively poor in natural resources, situation that create a dependency on others formaterial exportation. Also as the third largest country authorizing immigration, there will beavailability of non qualified labor forces because the economy attracts millions of immigrantsfrom around the world without taking into account immigrants’ job qualifications. The currencyitself carries some uncertainties in that the euro is falling in the currency exchange market overthe recent few months. In the beginning of May 2012 it “…declined 1.3 percent to $1.3084 andwas 1.8 percent lower at 104.49 yen after its drop in the past two years from $1.1877 in June2010 to $1.4940 in May 2011.” (Brown, n.d.) It is also necessary to consider the impact ofcompetition in the German market dominated by major global companies in every industry.These risks along with the linguistics and social barriers associated with the national cultureconsist of downfalls to impact and weaken foreign investment. The value of the euro can at anytime be impacted by the financial crisis experienced in some European nations like Spain,Portugal, Italy, and Greece, crisis that can lead to potential loss in investment.South Africa: A Country Non Member of the EU. South Africa (generally the Republic of South Africa) is one of the largest Africancountries, located on the southern tip of the African continent. The country benefits from its
Unit 1 IP: International Financial Markets 6border with two major seas, the Atlantic Ocean and the Indian Ocean that offer a greatopportunity to maritime trade with the rest of the world. With a total population estimated at 49million people for a total area of 471 thousand square miles, South Africa shares its borders withNamibia, Zimbabwe, Botswana, Mozambique, and Swaziland, countries that trade commerciallyin a direct partnership for a market expansion. Advantages about expanding manufacturing business into South Africa are associatedwith the country’s position in the world, especially on the African Continent where it serves asthe cornerstone of the economy. In fact South Africa plays an important role in Africa’s generaleconomy by exporting its products that are present in every other African country, in that “theeconomy of South Africa is the largest in Africa, accounting for 24% of its Gross DomesticProduct.” (The World Bank, 2012) Expanding into South Africa will thus give the opportunity tohave access to the African vast market. The country’s demography is another advantageousfactor to consider, in that South Africans are most interested in contributing to production andconsumption in their own country. In fact, not only South Africans offer trained and qualifiedlabors at lower cost, but they are also the first consumers of products manufactured internally.Beside the demographic factor, it’s necessary to consider the existence of international tradeagreements with all African countries members of the African United Organization, as well aswith countries like Germany, the United States, China, Japan, the United Kingdom and Spain, asa member of the World Trade Organization, the G-20, and the South African Customs Union(SACU). The SACU allows free transit of products manufactured in a member country toanother without custom tax. There exists also the Overseas Private Investment Corporation(OPIC), a bilateral agreement between South Africa and the U.S. to assist U.S. investors in theSouth African market with services such as political risk insurance and loans and loan
Unit 1 IP: International Financial Markets 7guarantees. With its Gross Domestic Product (GDP) estimated at $422 billion with 3.4 percentgrowth (U.S. Central Intelligence Agency, 2012) the country’s territory consists of an importantreserve of natural resources with an estimated share of world reserves of platinum group metalsamounted to 89% that include raw materials such as manganese, rutile, coal, phosphate rock,kyanite, and other more that might be needed in the manufacturing field of Acme. The presenceof these natural resources to include diamond, “…makes mining to become the main drivingforce behind the history and development of Africas most advanced and richest economy.”(World Bank, 2012). Another factor to consider includes the implication of the Government inpromoting job creation by encouraging foreign investments. There have been majorimprovements in government efficiency that led to an infrastructure improvement program andavailability of incentives toward the encouragement of foreign investments especially inmanufacturing. Also it’s necessary to mention the political stability that makes South Africa astable democratic country in Africa since the abolition of the “Apartheid” in the early 1990s withthe election of Nelson Mandela as President. There might be some risks and disadvantages as well. Risks about investing in aGreenfield in South Africa will be about the instability of the currency, the Rand that continue todrop in value since the beginning of the 1980s where it was trading at parity with the U.S. dollar.Ever since after the political pressures and economic sanctions experienced by the countrybecause of the apartheid, the Rand continue to depreciate until now when it’s trading at overeight rand for a dollar (1 USD = 8.4730 ZAR according to Google Finance on June 8, 2012). TheRand carries thus some uncertainty on whether it will continue to drop or not. Other than theuncertainty on the value of the currency, there exist some trade barriers related to trade policiesand regulations associated with higher corporate income tax evaluated at 28 percent. Another
Unit 1 IP: International Financial Markets 8barrier is the cultural and the linguistics environment in that South Africans are more affiliated totheir local rites and traditions, and the Zulu and its other variances such as IsiZulu, IsiXhosa,Afrikaans, and Tshivenda are used as official languages along with English. Other risks existespecially in relation with the social relations where racial discrimination or social segregation isstill experienced within the society. Corruption is not of the rest although the Government hasbeen fully engaged to fight practices related.Conclusion In conclusion, there is evidence that expanding the manufacturing businesses in eitherGermany of South Africa will contribute to success business and growth in the global marketbecause both countries possess enormous potentialities and advantages to encourage foreigncompanies. Nevertheless, after taking into account the risks associated with this expansion plan,the best and suggested recommendation is to install the new Greenfield in South Africa, a youngeconomy that attract many investors from every region of the world, with the abundance ofnatural resources and lower cost labor forces. South Africa also offers foreign companies thechance to be present in the whole African market with its hundreds of millions consumers.
Unit 1 IP: International Financial Markets 9 ReferencesBrown, T. (n.d.). Doing Business in Europe. Retrieved on June 5, 2012 from http://www.chelgate.com/news-articles/public-relations-articles/chelgate-articles/europe/Devol, R. & Wong, P. (2010). Investments and policies for economic growth and competitiveness. Retrieved on June 9, 2012 from http://www.nam.org/~/media/58F813B0D1E643DC91E564FE4C3B3C2F.ashx?utm_sou rce=nam&utm_medium=alias&utm_campaign=innovationreportMnyanda, L. & McCormick, L. C. (2012). Euro Strength Intact as Contagion Ends Aussie Dollar Haven; in Bloomberg published on May 7, 2012. Retrieved on June 5, 2012 from http://www.bloomberg.com/news/2012-05-07/euro-strength-intact-as-contagion-ends- aussie-dollar-haven-1-.htmlThe U.S. Central Intelligence Agency (2012). South Africa; in The World Factbook published on April 12, 2012. Retrieved on June 7, 2012 from https://www.cia.gov/library/publications/the-world-factbook/geos/sf.htmlWord Bank (2012). South Africa Economic Update, Focus on Savings, Investment, and Inclusive Growth http://siteresources.worldbank.org/INTSOUTHAFRICA/Resources/SAEU- July_2011_Full_Report.pdf