Objectives of the Studies on KW IT Ltd Set up of Subsidiary Company in India - Assignment Example

Table of contents Table of contents 1 Background 2 Statement of the problem 2 Objectives of the studies on KW IT ltd set up of subsidiary company in India 3 Hypothesis for testing 3 Significance of studies on KW IT ltd setting up subsidiary company in India 4 Indian potential for KW IT (India) Ltd 4 Doing business in India 5 Infrastructure and its role in manufacturing industry 6 Power Blackouts in India and prospect of economic development in India 6 Consumer products in India 7 Globalization trends 7 Factors that push KW IT Ltd to enter Indian Domestic market 8 Positive impacts of KW IT (Australia) Ltd setting subsidiary company in India 8 Negative effects of KW IT (Australia) Ltd setting KW IT (India) Ltd in India 9 Political risk and KW IT (India) ltd 10 Currency fluctuation risk 11 Effect of possibility of Australia dollar being pegged on United States Dollar 11 KW IT (Australia) products piracy risk 11 KW IT (India) Ltd inventory risk 12 Capital inventory risk of KW IT (India) Ltd 12 Space inventory risk of KW IT (India) Ltd 12 Safety inventory risk of KW IT (India) ltd 12 Quality inventory risk of KW IT (India) ltd 12 Materials inventory risk of KW IT (India) Ltd 13 Obsolescence inventory risk of KW IT (India) Ltd 13 Indians political and law in business and their effects towards foreign investment 13 Suspected Indian cultural influence on accounting practices 14 KW IT (Australia) Ltd Foreign currency translation 15 Currency of books and records (CBR) 15 Functional currency (FC) 15 Reporting currency (RC) 15 The first rule of KW IT (Australia) Ltd foreign currency translation 16 The second rule of KW IT (Australia) Ltd foreign currency translation 16 The third rule of KW IT (Australia) Ltd foreign currency translation 16 Bibliography 18 Background KW IT set up of a subsidiary company in India will come with change of business or company name in order to facilitate global different identity of operations between the two companies (Beausang, F. 2003). The parent company KW IT ltd is posed to change its company name to KW IT (Australia) Ltd while the company name for the Indian subsidiary will be KW IT (INDIA) Ltd. The successful set up of KW IT (INDIA) ltd should slough and weather barriers (Barnes, J. 1999: 401-415) that may negatively affect success of her operations so that they may conform to the parent company KW IT (AUSTRALIA) ltd. Statement of the problem KW IT (Australia) Ltd needs to improve management of her liquidity (Annavardula,M.G. and Beldona,S. 2000:48-57) by setting a subsidiary sister manufacturing company in India. Set up of KW IT (India) Ltd will make KW IT (Australia) to enjoy a uniform payment method (Buckley P.J. 2004: 50-62) and process since all her transactions will be based on Australia Dollar. Setting up KW IT (India) Ltd comes with benefit of competitive bidding for receipt (Buckley P.J. 2004: 50-62; Annavardula, M.G. and Beldona, S.2000) and settlement services of card systems. At the same time, by becoming multinational, KW IT (Australia) ltd will have powerful influence in Indian economies. KW IT (India) Ltd will also enjoy a lower productivity cost through adoption of lean manufacturing strategies. Objectives of the studies on KW IT ltd set up of subsidiary company in India 1. To evaluate effects of political factors and alignment of Indian law in business towards KW IT (Australia) Ltd investment 2. To investigate Indian cultural influence on KW IT (Australia) investment 3. To determine the effect of Indian culture on a accounting practices of KW IT (Australia) Ltd 4. To evaluate potential of foreign currency transaction of KW IT (Australia) Ltd 5. To determine impacts of KW IT (Australia) Ltd foreign currency translation. Hypothesis for testing 1. The Indian political climate and law in business favors KW IT (Australia) Ltd investment 2. Indian cultural influence on business will foster KW IT (Australia) Ltd potential for investment 3. Indian cultural influence on accounting practices will be a strength for KW IT (Australia) Ltd 4. There will be no challenges that may negatively affect KW IT (Australia) Ltd foreign currency transaction 5. There will be no prevailing conditions that will interfere with KW IT(Australia) Ltd perceived or forecasted foreign currency translation Significance of studies on KW IT ltd setting up subsidiary company in India a. The studies will show Indians current political climate and legal standards with respect to foreign investment b. The studies will show the extend cultural factors affect foreign business and foreign investments in India c. The studies will provide guideline on how culture affects accounting practices. d. The studies will provide a guide that can be used for Indians vs. Australia currency transaction e. The studies will show how KW IT (Australia) ltd and KW IT (India) will carry out their foreign currency translation. Indian potential for KW IT (India) Ltd a. Manufacturing sector of India is similar to other western manufacturing practices (Amsden,A.H. 1989). b. India is undergoing rapid development as a centre of research and development facility as well as a centre for IT research (Amsden,A.H. 1989). c. Indian is undergoing infrastructural reconstruction in order to improve her transport system with respect to airports, roads and marine ports (Buckley, P. J. 1976). d. Indians speak fluent English (Buckley, P. J. 1976 and Amsden, A.H. 1989). e. Indians land productivity potential is high and a greater population can afford to pay for IT products. f. Indians is an expatriate destination and skilled labor is present at a lower rate of 1.25 united States dollar (Christianson, D. 2006: 42-53) Indian opened her economy to International trade in 1992 (Christianson, D. 2006: 42-53). India’s annual foreign direct investment ranges between 3-4 USD billions out of global foreign direct investment of 1 trillion United Sates Dollars that is equivalent of 1,000 billion United States dollars. This makes 0.3- 0.4% of total. Indians foreign institutional investment is to the order of 0.3-0.4% of global foreign institutional investment. Doing business in India Success of foreign investment in India is a function of four main factors that are infrastructural factors, consistency of electrical power, cost of living and cultural factors (Christianson, D. 2006: 42-53). Infrastructure and its role in manufacturing industry The India transport system is not well developed and the roads are characterized by many potholes. There is high density of motorists and this increases transport costs in terms of fuel spend and man hours wasted while commuting from home to workplace (Christianson, D. 2006: 42-53). During wet weather, transport system is paralyzed by poor transport system, non- functioning sewers, flooded streets and lacks of traffic movement. Transit trucks do not move during the day in order to limit traffic jams and this has a negative effect of increasing time-to-market of products. The air ports are also congested and international clearance from marine ports and airports takes long. The Indian marine ports are congested and there is inadequate space for loading and uploading cargo. This further will cause delays of KW IT to (India) Ltd products whose compound effect is increased time-to-market of her products (Christianson, D. 2006: 42-53). Power Blackouts in India and prospect of economic development in India India experiences a one day power blackout once every week. This power rationing measure is meant to reduce electrical pressure on the India’s grid power. Companies operating in India have increased operational costs resulting from fuels for backup generators and electrician for maintenance of the generators. Many foreign investors try to avoid setting up manufacturing industries in India because of problems with India’s grid power supply. Problems related to power are responsible for India’s less than 1% of global trade. Problems related to electrical power supply have affected India’s economic development, prospect of increasing job opportunities and foreign investment (Dunning, J.H. 1997: 55-67). Consumer products in India The prices of consumer products like vegetables are very high. This is because of poor transport infrastructure that leads into delays in transport of agricultural perishable produce. Many vegetables like tomatoes and Kales get spoiled on their way to the market and distributors roll back the cost of their expenses to the consumer (Dunning, J.H. 1997: 55-67. Globalization trends Setting up a subsidiary company in a foreign country is a step of the parent company to become a multinational (Dunning, J.H. 1997: 55-67. The parent company sets up subsidiary companies in countries that have a market for its products and where the cost of production is minimal. This has an effect of positioning the company to produce products that are tailored to meet the cultural lifestyle and economic needs of the clients. Drive to set up a subsidiary company in a particular foreign country is a product of enabling political climate that has no trade barriers and that is oriented to stimulate and promote growth of economies (Dunning, J.H. 1998: 45-66).The political factor determines cultural exchange practices with regard to cultural orientation of the customers to business. Other factors that are used to make a particular country to qualify for setting up a subsidiary company include developed infrastructure with emphasis on communication network and transportation, population density and natural resources endowment of the country. Natural resources determine availability of disposable income for the purchase of the products. Factors that push KW IT Ltd to enter Indian Domestic market India is a culturally rich country and orientation of a company to serve cultural values of India is a key to successful penetration of Indian market. Indian labor market is characterized by need for perfection. An Indian laborer does not perform a task unless they are sure the way they are going to do it meets their manager’s expectation. This means instructions and the way the instructions are communicated determines the level of success and implementation. Cultural factors can therefore determine efficiency of labor which is a major factor in production. The average Indian prefer consultation model of seeking solution as opposed to being provided with a particular solution. Provision of solution is likely to trigger loss of morale or value for the employees input. Indian laborer feel tormented when they are confronted due to poor performance or under- performance. A human resource personnel need to give an Indian employee time to evaluate how an idea can be applied and the strength and weaknesses of the proposed idea. Positive impacts of KW IT (Australia) Ltd setting subsidiary company in India KW IT (India) Ltd will enjoy a reduced labor supply. India has a low labor hourly rate of USD 1.25 (according to electronic trend publication and circutree). There is a decreased domestic market for KW IT (Australia) Ltd products in Australia (Dunning, J.H. 1997: 55-67). KW IT (Australia) Ltd is not able to implement a reduction of her products prices in Australia because this can affect her economic stability and revenue (Dunning, J.H. 1997: 55-67). The KW IT (Australia) Ltd experiences a domestic reduction of her market share due to her product obsolescence (Dunning, J.H. 1997: 55-67). KW IT (Australia) Ltd products face stiff competition from other IT players in Australia while they are not likely to face the risk of obsolescence in India that is a lesser developed country (Dunning, J.H. 1997: 55-67). KW IT (Australia) Ltd has attained her plateau phase of economic growth in Australia (Dunning, 1988) because already Australia domestic market is saturated and her products have attained their maximum potential life cycle hence any continuous investment in research for more products in Australia for KW IT(Australia) Ltd will not have any economic value. The move by KW IT (Australia) LTD to set up KW IT (India) Ltd in India will make her to expand her market size and decrease her production costs (Dunning, J.H. 1997: 55-67). Negative effects of KW IT (Australia) Ltd setting KW IT (India) Ltd in India The main challenge that KW IT (India) ltd will face is manufacture of products in India that will be distributed to different oversea markets. Production costs of KW IT (India) ltd will increase due to real and intangible costs that are not factored in normal production equation that is a sum of labor costs, transport costs and duties. The intangible costs will arise through political costs, Australia currency risks and inadequate measures to protect KW IT (Australia) ltd intellectual property. The real costs that KW IT (India) Ltd will face include increased inventory costs. Real costs are not easy to estimate and account for and they have an effect of affecting future KW IT (India) ltd bottom-line (Dunning, J.H. 1988). Following KW IT (Australia) ltd move to set up a subsidiary company KW IT (India) Ltd, KW IT (Australia) ltd will be exposed to four globalization risks that are political risks, currency fluctuation risks, product piracy risk and inventory risk (Buckley, P. J. 2004:50-62). Political risk and KW IT (India) ltd Globalization political risk is likelihood that India’s government will change its rules and in turn make KW IT (India) ltd manufacturing an expensive undertaking. Political risk in Australia is lower compared to other western countries and this is to the advantage of KW IT (Australia) Ltd (Buckley, P. J. 2004:50-62).. Poor political climate has an effect of predisposing radical variation in policies that can adversely affect KW IT (India) ltd. Political interference in the manufacturing industries leads into increase in labor costs, increase in taxes to service political promises to electorate and increase in overall company taxes1(Buckley, P. J. 2004:50-62). Political risk affects manufacturing sectors delivery and cash flow obligation especially political demonstrations. Some of the political risks like damage due to vandalism are insurable but business losses arising from business shut-down are not insurable risks because the risk is not easy to measure and predict its possible financial outcome (Barnes,J. 1999). KW IT (India) will enjoy a political good will and therefore the likelihood of KW IT (India) Ltd shutting down her operations in India due to political risks is minimal. Currency fluctuation risk The KW IT (India) may be exposed to financial fluctuation arising from changes in exchange rate2 (IMF 2004). Supply and demand of currencies depend on the state of economy and balance of payments. KW IT (Australia) Ltd will pay for products manufactured in India by KW IT (India) ltd with foreign exchange. The Australia dollar will be bought in the Indian open markets like Indian banks. Effect of possibility of Australia dollar being pegged on United States Dollar Australia pegging of her Australian Dollar on United States Dollar (USD) will have an effect of making Australia Dollar to fluctuate less and be able to maintain her exchange rate. The main reason for pegging Australia Dollar on United States Dollar is because United States Dollar is free from political risks and economic risks. KW IT (Australia) products piracy risk Exposure of KW IT (Australia) ltd intellectual property to other industry players through KW IT (India) ltd may expose KW IT (Australia) to product piracy risks (Dunning, J.H. 1997) and this can affect both her global corporate image when other firms steal her intellectual property without her consent or authorization to abide by KW IT (Australia) Ltd standards3. KW IT (India) Ltd inventory risk KW IT (India) Ltd should maintain minimal inventory costs because inventory costs will increase production costs of KW IT (India) Ltd and reduce overall revenue of KW IT Ltd Group (Dunning, J.H. 1997). Some of inventory costs that KW IT (India) ltd may be exposed to are Capital inventory risk of KW IT (India) Ltd Capital inventory risk will reduce KW IT (India) ltd operating costs in the event of credit that are usually pegged at 10-15% of interest therefore operating capital of KW IT (India) ltd will be 90-85% Space inventory risk of KW IT (India) Ltd Space is used up that could be used for profitable cause by KW IT (India) Ltd. Safety inventory risk of KW IT (India) ltd KW IT (India) Ltd will suffer safety inventory risk if inventory reduce walking ways and this occurrence, based on Australia’s occupational health and safety legislation is a hazard and can lead into injuries and loss of man hours. Quality inventory risk of KW IT (India) ltd Efficiency of KW IT (India) Ltd should be high and be pegged at 97-99% in order to reduce production of waste products (Dunning, J.H. 1997). Materials inventory risk of KW IT (India) Ltd Materials stored in inventory are subject to rust, spoilage, deceased service life and refinishing (Dunning, J.H. 1997). Transaction inventory risk of KW IT (India) Ltd Accounting for inventory transaction within and outside the inventory storage will increase back office accounting costs of KW IT (India) Ltd and also lead into wastage of time (Dunning, J.H. 1997). Obsolescence inventory risk of KW IT (India) Ltd The value of products change with technological innovation or branding materials and products in inventory may lose time utility for a new product line, customer or manufacturing (Dunning, J.H. 1997). Indians political and law in business and their effects towards foreign investment Indian economy has a steady economic growth rate of 9.0% (IMF 2005a). This rise in economic growth was due to growth in the manufacturing and services sector. India has a commendable increase in Industrial investment inflows. The business climate in India is sabotaged by political policy decisions that favor short term investment. The potential for long-term investment is hampered by need for improvement of Indians infrastructure. The current political climate recognizes that long term economic development and growth depends on the long term investment. The political and business environment is geared to improve foreign investment through increased a. Sharing of information by increasing level of transparency. b. Improving flexibility of labor market that will reflect on operational costs. c. Improving liberalization of transactions in order to court foreign investors d. Reduction of taxes imposed on foreign investment products hence reduces operation and production costs. e. Restructuring of the banking sector and restructuring of credit availability f. Improving infrastructure in order to improve products time-to- market the current g. Political climate in India measured in terms of SWOT (strengths, weaknesses, opportunities and Threats) is aligned to foster and nurture foreign investment. This measure is meant to position India to benefit from global trade. India government is doing its best to ensure a peaceful industrial climate exists in order to solve the problem of insecurity that can affect foreign investment. Suspected Indian cultural influence on accounting practices KW IT (India) Ltd accounting standards will be affected by the Indian culture. Accounting as a social system goes hand in hand with cultural orientation of legal systems, financial systems and political systems. The accounting system therefore should conform to Indian culture and traditions KW IT (India) Ltd successful accounting standards may face challenges of Indian culture. Harrison and McKinnon (1986) and McKinnon (1986) reported that culture affects development and operations of accounting system. Harrison and McKinnon (1986:239) argues that accounting systems should rhyme and tally with National culture since culture and traditions are measures of value and belief-systems of citizens in a given country. This means accounting standards and systems that KW IT (India) Ltd will adopt will be in line with Indians authority of accounting systems and will conform to India’s accounting measurements that are used. The Indian culture and traditions will determine the degree of information disclosed that will impacts on the KW IT (India) Ltd accounting system. As a result, KW IT (India) Ltd will have to apply accounting practices that conform to Indian context. KW IT (Australia) Ltd Foreign currency translation In order to implement KW IT (Australia) Ltd foreign currency translation, KW IT (Australia) Ltd will identify three main currencies that are required for foreign currency translation. These three currencies are Currency of books and records (CBR) Currency of books and records is the currency in which the foreign financial statements are denominated Functional currency (FC) Functional currency is the currency, in which KW IT (India) Ltd generally buys, sells, borrows and repays Reporting currency (RC) Reporting currency is the one in which the consolidated financial statements are denominated.  KW IT (Australia) Ltd foreign currency translation should be done by using thee main methods. These three methods are a. Temporal rate method b. Current rate method c. Use of both methods KW IT (Australia) Ltd foreign currency translation use of the three methods will require use of one of three rules stated below. These rules are independent of each other. These rules are: The first rule of KW IT (Australia) Ltd foreign currency translation If it happens that the functional currency is hyper-inflatory characterized by a possible 100% cumulative inflation for a minimum period of three years then functional currency(FC) of KW IT (Australia) Ltd is ignored and then currency of books and records(CBR) of KW IT (Australia) Ltd is re-measured into reporting currency using temporal rate method. The second rule of KW IT (Australia) Ltd foreign currency translation If a scenario exists such that currency of books and records (CBR) is different the functional currency (FC) then CBR is re-measured into functional currency (FC) using temporal rate method. The third rule of KW IT (Australia) Ltd foreign currency translation This will involve translation of Functional currency into reporting currency These rules will be applied in sequence and in every phase, the analysis will stop when KW IT (India) Ltd financial statements will be corrected into the KW IT (Australia) Ltd reporting currency. For instance if the functional currency of KW IT (India) Ltd is hyper- inflatory, then the first rule of KW IT (Australia) Ltd foreign currency translation will be applied and all financial statements will be denominated in terms of currency of books and records that will be translated into reporting currency using temporal rate method. Due to independence of the rules, the other rules will not be used. On the other hand if currency of books and records is in Australia Dollar and functional currency is in Indian rupees (not hyper- inflationary) and reporting currency is assumed to be in United States Dollar, then the second rule of KW IT (Australia) Ltd foreign currency translation is used and involves translating currency of books and records into functional currency using temporal rate method. Since functional currency is not the reporting currency the third rule of KW IT (Australia) Ltd foreign currency translation is used to translate functional currency into reporting currency using the current rate method. If currency of books and records is similar to functional currency then the third rule of KW IT (Australia) Ltd foreign currency translation is automatically adopted for use. By using current rate method, all assets and liabilities are translated using current rate4. Equity and dividends are translated at historic rates5. Income statements can also be translated using average exchange rate6 for the temporal rate method. The objective is to measure each subsidiary transaction as though the transaction had been made by KW IT (Australia) Ltd. Monetary items for instance cash receivable, inventories carried at market payable and long term debt are re-measured using current exchange rate. Other items like prepaid expenses, inventories carried out at a cost, fixed assets and stock are re-measured using historical exchanges rates Bibliography Amsden, A. H. (1989). Asia's Next giant: South Korea and late indistrialization. New York: Oxford University press. Annavardula, M. G. and Beldona,S. (2000). Multinationality-performance relationship: a review and reconceptualization. International Journal of Organizational analysis , Vol. 8, pp. 48-57. Barnes, J. (1999). Changing lanes: the political economy of the South Africa automotive value chain. development of South Africa , vol.17 (issu 3), 401-415. Beausang, F. (2003). Third world multinationals: Engines of competitiveness or new form of dependency? London: Palgrave. Buckley, P. J. (2004). Asian Network firms: An analytical framework. Asian Pacific Business Review , vol.1 (issue 1), pp. 50-62. Buckley, P. J. and Mark, C. Casson (1976). The economic theory of multinational enterprise. London: Macmillan. Buckley, P. J. and Mark C. Casson (1976). The future of mul;tinational enterprise . London: MAcmillan. Christianson, D. (2006). Unpacking Great Asian opportunity: a special report. business in africa , 42-53. Dunning, J. H. (1988). Explaining international production. London: Urwin Hyman. Dunning, J. H. (1997). How should governement respond to globalization. International executives , vol. 39 (issu. 1), 55-67. Dunning, J. H. (1998). Location and the international enterprise. A neglected factor? Journal of international business studies , vol. 291, 45-66. Harrison, G.L. and McKinnon,J.L. (1986). Culture and accounting change: A new perspective on corporate reporting on , regulation and accounting policy formation. Accounting, organisations and society , vol.11 (iss. 3), 233-252. IMF. (2005a). Global financial stability report: market development and issues. Washington D.C.: IMF. IMF. (2004). Revision of balance of payments manual (annotated outline. Washington DC.: IMF. McKinnon, J. (1986). The historical development of the operational form of corporate reporting regulation in Japan. New York: Garkland. Read More