Risks of Diversifying Business to China from America - Essay Example

Risks of Diversifying Business to China from America

The business world is in the middle of a dynamic and new phase of globalization. Emerging markets once sought primarily for their cost-saving capabilities, are now an important destination – the modern growth frontier (Henisz & Zelner, 2010). Businesses in developed markets are progressively taking advantage of the purchasing force of the billions of customers in these developing economies. For instance, Brazil, Russia, India, China, and Turkey have a combined population of 2.89 billion individuals that makes up more than 40% of the world's population. This population is about 13% (U.S. $6 trillion) of the worldwide GDP (Onyiriuba, 2016, p. 113). Therefore, many businesses in the United States and other developed nations find it sufficient to expand to such emerging markets. Working efficiently in these business sectors has turned into a business essential for most segments of the worldwide economy. However, numerous challenges political, social, economic, technological among other key economic drivers usually define these economies (Liu, 2015, p. 37). Therefore, this paper examines different challenges that Safaricom Inc., a cellular telecommunications and internet network company, is likely to face in China, which is an emerging market.

The first primary risk that Safaricom Inc. is likely to face in China is the foreign exchange risks. The company’s foreign investments in bonds and stocks will literary produce returns within the Chinese local currency of the same investment (Organisation for Economic Co-operation and Development, 2002, p. 142). This means that all the investors in the United States will have to convert their currency back to the domestic currency. In other words, the American investors who buy the company’s stock in China will have to sell and buy their securities in the Chinese yen. Thus, the current fluctuations are likely to have considerable effects on the total return on the vestment (Alon, 2003, p. 77). For instance, if the company’s local (American) value held on stock increases by 5% and the value held in the same stock in Chinese depreciate by 10%, and then the Safaricom Inc. investors will have a net loss on their investment. They will have to sell their shares in Chinese yen and convert their total returns to the U.S. dollars. The America’s currency is usually high in value than currencies of emerging markets; therefore, any sales in those countries converted back into the American currencies will lead to significant losses (Fung, Pei, & Zhang, 2006, 160). Additionally, these economies have high risks of economic crisis than developed nations thereby putting investors’ money and the company at risks.

China is also experiencing market returns non-normal distribution. Most of the markets in the developed countries usually have normal distribution on their market returns (Organisation for Economic Co-operation and Development, 2002, p. 159). The standard distribution of market returns makes it easier to use price derivatives to undertake economic forecast on the future of the equity prices of these economies accurately (The United States, 1997, p. 40). However, the securities of the emerging markets cannot be evaluating using the same principle since their market returns are not distributed normally (Onyiriuba, 2016, p. 135). Additionally, these markets are experiencing constant changes; thus, it is tough to utilize their historical information to draw the appropriate correlation between market return and the underlying events in the country. Notably, these factors explain why the Chinese market returns are not distributed normally; thus, it would be difficult for Safaricom Inc. to determine it future prosperity in the Chinese market. Before getting into a market economy, it is vital to identify economic trends within such economies (Alon, 2003, p. 173). Telecommunications and internet services are new ventures diverse economies; their successes are dependent on the perfect understanding the market returns in these economies. Thus, lack of such information will only increase the business uncertainties.

Safaricom Inc. is also likely to face Lax insider restriction of its operations. Despite the fact that most countries claim that they have strict insider trading laws, none of the emerging markets can offer rigorous enforcement of the insider trading laws and the United States. Countries like China are unlikely to punish people engaging in unfair trading practices. Safaricom Inc. being a telecommunication and internet providing company, it is at high risk of numerous trading malpractices from rogue traders or Chinese citizens (Beridze, 2008, p. 95). Some of the insider trading challenges that Safaricom Inc. is likely to face in China include manipulation of its networks; thus, they are used freely and productions of counterfeit products associated with the company (Coase et al., 2011, p. 192). All these manipulated products and services will be sold at lower prices compared to the genuine Safaricom Inc. products. It should be noted that middle and low-income earners usually characterize economies of the emerging economy. These people have the character traits of maximizing saving; thus, they are likely to buy counterfeit products at lower prices. Therefore, Safaricom Inc. is to be faced with market inefficiencies that are likely to affect its equity prices on its products and services (Onyiriuba, 2016, p. 126). The company’s intrinsic values are liable to be interfered with manipulations in the Chinese market. Despite being privy to such information, it remain difficult to evade them since the laws and law enforcers are not keen to eradicate and implement legislation that will bring sanity in this market economy.

Safaricom Inc. is likely to have less liquidity in the Chinese market economy. Developed nations often have more liquid than emerging markets. The imperfections in the Chinese market create a likelihood of the market having high broker fees that it is in the United States (Ulrici, 2007, p. 99). The less liquidity in the Chinese market will increase the price uncertainty of the company’s products and services. This liquidity aspect is also likely to affect the company’s investors in that, investors who will want to sell their stock in the Chinese illiquid market will face substantial risks of their orders not being filled at the trading price. Moreover, the transactions of investors who will try to sell their stocks will not go through favorable levels as it could have been in the United States or any other developed nation (The United States, 1997, p. 127). Furthermore, the brokers in China are likely to charge higher commissions on the investors since they will have to develop diligent effects to locate counterparties for their trades. In other words, the illiquidity of the Chinese market will only prevent the Safaricom Inc. investors from realizing their full benefits from faster transactions that it would have been in the developed nation.

Chinese market economy is also likely to be a challenging economy for the Safaricom Inc. activities. Since the Chinese market is an emerging market, there are possibilities that its financial systems are not yet fully matured (Lim & Institute of Southeast Asian Studies. 2008, p. 84). Thus, there are likelihoods that the weak banking systems may be challenging; hence, might affect the financial operation of Safaricom Inc. If the banking systems in China are not fully developed, then they may offer Safaricom Inc. poor financial support or access to finances thereby interfering with the growth of the company (Barnett & Prasad, 2004, p. 272). Additionally, the poor financial structure will always issue the attained capital with high return rates thereby increasing the company’s capital weighted average costs. The increasing weighted average capital cost will lead to inadequate response on the company’s projects ((Liu, 2015, p. 146). In other words, the Chinese capital will subject Safaricom Inc. with difficulties of raising capital to undertake new projects; thus; it will force the Safaricom Inc. to seek alternative sourcing from stakeholders from Mother Company’s branch in the United States. The latter move may interfere with the investors’ confidence.

Just like in China, all other emerging economies have weak corporate governance systems. Without reliable corporate governance systems, businesses can never have positive returns on stocks. This is the likely situation in China. Management systems, usually affect Performance of markets as well as the contribution of shareholders (Beridze, 2008, p. 187). With poor or weak governance systems, businesses cannot thrive to their potentials since the voices and contributions of shareholders are interfered with or weakened. For instance, China has restrictions on the corporate takeovers (Edwards & Garcia, 2008, p. 78). These limitations are likely to thwart the incentive levels thereby reducing the performance of businesses within this economy. In most cases, emerging economies usually restrict corporate takeovers to increase job security for their citizens. It is worth noting that corporate management in the emerging markets has long ways to achieve minimum consideration of full effectiveness (Lim & Institute of Southeast Asian Studies. 2008, p. 120). Nonetheless, many emerging markets including China are showing improvement in their corporate governance. However, in the current standings, the situation still put businesses are risk.

Emerging economies are also faced with increased cases or chances of bankruptcy. These economies have weak monitory systems that put the entire financial systems such countries at risk of collapse (Pigott et al., 2002, p. 208). The books of account of the most financial institution are China are weak checked and balanced thereby weakening accounting audit procedures of this market economy and its major financial institutions. Inadequate auditing often leads to a poor projection of the exact financial situation of a financial institution. These cases are common in emerging market economies (Fung, Pei, & Zhang, 2006, 263). The primary intention of these moves is strengthen the investor confidence. However, when all goes wrong, most of the financial institution with fake financial position and projection are usually at high risk of bankruptcy and being placed under receivership (Mobius, 2012, p. 176). In other words, financial institutions in China, just like any energy economy are more likely to cooks books of account to reflect these firms extended picture of profit making. Revealing these circumstances is within the countries financial control units. In most cases, it takes long before this unscrupulous financial management to be detected. Moreover, outsiders other than the central bank of such economies cannot be in a position to identify the same (Ulrici, 2007, p. 201). Therefore, Safaricom Inc. moving to such an economy with highly unclear exact financial positions of it financial institutions are a risk not worth taking. In this case, therefore, China will not issue Safaricom Inc. with higher paying interest rates bonds since it knows the risks within its financial market.

Finally, it is worth noting that the instability of politics in these economies increases the risks of expansion to the foreign investors. For instance, China and Japan are ever in being in political struggle on boundary issues. These situations are likely to weaken investors’ confidence. Moreover, when their war threats take effect, the Safaricom Inc. businesses in China will be affected immensely (Arouri, Boubaker, & Nguyen, 2014, p. 154). Other political aspects that are likely to affect the operations of Safaricom Inc.’s production and profitability in China include ever increasing or revision of taxation laws, ever changing market policies, loss of subsidies, and privatization of institutions upon demand. The Safaricom Inc. products and services are technology driven; therefore, political leaders with China varied interest may affect laws concerning market policies towards their interests (Beridze, 2008, p. 102). Therefore, before Safaricom Inc. takes a move to decide on its expansion into China, it must conduct thorough market analysis about these factors among other factors including social factors that are likely to affects the purchasing habit and behaviors within this market economy.

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