SLP2 THE FINANCIAL AND ECONOMIC ENVIRONMENT OF INTERNATIONAL BUSINESS - Essay Example

The financial and economic environment of international business In 2003, the Latin American subsidiary of the US based corporation, DirectTV filed for bankruptcy. The rampant political instability in the region impeded the company’s ability to carry on its daily operations, which resulted in huge financial losses. Political upheaval in the region continues to affect adversely foreign investors. Explored in the essay are the major political events threating DirectTV’s operations in Latin America and possible actions that can be undertaken to safeguard the company.

The Latin American subsidiary of DirectTV generates high revenues for the parent company. Therefore, it is pivotal for the company to ensure operations run smoothly amidst the political instability and economic problems afflicting the region. More often than not, peaceful protests and rallies lobbying for political reforms turn violent and destructive, as protestors adopt more extremist ideologies. For example, Venezuela has experienced 6,369 protests in the first six months of 2014, which were triggered by the escalating anti-government sentiments supported by the growing opposition faction (Shackman, 2014).

Both public and private infrastructures get damaged during clashes between protestors and the police. Besides political instability, DirectTV faces other challenges while operating in Latin America, which include the imposition of price controls and the planned strategy by Latin American governments to update foreign exchange rules. Price controls adversely affect business operations, as they undercut fair competitiveness, a prime feature of the free market. For example, in Venezuela, price controls facilitate expropriations with a 30 percent cap on profits acquired (Avadhani, 2010).

Foreign investors operating in hostile markets defined by unwarranted price controls shy away from committing to more investment opportunities. Conversely, Latin American governments are prone to updating foreign tax rules to further their personal interests. Therefore, foreign investors in the region are always wary of the foreign policies, as they might translate into adverse consequences for their businesses. In the case of Argentina, which ended the previous year with major challenges, as exemplified by long lasting blackouts in various major cities, the government struggled to contain social dissatisfaction on public security and prices of basic goods.

This was likely to lead to heightened political and social polarization, with a high probability of industrial unrest.In order to safeguard itself against these challenges, DirectTV has adopted strategies such as agreeing to mergers that are mutually beneficial, directing its efforts towards product innovation, and increasing the number of locals recruited as employees (Cohen & Bremmer, 2006). These strategies are grounded around delivering attractive returns while completing infrastructure build-out and mass-market expansion; for example, the implementation of “connected home strategy” and rolling out industry-leading high definition user interface across multiple households.

The merger between AT&T and DirecTV also sought to cement the company’s position in the region. The company has slowly ventured into the wireless broadband market, where weak infrastructure has hampered adoption of competing high-speed internet services, as a strategy to beat off competition (Cohen & Bremmer, 2006).In conclusion, the Latin American subsidiary of DirectTV accounts for 95% if the multinational company’s subscriber growth, which translates into 20% of the company’s total revenue.

Therefore, safeguarding its operations in a region marred by political upheaval, unwarranted price controls, and irregular foreign exchange rules remains a priority for the parent company. For example, the parent company has undertaken steps such as product innovation, agreeing to mutually beneficial mergers, and recruiting local employees. Through the implementation of such strategies, DirectTV seeks to improve margins, which is a step towards ensuring the subsidiary generates enough cash flow to be self-sufficient (Shackman, 2014).

ReferencesAvadhani, V.A. (2010). Chapter 20: Measurement of Politico-Economic Risks (Country Risk Management). International Financial Management. Global Media, Mumbai, INDCohen, F. L., & Bremmer, I. (2006). Political risk: When diversification isnt enough. Financial Executive, 22(7), 54-57Shackman, J. (2014). The economic and financial environment of international business. Trident University International, Cypress, CA