合资企业的风险研究assignment指导

合资企业的风险研究

Examine The Risks Of Joint Ventures Economics Essay
 

直到上世纪80年代，中国实行的是固定汇率制度。随着科技和经济的发展，出现了开放的中国经济。在1988至1993年间，中国是实行双重汇率制度，官方汇率与市场决定的利率共同存在。调剂中心成立于1988年，其中的出口商，进口商和其他各方的外汇供给或需求可以在交易市场决定汇率。 1994年官方汇率贬值，统一的汇率在外汇调剂中心和汇率制度正式改为浮动汇率制度。自此，中国开始实行浮动汇率制度。由于力量决定汇率的复杂性，我们了解到汇率是一个温和的任务。另一种方法是研究在统一框架下汇率的长期和短期走势，它在那里被建模为响应各种结构冲击的内生变量。这提供一个更好地了解实际汇率的演变过程的舞台。
 

China followed a fixed exchange rate system till the 1980s.With advent of technology and economic development and the opening up of the Chinese economy. China had a dual exchange rate system between the period of 1988 – 1993 and the official rate co existed with the market determined rate. Swap centres were established in 1988 where in the exporters, importers and other parties with foreign exchange supplies or needs could transact at a market determined exchange rate. In 1994 the official exchange rate was devalued and unified with the exchange rate at swap centres and the exchange rate system was officially changed into a floating rate exchange system. China followed a floating exchange rate system since then .Understanding the exchange rate is a subdued task due to the complexity of the forces determining the exchange rate. A different approach is to study the long run and short run movements in a unified frame work, where it is modelled as an endogenous variable that responds to the various structural shocks. This could provide a better understanding of the evolution of the real exchange rate. For a developing economy like China, fiscal policy is substantially much more important, when its exchange rate is under tight scrutiny. But as the economy is not under any major foreign debts and also has modest budget deficits, it does not come under any immediate fiscal sustainability. But even with a significantly progressive economy, n an ageing population means that there are losses are predictable in the state run banking system, inevitable expenditures in healthcare and education, and demanding pressures of the pension funds pose as a medium term challenge. The piling up of such contingent liabilities could mean that major structural reforms to exchange rate system are necessary.

 

A fixed exchange rate is usually used to stabilize the value of a currency, against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable.

 

It can also be used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, as per”Mundell-Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability”.

 

The only problem with expanding into a country like china with fixed exchange-rate system is that when a trade deficit occurs, there will be increased demand for the foreign (rather than domestic) currency which will push up the price of the foreign currency in terms of the domestic currency. That in turn makes the price of foreign goods less attractive to the domestic market and thus pushes down the trade deficit. Under fixed exchange rates, this automatic re-balancing does not occur. Instability of interest and exchange rates are unstable as greater unpredictability means a “greater potential gain for the option holder and a greater potential loss for the option writer”, a higher premium is therefore charged.

 

Corporate finance: principles & practice By Denzil Watson, Antony Head

 

As per the Bretton Woods system in 1973, real exchange rates have begun to fluctuate greatly. As instability increased exporters and importers where not unable to judge the prices of their products and services. This uncertainty prevailing doubts and affects the profit earning capacity and thus adversely influence their decision to trade. Exchange rate uncertainty has been shown to have affected trade flows between countries and across sectors. It is in a way boon and bane when considered different studies done. Increased instability has had important propositions in measuring the costs and benefits of various exchange rate establishments, as well as of exchange rate controls.

 

2 b)Companies should focus on the main business they are in and take steps to minimize risks arising from interest rates, exchange rates and other market variables.(Hull,2002) There are number of in which a firm hedges their exposure. Balance sheet exposure is hedged by matching the Currency denomination of assets and liabilities or by using financial instruments like swaps. Forwards and options are financial instruments used for hedging the cash flows, and profit and loss by matching the currency denomination of inflows and outflows.

 

Hedging by options:

 

Options is another way used for hedging purposes be it small hedge, long hedge, which in essence are buying and selling products. It involve taking a position in an option and a position in the underlying bond in such a way that changes in the value of one position will offset any unfavourable price movement in their position. Points to be taken into consideration while using options for hedging are, Determining the option contract that is the best hedging vehicle.

 

To find the appropriate strike price

 

Determine the number of contracts.

 

It is a choice to either buy or sell the asset at an agreed price at some future date.

 

Money market hedge involves taking a money market position to cover a future payables or receivables position.

 

Money market hedge on payables occurs when a firm has excess of cash. It deposits the cash in foreign currency for a short term period and utilizes it for future needs. While money market on receivables occurs when a firm is expecting the receivables in a foreign currency, it can hedge this position by borrowing the present value of the receivables now in that foreign currency and converting the amount in to the home currency.(Madura,2007)

 

When exchange of cash flow in two different currencies between any two companies occurs it is called as Swap Market Hedge. This type of swap that accommodates a company’s needs to cover its transaction risk is currency swap. In this swap one company provides a certain principal in one currency to another company in exchange for an equivalent amount in a different currency to cover its transaction risk .(Kim,2002)In a currency swap it makes it possible for the companies a chance to gain the usage of foreign currency and to avoid any exchange rate risk.

 

2 c) The only problem with expanding into a country like china with fixed exchange-rate system is that When a trade deficit occurs, there will be increased demand for the foreign (rather than domestic) currency which will push up the price of the foreign currency in terms of the domestic currency. That in turn makes the price of foreign goods less attractive to the domestic market and thus pushes down the trade deficit. Under fixed exchange rates, this automatic re-balancing does not occur.

 

For the kind attention of the Managing direct

 

3A) Benefits and Limitations of:

 

Expanding Organically

 

A business expands organically means that the company is using internal funds to expand the business, rather than purchasing another business or thru other partner-sharing business. An example of organic growth will be increasing capacity using the own money.

 

Below are some advantages of organic growth:

 

Organization strategic goals can be achieved - Through organic growth, the management team are able to guide and lead the business according and in-line with the strategic goals of the company.

 

No crashes in culture - There will be no culture clashes as the company employees are all either hired from the start of the business or being transferred to the newly setup business. the culture and norms of the business will be maintained.

 

Cheaper compared to acquisitions - Very often when a company buys another business. they'll need to pay a premium, and that premium itself can sometimes wipe out the whole value of the acquisitions rather than increasing shareholder's value.

 

Disadvantages of organic growth are:

 

Longer time - Organic growth business needs longer time to grow as they need to start from scratch including setting up the whole business, hiring and recruiting human capital, investing in machineries, and etc.

 

More risky – There is no spreading of risk and the business will be bearing the whole risk by themselves.

 

Acquisition

 

Advantages:

 

Control of inputs leading to a wider platform and improved quality.

 

Control marts by guaranteeing sales and distribution. This can arise through a combination of linkages in the value chain when the production and distribution channels are combined or when a company uses its well established brand name or corporate identity to gain benefits in new markets.

 

Ability to take advantage of specific expertise, knowledge and resources in the company when expanding into new activities. This generally results in transfer of skills such as research and development knowledge and sharing of resources.

 

A joint venture is when two or more businesses, individuals or projects come together to co-market an opportunity, project or product to each other's client list and new prospects. It allows you to leverage the relationships and goodwill already established by your partner to the benefit of both parties. So in layman terms, a joint venture is when you join forces with another business to make some money!

 

With joint ventures, you want to identify people who are selling into your target market with a non competitive product or service but who are working deals with the same individuals who make the decisions on your products or services. Develop a proposal that is mutually beneficial for both parties and a marketing strategy and hit the road with your co-branded offer.

 

Although this is one of the quickest ways to enhance your market presence and boost your profits, there are many other benefits to forming a partnership with another business in your space.

 

Benefit # 1: New Client Acquisition Joint ventures are a great way to acquire new leads and new clients at no additional cost. By having new subscribers, you are able to continue building a relationship with these people and even if they don't buy from you right away, chances are they will eventually. Not a bad way to build a prospecting list without incurring any processing fees. Some new online marketers may benefit greatly from giving away all profits from their first joint venture just to build their options for future opportunities.

 

Benefit # 2: Enhanced Credibility. One of the keys to an effective partnership is selecting the right partner. If you joint venture partner is reputable, trustworthy and has already established a great following, their followers will trust you based upon that recommendation. This is why your "list" is sacred. Do not partner with just anyone, make sure you select someone who is worthy of your list and make sure that you are worthy of theirs.

 

Benefit #3: Increase Breadth of Services Joint ventures are a great way to offer your clients and prospects additional products. By jointly co-branding a product, you and your partner are able to bring new solutions to your current client list increasing your breadth of services you offer. The more solutions you can bring to your customers, the more valuable you are to your customers.

 

Benefit #4: Improved Conversion rate, will improve your conversion rate. One of the goals when you get your list is to convert those prospects into buying customers. With a joint venture partner, you will increase your conversion rate. Your joint venture partner will be endorsing you and your product and by that testimony alone, will convert more of their leads into sales in their own list. Since they already have an established relationship, their subscribers trust their endorsements and you can leverage that trust by offering a high quality product that will benefit the joint venture partner's subscriber list.

 

Joint venture - benefits and risks

 

Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects.

 

A successful joint venture can offer:

 

access to new markets and distribution networks

 

increased capacity

 

sharing of risks and costs with a partner

 

access to greater resources, including specialised staff, technology and finance

 

A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business' exposure.

 

The risks of joint ventures

 

Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:

 

the objectives of the venture are not totally clear and communicated to everyone involved

 

the partners have different objectives for the joint venture

 

there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners

 

different cultures and management styles result in poor integration and co-operation

 

the partners don't provide sufficient leadership and support in the early stages

 

Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.

 

3B)

 

The below literature review will focus on the country risk that a company has to consider before expansion activities. They are the market size, costs of borrowing, wage rates, trade, exchange rates, political risk, geographic distance and cultural differences. All of which are briefly discussed below:

 

1. Market size

 

The market-size theory argues that inward FDI is a role of the size of the swarm country market, it is measured by GDP. There are two GDP variables, which are often used in single or together in experimental study, which is the change in GDP in absolute terms and the growth rate of GDP. The size of the Chinese country market is positively related to the amount of FDI in the multitude country. In the study done by Ajami and BarNiv (1984) and Grosse and Trevino (1996), market size is used as a substitute for the number of firms in china that can enter into international expansion. On the other hand, Pitelis (1996) argues that the domestic demand deficiencies as an important reason for Chinese firms to invest abroad. Since market size can be used as a proxy for aggregate demand, the size of the home country market may be negatively related to the amount of FDI by the host country. The one way to consider FDI is to compare the change in the size of Chinese market and foreign market. If the home country market is fully expanded in the home country, then it is likely that the foreign countries may enter the market to gain competitive advantage by way of FDI’s. Hence, gaining access to the rapidly growing Chinese country is one of many potential advantages in launching foreign as opposed to domestic investment. Thus, if the ratio of host country market size (growth rate) to the home country market size (growth rate) is higher, the higher is inward FDI in the host country.

 

2. Costs of borrowing

 

FDI is actually funded completely by the country which extends its arms to expand internationally. If the cost of borrowing in the UK rises then it is lower than in the Chinese market, then the UK market has an advantage over the host country where the home country is in a better position to enter the host country market through FDI. Thus, we can say that higher the ratio of the foreign country borrowing costs to the home country costs, the higher will be inward FDI in the foreign country. Aliber (1970), and Grosse and Trevino (1996).

 

3. Wage rates

 

This is one of the potential advantages for the foreign company to invest in Chinese market. Most of the foreign wants to lessen their operating cost by means of reducing cost in labour and manufacturing cost. Labour cost is an important part of total costs, especially in labour-intensive manufacturing. The lower the labour cost in the host country, the more attractive will be the host country. Moore (1993) this can be put in other words, the lower the ratio of host country wage rates to home country wage rates, the higher will be inward FDI in the host country.

 

4. Bilateral trade

 

For an individual firm exports and FDI are the two alternative entry modes to enter foreign market. If other things remain the same, then the higher the international transportation costs and tariff/non-tariff trade barriers, then more the firm will hesitate to do FDI in foreign country. FDI caused by the host country's tariff/non-tariff trade barriers is consistent with the "tariff jumping" hypothesis. If tariff or nontariff trade barriers are low or absent, and if there are no other cost advantages, then there are plenty of opportunities for the investing country firm may export its product rather than doing direct investment. Thus, for an individual firm, trade and FDI are substitutes. The impact of bilateral trade on FDI is not clear-cut. According to Horst (1972) and Jeon (1992) indicate a negative relationship between imports and inward FDI in the foreign country because growing imports imply lower tariff/non-tariff trade barriers and therefore lead to a temporary fall in FDI. Ajami and BarNiv (1984), Ray (1989) and Grosse and Trevino (1996) suggests that bilateral trade and FDI may be viewed as complementary substance. More bilateral trade implies a higher level of integration between the two countries. This may enable the investing companies to build a good rapport and obtain information on FDI investment in the country. Greater exports may encourage greater FDI into the host country. In addition, exports may represent parent companies' supplies of machinery or product lines for their subsidiaries in the host country. Similarly, imports from host to home country may represent supplies of inputs or final products by the subsidiaries for the home country market. If we follow this line of reasoning, then the higher the bilateral trade (exports and imports), the higher will be inward FDI in the host country.#p#分页标题#e#

 

5. Exchange rates

 

Exchange rates affect FDI in several ways. According to Froot and Stein (1991),the relative wealth effect of exchange rates. A rise in the exchange rate in terms of the home country currency over the foreign country currency implies a depreciation of the foreign country currency, when the currency value of the investing country gains, it is very advantageous for the firms by way of getting more purchasing power with a strong currency value. Cushman (1985, 1987) and Culem (1988) emphasize the effect of exchange rate changes on relative labour costs. There is also relative effect with labour cost. The foreign firms with powerful currency value may employ more people as the cost of labour will be less compared to its home conditions. The study of Klein and Rosengren (1994) supports the significance of the relative wealth effect and fails to support the relative labour costs effect. In general, the higher the ratio of the host country currency/UK pounds exchange rate to the home country currency/UK pounds exchange rate, the higher will be inward FDI in the host country.

 

6. Country risk

 

It is very much evident that internal political, economic, and social instability in the host country will have a negative impact on FDI inflows. Firms tend to avoid any uncertainty or country risks while FDI. In relative terms, higher the degree of risk in foreign country with relation to the home country, the higher will be inward FDI in the home country. Kobrin (1979) and Tallman (1988). But Grosse and Trevino argues the negative effect of country risk on inward FDI in the host country.

 

7. Geographic distance

 

In the recent study done on geographic distance suggests to be negatively related to FDI inflows in the host country. As per Grosse and Trevino (1996), the greater the geographic distance between the two countries country, the higher will be the cost of obtaining information and managing the members in the Chinese market, and the smaller will be inward FDI in the host country due to its high costs of obtaining information and the managing from a far distance before the inception of the firm.

 

8. Cultural differences

 

As in the case of geographic distance, the greater the cultural differences between the investing and invested countries, the more difficult will be the management in the investing country, and therefore the smaller will be inward FDI in China. As more companies realise the value of culture and are not sure as to how it should be dealt with. The large number of failures in M&A process is mainly because of the lack of uniformity and disagreement between the groups or members or employees of two different cultures. Hence we can say that cultural difference is one of the main issues that a company would want to clarify before they go for any FDI in foreign countries like China. China is a country which has strong trace of being very traditional. Hence it is very important to understand the cultural values of the investing country.

 

3C)

 

Some of the major advantages of setting up a manufacturing facility in a growing economy like china are due to its unperturbed manufacturing prowess. Apart from assuring good quality there are significant cost advantages as well. The growing importance of china in manufacturing arena is evident from its worldwide market share which is 50% of cameras, 30% of air conditioners and televisions, 25% of washing machines, 20% of refrigerators. The western companies have started to realise this potential of investing in developing countries like china for example wal-mart investing $18 billion on goods from china to re-brand as its own thus providing a direct link to US customers.

 

Due to the low cost pricing by the Chinese companies, the world economic power has experienced a paradigm shift. China now seems to be in forefront of manufacturing processes which makes the US manufacturers forcibly reduce their price by 30% or give up their existing customers.

 

From the balance of payment perspective the trade deficit that the US owes stands at more than $150 billon. Out of which 12% comprises of goods purchased by wal mart with other retailers following suite.

 

America has always known to be a great manufacturing power but could never match with China’s growing presence due to extremely low cost driven manufacturing. The quality factor of Chinese manufacturing has also been quite prolific which has created a decrease in demand of finished goods from the US. Although relationship with china reaps extreme benefits for companies, US companies have largely set up their manufacturing operations in China to cater to its burgeoning middle class. The return on investment for US companies has also risen sharply. Meanwhile as demand for manufacturing processes increase in China, the price of raw materials across the globe has also gone dramatically high. It can be also understood to a certain extent that only due to the influx of Chinese goods in the US markets, have kept its economy in buoyancy, thus saving its fate from a recession for a long time until the recent credit crisis of 2008.