International Business Finance - Essay Example

However, expanding overseas is a major decision for the firm and it involves many risks dependent upon the country in which the firm decides to enter. Thus care and diligence is required in planning and implementing overseas expansion, in order to obtain positive results and growth for the firm. Overseas Expansions Every firm needs growth to fulfil its going concern requirement. Growth for the firm may be within the country of operations i.e. source country or on an international level. The increase in competition and technological advancements compel the firms to enter into new markets within the country and overseas.

“Firms may expect to increase their profits through overseas operations.” (Habbard and O’Brien 2006) Thus firms engage in overseas operations for better results and diversity. There are many methods for overseas expansion depending upon the requirement and feasibility of the organization wanting to expand overseas. The basic method for international expansion is exporting. This is a low cost and low risk way to enter into the global market by selling your products in overseas domestic markets.

The exporters get rebates by the government in order to promote the export and increase the foreign exchange reserve for their country. Another approach for expansion is the Foreign Direct Investment (FDI). “Foreign direct investment (FDI) is the process whereby residents of one country (source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country (host country)” (Moosa 2002) This method is more expensive as compared to the previous one and requires more investment in terms of cash, machinery, personnel etc.

There are different ways for this method to work, i.e. wholly owned subsidiary which is completely owned by the parent company, joint ventures that are partnerships between two business and strategic alliances that are arrangements between businesses. Whatever way the firm decides to expand abroad depends upon its priorities. Other method of overseas expansion may involve relocation of production. In this method the firms shifts its production facilities to a country that provides cheaper labour, less trade barriers etc.

This shifting reduces the product costs thus making it more competitive in the market. Management contracts are also used by the firms to provide managerial expertise to other businesses. Firms also use licensing and franchising as methods of overseas expansion. Thus overseas expansion is a decision that requires proactive thinking and careful selection of methods and deployment of the appropriate resources in order for it to be successful. Risks Involved in Overseas Expansion The overseas expansion brings with it different types of risks.

The firms must assess these risks wisely in order for the expansion to be beneficial. These risks can be categorised as pure risks and speculative risks. “Pure risks are associated with hazards such as health, safety, environment and security, whereas speculative risks are associated with business, finance, human resources, information technology strategy and politics.” (Adams 2006) The risks of overseas expansion depend upon the country in which the country is expanding. When a firm goes overseas it may encounter fraud, corruption, and other means of terrorism.