International financial management - Essay Example

International Financial Management By: Most investors in the UK and other parts of the world choose to place a portion of their portfolios in foreign securities. The decision, however, should involve an analysis of various mutual funds, exchange traded funds and bond offerings. To be successful in this venture of overseas investment, the company must begin first by determining the risk that characterizes the investment climate of the countries under its consideration. This would involve a careful analysis of both the economic, political and business risks associated with such investments in these countries (Michalet, 1997, p.19). The main factor to be considered by the company before investing overseas would be the types of the markets to be penetrated. There exist the developed, emerging and the frontier markets. The developed markets are those that consist of the largest and most industrialized economies whose economic systems are well developed, with politically stable environments and where the rule of law is well entrenched. These markets are considered by several economists to be the safest investment destinations, but with lower economic growth rates often trailing those of countries in earlier stages of development. An investment analysis of such markets would concentrate more on the current economic and market cycles and less by the political considerations. This would be the situation when the firm decides to invest in the United States of America (Organization for Economic Co-Operation and Development, 2011, P.77). The Emerging Markets, on the other hand, represent those markets experiencing rapid industrialization with remarkably higher levels of economic growths. Such market conditions often translate into superior returns on investment as compared to the developed markets. They, however, are more risky with higher political uncertainties as compared to the developed markets. In these markets, closer attention should be paid to the country’s political environments and the potential for unexpected political developments when evaluating their economic potentials. Such is the case when investing in the Chinese market (Gómez et al., 2014, p.42). The other market consideration is the frontier markets that represent traditionally smaller markets as compared to the emerging markets. In such markets, there exist more restrictions on the ability of foreign investors to invest within its boundaries. They are potentially riskier than the emerging markets with low liquidity but could result in exceedingly high returns on investments. The markets provide more diversification benefits than the other markets and are associated majorly with the developing nations (Gómez et al., 2014, p. 48). When compared, investing overseas in the US would be less risky as compared to investing in China. More considerations and analysis would thus be given to the Chinese market. In such uncertain markets, the factors to be usually considered involve; Political Stability and legal considerations; this would be done with consideration to the government in place, its stability and policies. In the US, the government is more stable and with stable economic policies as compared to China. It should be a great concern for investors considering investing in the Chinese markets, with constantly changing governments, weaker regimes and economic policies. It is paramount to ascertain the attitude of the government and the people of the host countries before the company decides to commit resources overseas. Some of the indicators of a government’s willingness to foreign investment would include proper and streamlined procedures, the absence of bureaucratic hurdles and subsidies and incentives. It is also necessary to assess the tax structures and other legal systems and procedures in the host countries before deciding to invest in them. In most of the emerging markets as that of China, the legal systems tend not to be stringent, thus could present the company with the difficulty of implementing and enforcing its policies and contracts. The United states indices relating to corporate governance, legal/judicial effectiveness, public sector ethics and corporate ethics rates; are higher than that of China and goes to show the stability that exists in the developed markets as opposed to the emerging ones (Liaw, 2007, p.56). Trade Balance; another factor to consider would be the balance of trade payments of a country. Many emerging markets including that of China takes their strength from strong exports that indicate stronger domestic industries. These points towards a variety of things that include the country’s infrastructure, technological advancement and the government support (Liaw 2007, p.56). The existence of Investor Friendly Policies; another important factor would be whether the governments of the countries encourage direct foreign investments. This would be provided by the data on the existing inward foreign direct investment activities on the chosen county destinations. Several countries in most cases do not encourage foreigners to purchase companies or take larger stakes in their existing companies. On the other hand, some countries encourage foreign investments in order to grow their markets by giving such foreigners rebates and incentives (Chaudhuri & Mukhopadhyay, 2014, p.81). Infrastructure; another factor to consider and which applies across the board in terms of localities, industries and businesses are their access to the necessary infrastructures. In the developed markets, including that of the United States, access to these infrastructural facilities including roads, internet and electricity aren’t a major concern. However, in the emerging and frontier markets, they denote major inputs whose availability and access must be considered (Chaudhuri & Mukhopadhyay, 2014, P.90). China, despite most of the uncertainties associated with its market, present better overseas investing opportunities for the company more than the United States. This is majorly because of the superior returns of investments gained in its market. Other reasons making China a better alternative for investment include; Capital availability; China had emerged one of the largest recipients of foreign investments even surpassing the United States in 2000. With a thriving global economy, capital market, and a sustainable business environment, China has become one of the hotspots for interested foreign investors and multinational companies (GÓMEZ et al., 2014, p. 66). Competitiveness. Due to its rapid development, as an emerging market in infrastructure, resource availability, the productivity of its workforce and development of the business value chain, China has become a very attractive destination for foreign investors. There has been an increasing availability of low-cost and skilled employees in China, and this too has attracted investors as this has helped them in increasing their returns (Liaw, 2007, p.72). Market availability and an improved business climate; China’s population, the size of its market and the potential for growth presented by this size has been a pull factor for most foreign investors. The company’s products would require a sizeable and a receptive market in order to make gains on its investments, and this could be adequately provided for by the Chinese market (Liaw, 2007, p. 84). In a nutshell, most of the considerations to be made before investing overseas would depend on the nature of the market to be entered. Most investors are, however, attracted to the emerging markets because of the huge market availability. This is also motivated by the fact that the government and the local investors are not able to satisfy the local market due to inadequate expertise or financial resources. In these circumstances, it would be most prudent for the investor to consider the political and economic stabilities of their target countries before making the decision to invest (Turk, 2015, p.90). Reference CHAUDHURI, S., & MUKHOPADHYAY, U. (2014). Foreign direct investment in developing countries: a theoretical evaluation. http://dx.doi.org/10.1007/978-81-322-1898-2. GÓMEZ MERA, M. L., KENYON, T., MARGALIT, Y., REIS, J. G. A. D., & VARELA, G. (2014). New voices in investment: a survey of investors from emerging countries. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=843009. LIAW, K. T. (2007). Investment banking and investment opportunities in China a comprehensive guide for finance professionals. Hoboken, N.J., John Wiley & Sons. http://www.123library.org/book_details/?id=7690. MICHALET, C.-A. (1997). Strategies of multinationals and competition for foreign direct investmen: the opening of Central and Eastern Europe. Washington, DC, World Bank ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT. (2011). Attractiveness for innovation location factors for international investment. [Paris], OECD. http://public.eblib.com/choice/publicfullrecord.aspx?p=714196 TURK, R. (2015). Financial Decisions and Investment Outcomes in Developing Countries: The Role of Institutions. Washington, United States, INTERNATIONAL MONETARY FUND. http://lib.myilibrary.com?id=763478. Read More