Hamilton Investment Company Expansion Program in China - Case Study Example

Hamilton Investment Company Expansion Program in China Introduction Boom in economic activities inform of trade, business ventures and upcoming of new high profile manufacturing and processing industries has hailed China in the past two decades. Development in china has continuously been favored by good policies regarding trade and investments. High growth start-up business across the region are emerging considering their high risk factors that require good strategic policies intervention. Notably, these start-up high growth high risk business face challenges within their first years of operations. This memorandum explores the possible ways in which Hamilton Company may reduce the risk in their new expansion programs in China. Hamilton CEO requests the General Counsel of Hamilton to come up with suggestions in which the company can only risk $ 100 million in the projects that account to around $ 200 million including the infrastructure. Background Information Hamilton Investment Company is a multinational company that specializes in hotel and hospitality departments across Texas. In addition to hotels, it also manages a semi-conductor manufacturing plant in South Korea. The hotels the company manages are located in several parts including subsidiaries in Bangkok, Singapore, London and Tokyo. The manufacturing plant in South Korea specializes with the manufacture of technology based equipment that are high tech designed. On its expansion program, the company has agreed to build hotel expansion and manufacturing plant for semi-conductors in china. Like many established business investments, Hamilton is conservative in business ventures that have undue risks. In developing countries, the company analyses that they is risk associated with the business. However, the company has a positive approach that it will be able to manage the risk by critically evaluating the possible causes of these risks. However, the management strategies for evaluating this risks and identification of whether Hamilton can manage is the main challenge for the company. China Business Policies The launching of Shanghai special economic zones formed in 2013 has raised the hope for the company investment project in China. The policy is adoptive and resembles one that was established in the Shenzhen. These policies were received warmly by the companies, in fact, over 1400 business companies has registered with the Shanghai SEZ. In addition, there are over 6000 companies that are in the process of registration into the program. Within Shanghai, the registration takes approximately four days and outside the city it takes a total of 30 days. Due to its location and interventions the government has made, Shanghai is the best region for technology based companies. US companies have partnered with the University of Jiaotong in technology and integration of business and technology. Technology currently plays a central role in determining the competitive ability of the business with other investment projects. Shanghai government encourages investment in technologically enhanced business investments. There are several companies that have established their base in china. A good example would be no other than the Walt Disney Company. The project commenced in 2011 waiting for its completion by 2015. Investment Path for Hamilton in China Shanghai tourism coumpany has approached the Hamilton Investment over business partnership. the tourism compsany intends to open hotels on the shores of the ocean in the SEZ region. The project is budgetted at $ 100 million for the hotel and $ 50 million for the semi-conductor manufacturing plant. In addition, the inflastructure targeting to link these tow investments is expected to amount to $ 50 million. Excluding the cost of the infrastructure, the company may experience reasonable profits from the two investment according to the feasibility study carried out. Scope of the Research Paper As the general cousel of the Hamilton Investment Company, the CEO intends to establish thek project in the hotel and the semi-conductor facility plant. The path to be used for the funding of the projects forms the main pillar of this memorandum. It will observe possible strategic fundig methods that can be effective and ensure risk associated with this company is reduce possibly thorugh distribution to a number of shareholders. For the sake of the funding process for this project, more emphasis will be given towards identifying the viability of crowd funding. Limitations of the Study As a result of several technicalities in the process of conducting this research, it would not be unrealistic to claim that all the information acquired and used in this research has been examined exhaustively. Such issues could result in possibly important facts not being missed or being understood vaguely. It implies that further research can be conducted to explore the topic further. The information collected has limitations, ranging from the respondents to the ethnographic ones, and possibly contains excesses introduced by inaccuracy of field survey data. Notwithstanding the above, the author has undertaken to reduce the effects of these limitations to the minimum level possible to avoid bias by employing efficient techniques of data and information collection and analysis. Theoretical Approach to Business Funding Funding the Projects Several methods can be applied to cater for the funding this project. These funding methods depend on the nature of business and whether a start-up business or expansion program for existing industry. These methods are use of private equity, funding by venture firms and most recent method called crowd funding. (a) Private Equity Lerner (2009) defines private equity as the share of ownership that a company awards an investor in exchange for money invested. As discussed before, many startup companies are faced with the problem of raising capital. Most of the times a company’s founder may not have enough funds to venture the whole project (Durrani 2006). This forces them to seek outside financing. Most start-up companies have significant intangible assets and have uncertain prospects (Lerner 2009). Therefore, it is unlikely that banks or any other debt financing institutions will consider them eligible for financial loans. Private equity financiers give capital to these high-risk ventures, which have the potential to give high returns. In exchange, the investors are given a share of ownership and retain a powerful oversight and control of the business to ensure that it performs. Due to the high risk involved in private equity ventures, private equity organizations look for ways to protect their investments (Motamen 2005). They undertake due diligence carefully before investing in a star-up or any other business (Lerner 2009). In addition, they watch the company’s operations closely and sometimes intervene to avoid failure, which would bring them massive losses. Sometimes, private equity investor may be given a seat in the board of directors of the company, to ensure that whatever actions the company undertakes do not risk his investments. (b) Venture Capital Venture capital is an activity by which investors whether individuals or institutions support the ability of an entrepreneur with capital and skills to dominate market opportunities and hence obtain capital gains in the long run (Shilson1984, p.208). Venture capitalists give funds to businesses knowing that the risk exist in the future of the company’s future returns and flow of cash. Durrani (2006) states that the original idea of venture capital was to support high-growth high-risk ventures including new companies and or technologies. In essence the idea of VCs is all about willingness to accept high risks in anticipation of extremely high rate of return (McDonough 2011). Hill (2001) argues that a venture capital arrangement is a kind of interdependence between an investor and an entrepreneur. The entrepreneur has a business proposal and also a strongly structured idea for success. On the other hand the investor has money and or the ability to raise money and is well linked to the business world. He can therefore exploit his links and contacts to put together an efficient management team and establish a distribution channel for the business. Each of the two parties needs each other since the investor does not have the time to oversee the daily running of the investment and the entrepreneur does not have the funds to put up a business. (c) Crowd Funding Crowd funding is the process through which people come together to pool resources to fund a set project. Hastings (2012) defines crowd funding as the practice fundraising through securities offered through the internet and mass communication media directed to the general public. Hastings definition is more business oriented as compared to other definitions of crowdsourcing activities that are not necessarily done in anticipation of financial gains. Crowdsourcing.org (2012), an organization dedicated to researching the concept of crowd funding, defines four categories of crowd funding. These include: Equity based, lending based, reward based and donation based crowd funding. Specifically, the memorandum concentrates on the first type; equity based crowd funding. It will be in line with the aim of the research to evaluate whether this funding can be a suitable alternative to venture capital firms. Considering Hastings (2012) definition of crowd sourcing, it appears like he defines equity based on crowd funding more directly than the other categories. Steinsberg (2012), an entrepreneur and innovator who owns the Pebble Company that was partly funded through crowd funding, explains that the theory of crowd funding has started to take root in the US that is the origin of the idea of venture capital. He states that crowd funding has changed the way entrepreneurs are selected and evaluated by investors. Viability of Crowd Funding As a Solution for Hamilton According to Pandey (2011), an assistant professor at LM Thapar School of Management, a business idea is considered viable if it conforms to legal regulations and has a market. This means that the entrepreneur should introduce a product, technology or service that is being demanded by the targeted market. Welstead (2012) argues that careful research is the only way a person can establish whether a business idea is viable. Through market research an entrepreneur can establish whether the product and/or service is demanded by the targeted market. In the context of Hamilton Investment expansion program, the general public can be treated as the market and the idea of crowd funding the item for which market is sought. To establish whether crowd funding is a viable source of venture capital, it is important to establish whether there are enough people (market) willing and able to make contributions to purchase equity in business start-ups. It is necessary to establish whether the idea will be sustainable. The author has hypothesized that the sustainability of crowd funding as a source of capital largely depend on the ability of members of the public to make profitable investments. This will ensure that they continue making investments in start-ups through crowd funding activities and hence be a sustainable source of venture capital. Factors to Consider in Crowd Funding Information flow is also an important factor that seems to affect the idea of crowd funding. Though it is possible to suppose that the two groups of people, private company employees and civil servants, may have the money required to make the investments, emphasis should be checked to ensure that the role of information in influencing their investment decisions is not overlooked. As such, the general counsel supposes that more people would be ready to invest if key stake holders in the industry took a public awareness initiative to educate the public about equity based crowd funding activities. The role of government in regulating crowd funding activities is also notable. It is believed that the government has the ability to control fraudulent crowd funding. It is necessary noting that there is a significantly large percentage of people who believe trading in stocks is a risky business. However, most people are interested in investing in potentially high return start-ups. As such, the future of crowd funding largely depends on this willingness of the members of public to invest in private equity. Importance of Crowd Sourcing Venture capital firms continually shift their lines of business as time goes. They time their investments to coincide with the period when an industry is likely to record the highest growth rate. They also reduce the likelihood of losing money by investing in those industries which have shown indications of establishing. For the case of crowd funding, crowd funding intermediaries are the ones who make the decision of the line of business to specialize. Since intermediaries will focus on different industries, it partly rests on individual contributors to choose which projects they want to invest in. Once again the information factor will play a key role in influencing investment decisions. The US “Jump-start Our Business Start-up Act of 2011” obligates any entrepreneurs to disclose information relevant to the investment they want to make before soliciting for funds through public offerings. Among other things, an entrepreneur is supposed to disclose the risks associated with the venture. Such information will help the people who want to invest to make decisions. However, there exist several countries across the globe that do not have regulations for crowd funding activities. Therefore, enactment of similar laws in other parts of the world would boost crowd funding by giving the public access to information to help them make wise investment decisions. Conclusion The venture capital market has expanded and will probably continue expanding. Therefore, there is increasing need for more sources of venture capital for start-ups. Venture capital firms operate selectively and hence some entrepreneurs who may have brilliant business ideas may not get capital from these firms. Crowd funding is a viable source of venture capital if large numbers of people make contributions. From the survey, it is evident that a significantly large portion of people are willing to purchase private equity in start-ups. As such, crowd funding can raise significantly large amounts of money for investments. However, the industry will tap the full potential in the public if it incorporates people who have a small financial base. Selling small amounts of private equity will attract a large population of medium wage earners and low wage earners. The idea of raising venture capital through crowd funding is relatively new. Many people (except in USA) do not clearly understand how the idea works. Consequently, to activate the potential in crowd funding, stakeholders need to start public awareness initiatives. Notably, the government has a great role to play as well. Most of the individuals willing to invest in start-ups, believe the government has the capability to regulate crowd funding activities. Therefore, the government is advised to maintain this trust by enacting laws, such as was done in USA, to protect the public from fraudsters. Technology has provided a platform through the internet which is an important infrastructure for crowd funding. The idea of making contributions through the internet is familiar to many people. Therefore, entrepreneurs will not be introducing a new concept by asking people to invest via the internet. Many people have also had the opportunity to make contributions in various types of public fund-raising events. Basically, the idea of crowd sourcing is not new rather it is in advanced stages since it is up to date in the manner in which contributions are made. However, the idea of purchasing private equity in start-ups has been dominated by venture capitalist specifically venture capital firms for a long time. If the government regulated process, citizens would be advised on how to make informed decisions regarding investment that will give them profit. This would make crowd funding a sustainable and dependable source of capital for various business ventures. In conclusion, crowd funding is a viable alternative source of venture capital to venture capital firms. Considering the case of Hamilton Investment Company, the funds remaining to fund the project has a high probability of success through crowd sourcing. Though the sustainability of the idea is dependent on future events such as government policies there are indications that the idea will take root. More countries are likely to follow the example of US and hence form a good platform for the practice of raising capital through public offerings. Bibliography Read More