International Operations
1 Introduction
In this chapter we briefly consider the different ways in which a company can conduct overseas operations, and also examine the nature of political risk of overseas investments and ways of attempting to manage it.
2 Forms of international operations
export from the home country
low risk; low capital needs
little local knowledge
slow response to market
set up overseas branch
profits of branch treated as profit of parent company
cheap to run
set up overseas subsidiary
may be able to claim local grants / tax advantages
local profile may be better for subsidiary
takes longer to form; less flexible
joint venture
access to new markets at comparatively low cost
use of partner’s expertise and local knowledge
easier access to government incentives and local capital markets
but, cultural difference / finding partner may be difficult
licensing
rapid penetration of local markets
low investment
regular licensing fee income (often regardless of profitability)
When a company that already exports to a market is considering a subsidiary there, compare the subsidiary with exporting, not with doing nothing: 'it can sell into that market' earns nothing, because exporting already does that. Argue what the lists above give a subsidiary that exporting lacks — a local presence, a quicker response to the market, possibly local grants or tax advantages — against its longer set-up and lower flexibility, and as advantages to the company, not to the host country.
3 Ways of remitting income from overseas investments
Dividends
Loan interest
Royalties
Management charges
Transfer prices
Countertrade
4 Political risk
Political risk is the risk that political action will affect the position and value of a company.
Examples of macro (country specific) political risk:
outbreak of war / civil unrest
confiscation of assets (nationalisation) / restrictions on foreign ownership
import quotas / tariffs
exchange controls
Examples of micro (firm specific) political risk
These are risks that affect only certain firms in certain industries, rather than all foreign firms.
minimum wage legislation
pollution controls
product legislation
health and safety legislation