Fin 630 u1 ip

Unit 1 IP: International Financial Markets 1

Deveye Hademeon

American Intercontinental University

Unit 1 Individual Project

FIN630-1203A-05: Global Financial Management

Project Type: Unit 1 Individual Project

June 10, 2012


Abstract

The necessity to maximize shareholders’ shares and corporate wealth becomes since the 1980’s

the driven force that pushes companies to operate in the global market, making investments in

countries out of the borders of their homes. Many firms have been interested in making

investments in developing countries in the Middle East, in Africa, in South America to name few

of the regions around the world that have become investment grounds. The Europeans countries

have never been of the rest, as since the creation of the European Union (EU) and the

instauration of the common currency, European nations became and continue to be the center of

business expansion for American firms interested in having branches and subsidiaries in the old

continent.


Global expansion or being present in the international market becomes the main objet of

business plan for companies throughout the world. In fact, a firm operating in it home country

will implement a plan to extend its business to different other countries in the necessity to

increase 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 recent

domestic acquisitions of about 10 other American companies between 2001 and 2010, the firm is

interested in expanding its businesses internationally. The international expansion program of the

U.S. multinational consists in creating a “Greenfield” oversea in either a country within the EU

or in another country non member of the EU. The development over the following lines will

explain what the creation of a “Greenfield” is about, making a comparison of the advantages and

disadvantages of this investment in a developed country like Germany or in a developing country

like South Africa. The result of the comparison will lead to a choice to contribute to the

company’s success.

Germany: A Country Member of the EU.

Covering a total of 138 thousand square miles of territory, Germany is located in Central

Europe between the Alps, the North European Plain, the North Sea, and the Baltic Sea. A

country member of the European Union, Germany shares its borders with others like Denmark,

Poland, the Czech Republic, Austria, Switzerland, France, Belgium, Luxemburg, and the

Netherlands. Advantages about expanding operations to Germany include the country’s

economical strength in both the European and the world’s economy. Known as “…the hub of

global scientific and technological developments Germany’s economy ranks fourth in terms of

nominal GDP and fifth in terms of purchasing power, being the world’s second largest trader

both in terms of imports and exports.” (Economy Watch Content, 2010) Germany’s GDP is


evaluated at $3.56 trillion with a GDP per capita of $43,741 and a GDP growth evaluated at 3.06

percent 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 82

inhabitants 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 market

economy characterized by a highly qualified labor force, a developed infrastructure, a large

capital 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 the

United States, China, Japan, the United Kingdom, and African countries especially its old

colonies, as a member of the World Trade Organization, the G-20, the G-8, and the ACP-EU that

allows free trade between the member countries of the EU and countries of Africa, the Caribbean

and Pacific islands. There are innovations in every sector to include energy, transport, and

infrastructure in the necessity to motivate investment and job creation. The other advantage is the

strength of the euro in the world financial market, where although certain member nations of the

EU are facing financial crisis, that currency still stands strong face to the American dollar. As a

common currency of the European market, “…the euro is trading more than 8 percent above the

average against the dollar since its 1999 creation even after Spain, Greece, Italy and Portugal slid

into recession.” (Mnyanda & McCormick, 2012) Also operating in Germany offers the

advantage to access the whole EU market based on the Schengen Convention that is designed to

be a simple liberalizing measure to promote trade and integration between different nationalities

and to allow the free movement of European citizens across national borders. It’s necessary to

mention the political stability of Germany and the union, stability based on the fact that the

nation members are old democracies far to experiment a political instability like it’s the case in


many developing countries ruled upon dictatorship. As a member of the European Union it has

been developed to function as a single market through a standardized system of laws which

apply to all member states, guaranteeing the freedom of movement of people, goods, services

and capital. It maintains a common trade policy, agricultural and fisheries policies, and a

regional development policy that benefit multinationals to operate across many national borders.

Nevertheless an expansion to Germany carries some disadvantages in that the country’s

soil is relatively poor in natural resources, situation that create a dependency on others for

material exportation. Also as the third largest country authorizing immigration, there will be

availability of non qualified labor forces because the economy attracts millions of immigrants

from around the world without taking into account immigrants’ job qualifications. The currency

itself carries some uncertainties in that the euro is falling in the currency exchange market over

the recent few months. In the beginning of May 2012 it “…declined 1.3 percent to $1.3084 and

was 1.8 percent lower at 104.49 yen after its drop in the past two years from $1.1877 in June

2010 to $1.4940 in May 2011.” (Brown, n.d.) It is also necessary to consider the impact of

competition 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 culture

consist of downfalls to impact and weaken foreign investment. The value of the euro can at any

time 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 African

countries, located on the southern tip of the African continent. The country benefits from its


border with two major seas, the Atlantic Ocean and the Indian Ocean that offer a great

opportunity to maritime trade with the rest of the world. With a total population estimated at 49

million people for a total area of 471 thousand square miles, South Africa shares its borders with

Namibia, Zimbabwe, Botswana, Mozambique, and Swaziland, countries that trade commercially

in a direct partnership for a market expansion.

Advantages about expanding manufacturing business into South Africa are associated

with the country’s position in the world, especially on the African Continent where it serves as

the cornerstone of the economy. In fact South Africa plays an important role in Africa’s general

economy by exporting its products that are present in every other African country, in that “the

economy of South Africa is the largest in Africa, accounting for 24% of its Gross Domestic

Product.” (The World Bank, 2012) Expanding into South Africa will thus give the opportunity to

have access to the African vast market. The country’s demography is another advantageous

factor to consider, in that South Africans are most interested in contributing to production and

consumption in their own country. In fact, not only South Africans offer trained and qualified

labors 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 trade

agreements with all African countries members of the African United Organization, as well as

with countries like Germany, the United States, China, Japan, the United Kingdom and Spain, as

a 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 to

another 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 the

South African market with services such as political risk insurance and loans and loan


guarantees. With its Gross Domestic Product (GDP) estimated at $422 billion with 3.4 percent

growth (U.S. Central Intelligence Agency, 2012) the country’s territory consists of an important

reserve of natural resources with an estimated share of world reserves of platinum group metals

amounted 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 presence

of these natural resources to include diamond, “…makes mining to become the main driving

force behind the history and development of Africa's most advanced and richest economy.”

(World Bank, 2012). Another factor to consider includes the implication of the Government in

promoting job creation by encouraging foreign investments. There have been major

improvements in government efficiency that led to an infrastructure improvement program and

availability of incentives toward the encouragement of foreign investments especially in

manufacturing. Also it’s necessary to mention the political stability that makes South Africa a

stable democratic country in Africa since the abolition of the “Apartheid” in the early 1990s with

the election of Nelson Mandela as President.

There might be some risks and disadvantages as well. Risks about investing in a

Greenfield in South Africa will be about the instability of the currency, the Rand that continue to

drop 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 country

because of the apartheid, the Rand continue to depreciate until now when it’s trading at over

eight rand for a dollar (1 USD = 8.4730 ZAR according to Google Finance on June 8, 2012). The

Rand carries thus some uncertainty on whether it will continue to drop or not. Other than the

uncertainty on the value of the currency, there exist some trade barriers related to trade policies

and regulations associated with higher corporate income tax evaluated at 28 percent. Another


barrier is the cultural and the linguistics environment in that South Africans are more affiliated to

their 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 exist

especially in relation with the social relations where racial discrimination or social segregation is

still experienced within the society. Corruption is not of the rest although the Government has

been fully engaged to fight practices related.

Conclusion

In conclusion, there is evidence that expanding the manufacturing businesses in either

Germany of South Africa will contribute to success business and growth in the global market

because both countries possess enormous potentialities and advantages to encourage foreign

companies. 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 young

economy that attract many investors from every region of the world, with the abundance of

natural resources and lower cost labor forces. South Africa also offers foreign companies the

chance to be present in the whole African market with its hundreds of millions consumers.


References

Brown, 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=innovationreport

Mnyanda, 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-.html

The 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.html

Word 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

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