Mid Term Paper
Question one
The German exporter faces several foreign exchange risks while selling their products to the American manufacturer. Foreign exchange risks occur in three forms namely transactional, translational, and economic exposure risks. Transaction risk arises when a business transaction involves foreign currency. The risk involved in the transaction is that a change in the existing exchange rates within the transaction period affects the probable and actual export and import transactions (Aithal 94). The change in rate lowers the German firm’s selling price thereby affecting profits. Mitigating this risk, the German firm may consider transacting in their currency even when transacting business abroad.
Translation exposure is another risk that Germany exporter encounters in its business engagement with the American manufacturer. Translation exposure occurs where the organization reports its balance sheets and account records to foreign subsidiaries. For the consolidation of these records, reporting follows the parent company’s reportage currency in terms of the prevailing accounting standards (Aithal 95). The risk involved is that the currency volumes requiring translation varies in proportion and accelerates when the currency volatility is high. To avoid this risk, the German firm should consider setting a standard foreign exchange rate during the reporting of their records.
Economic exposure may also affect the German firm’s dealings with the American manufacturer. Operating exposure is a long- term risk that emanates from unanticipated and inevitable fluxes in foreign exchange on the firm’s future cash flows and prevailing market value. The exposure may render the long-term strategic goals of the German Firm unattainable and may lower the profitability of the firm. The firm may mitigate this risk by ensuring its business as it may cover the accrued losses resulting from the unpredicted market conditions. The firm can consider engaging in hedging activities to counter the risk associated with exchange rate variation.
Question Two
Domestic business is a business involving economic transactions within set geographical boundaries of a country while international business is one whose transactions are unrestricted to a particular country but engages transactions with various countries in the world. The business operation area influences the range of transactions and profitability in trade. The international business enjoys a large population of target audiences thus; their business dealings are vast hence increasing their profitability (Rask 147). Domestic trade is limited to the country’s population hence has fewer profits and sales.
Quality and standards of goods and services distinguish a domestic business from international business. Domestic trade lacks standard restrictions, which allows counterfeiting and provision of substandard goods, and services, which affects customer reputation thereby deteriorating economic growth (Rask 150). The international business operates under strict global standard guidelines that encourage trade as customers and clients are satisfied with the quality of goods, and services offered which fosters global economic advancement.
Domestic business transacts its business in local currency while international business operates using various foreign currencies. Domestic trade occurs easily as only a single mode of exchange exists. International trade involves several currencies that require exchange during business activities thereby complicating the business engagements (Rask 151). However, foreign exchange in business is beneficial to investors as rates vary from a country to another culminating in profitability.
International business is subject to several taxation restrictions. Taxation laws differ in every country hence complicating international business as a corporation requires to adhere to the set taxation guidelines for operation in a particular country (Rask 158). However, domestic businesses only require learning and following only the taxation guidelines set in their country.
Domestic business involves customers or clients within the same area while international business is diverse in nature and culture. Undertaking international business entails understanding and assimilating the culture of target consumers to expand their business territories (Rask160). International business is thus complicated compared to domestic business, as it is difficult to integrate into every community effectively due to cultural, social, and religious diversity.
Question Three
John Maynard Keynes was an economics British scholar in the 20th century and who brought revolutionary economic theories about unemployment and recession known as Keynesian economics. Freidrich von Hayek was a Nobel prize-winning economist well known for his critique opinions on the prevalent economic theories in the 20th century, socialism, and the Keynesian models (Davids, Paul). Margaret Thatcher was the first woman prime minister of the United Kingdom who led her country while implementing conservative economic policies such as the transfer of state-owned industries to private developers. Franklin Delano Roosevelt was the 32nd president of the United States who spurred the economic recovery of the US from the Great depression.
Margaret Thatcher through her government aspired to dislodge the Keynesian theory and replace it with monetarism. The government established measures that would spur steady growth in money supply thereby ensuing to proportional economic growth. The measures applied included the abandoning of traditional Keynesian interventions that focused on employment and output goals. Margaret Thatcher successfully carried out the privatization of state corporations such as British Airways, British Gas, and British Rail among others. Her government privatized the water supply and broke the power supply monopoly (Edward 89). These efforts successfully generated accelerated money circulation yielding economic growth.
Question four
Brownfield and Greenfield investments are types of foreign direct investments. Both investments engage production facilities and companies in their business involvements. These companies purchase, acquire, or lease assets available in their host countries including land, plants, building, and office space (Hayalı ). The companies acquire these assets in the form of new premises or existing facilities. However, these companies differ from each other in terms of operation. For Greenfield investment, the mother company opens subsidiaries in another country. The company acquires a new venture via the construction of new facilities in the country. The construction work entails completing offices, accommodation facilities for its management staff, and business distribution centers (Bayar 20). Brownfield investments differ with Greenfield in that the firm purchases or rents a preexisting facility and develops it for a new venture. Brownfield’s approach is of preference to companies as it saves time and resources required for the construction of new structures. Various companies aspiring foreign direct investment may consider several factors before deciding on the most appropriate alternative.
A company may consider Greenfield investment for the following motives. A company may find it worth to construct a new facility instead of leasing or purchasing an existing one because the company is at liberty to make efficient design adjustments to meet the project objectives. Contrarily, an existing facility necessitates alteration of present designs, which is expensive and time-consuming (Ashraf 1997). The cost incurred in the maintenance of previously occupied facilities is higher than that of new facilities.
A company may consider Brownfield investment alternative with some considerations. A company may find it difficult to start up a new facility due to costs incurred and time devotion required for its set up. The strategy also offers quick access to foreign markets due to its less time-consuming nature. The alternative has low staffing and training spending due to the presence of workers previously recruited by the previous company (Bayar 25). Brownfield investment is worth considering due to its low fixed costs resulting from the utilization of established infrastructure and networks.
Work Cited
Bayar, Yilmaz. “Greenfield and brownfield investments and economic growth: evidence from central and Eastern European Union countries.” Naše gospodarstvo/Our economy 63.3 (2017): 19-26.
Davidson, Paul. John Maynard Keynes. Springer, 2017.
Rask, Morten. “Internationalization through business model innovation: In search of relevant design dimensions and elements.” Journal of International Entrepreneurship 12.2 (2014): 146-161.
Aithal, P. S. “Impact of Domestic, Foreign, and Global Environments on International Business Decisions of Multinational Firms: A Systematic Study.” International Journal of Management, Technology, and Social Sciences (IJMTS) 2.2 (2017): 93-104.
Hayalı, Ayça Sarıalioğlu. “Is FDI beneficial for development in any case: an empirical comparison between greenfield and brownfield investments.” (2014).
Edwards, Chris. “Margaret Thatcher’s privatization legacy.” Cato J. 37 (2017): 89.
Ashraf, Ayesha, and Dierk Herzer. “The effects of greenfield investment and M&As on domestic investment in developing countries.” Applied Economics Letters 21.14 (2014): 997-1000.