IBM International Venture - Coursework Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: ABSTRACT International business machine is multi-international company dealing with information technology both hardware and software. It has recorded success regardless of volatility affecting the industry due to the strength of management, depth, and broadness of its market. The company engages on intensive research and development in more than 12 large laboratories all over the world. The company is recognized worldwide due to its outstanding product quality though it is among the oldest companies in the industry, but it is still relevant due to continuous modification of its product. IBM is ranked second in US on companies having large number of employees and fourth in terms of market capitalization. The company faced some difficulties in 1939 during economic crisis and made biggest lose in 2003, they were able to recover and still maintain its position in the industry since it concentrated more on software part and came up with several business software such as BI(business intelligence) and bought several software companies. International business machine is ranked among 14 United States companies who have successfully achieved environmental, safety and healthy goals in endlessly improving its management practices and it has ploughed over than $1 billion since 1973 to 2007 on conserving environment within its offices on its headquarters. In 2007 the company was ranked 12th by the EPA through its effort in cutting down the emission of green house gases and achieving the 4% use of renewable energy. International business machine company lays emphasis on four major key areas in responding to corporate responsibility issues that is: Solving societal problem by use of technology, measure of the response from its initiatives and programs, empowering employees and others like students to serve the community, corporate loyalty and social responsibility in every decision of the company. The above success puts IBM in a suitable position to compete internationally. (IBM. Investor relation) IBM INTERNATIONAL VENTURE American market has contracted due to number of companies coming up in information technology industry. Therefore, IBM developed strategy of identifying and venturing in new markets and its new major market is African continent and part of Asia. In addition, the company developed open office administration and train its employees and through this move, it has been able to get help from employees on how to improve its relevance in the market and identification of potential market in order to improve company’s profitability. Company entering international market is required to carry a lot of research on viability and strategies to enter the market. IBM did research on various financial factors that affect the company entry both directly and in directly. This factors includes, Trade policies and regulation- this involves taxation, competition and laws relating to company activities e.g. Policies on raising equity capital through public subscription of share International capital market- this deals with international bond, equity and currency market of the country they are going to venture. Foreign exchange market- this deals with quoting currencies, spot rates, forward rates, swaps, option and futures availability and effectiveness in the target market. Currency convertibility- this involves the ease of converting currency and the restriction on conversion imposed by the laws of the country and central bank. Trade policies and regulation Trade policies and regulation determines acceptability of entity or company product in the market and amount of tax the company is required to submit to that particular country. Most countries impose final withholding tax to foreign investment due to believe that foreign investors might evade tax and making tax collection easy. (Chemmanur, T. J., Hull, T. & Krishnan, K. 2010). For example, Indonesia chargers corporate withhold tax of 30%. Other factors on trade policies and regulation include trade barriers, sanctions and fair trade policies. Trade barriers are tariffs imposed to international investors in the country for a reason of protecting local industries and preventing dumping. These barriers include bottleneck administration, quotas and increasing tax on certain foreign investment. It is implemented to bring fair competition with local infant producers in prices of commodities since most of foreign companies like IBM have large economies of scale and can produce a product at a lower cost compared to a small local company dealing in the same line of product e.g. Business software. Therefore, IBM needs to look at the barriers imposed by the target country if it will favour company venture. It is important aspect in international venture since it determine project success or failure this is because it is a soft way a country can use to kick you out of market to enable its infant industry to grow and improve on its balance of payment position by reducing loss of revenue to foreign companies. (Beckwith, Christopher I 2011) Trade sanction is prohibition of trade with some specific countries as form of punishment due to failure to honour certain conditions. IBM is currently facing difficulty in implementing their programmes in Iran market due to sanction imposed by US government since sanctions leads to negative attitude, hostility and even interdict products from entering their market when the country of investor impose sanction on your target market. Another sanction that affects IBM is sanction to Syria due to Human Right Act of 2012, sanction is always on export to targeted country and it is on basic commodities such as drugs but the effect from such sanction affects all its ventures on the sanctioned country. It may lead to destruction of property of companies and evection of nationalities from country that imposed sanction. Therefore, IBM has to study on relation trend between American and the country it is venturing into in order to avoid such instances. (Beckwith, Christopher I 2011) Fair trade is another factor and it involves laws and regulation to labour, conservation of environment and product impact on the society. Each country has its own laws relating to labour framework for example, proportion of local and foreign employees in any given foreign company. It is impossible to establish a business in a foreign country and the entire workforce are foreigners. Another important aspect relating to labour is wages, each country have minimum wage rate and anybody who violates this law faces certain consequences like fine or being banned trading in that country.(Beckwith, Christopher I 2011). The company is also required to engage on corporate social responsibilities for example, IBM policies rotates between three arms of triple bottom line that is, environmental concern, societal and business field all this is related to company leadership since the leader determine if to adopt or to discard corporate social responsibility in their decision making. The triple bottom line address issues such as human rights, environmental conservation, equality and mutual relationship between the community and the organisation. Therefore, trade justice consideration affects company position to grow and increases its market share in a foreign market since it is a sign of respect to the locals of the targeted market. (Chairman letter, 2012) International capital market International capital market involves ability of the company to raise capital to finance the venture by issuing bonds, equity or exchanging currency from one form to another. The cost raising capital always varies between countries due to different economic conditions facing each country. One incurs high cost in unstable economy than in countries with stable country. This is one of the challenges IBM face in its entry to African continent due to nature of Africa economy since it is still young and growing. Countries have different regulation and policies regarding capital market, it affects the firm investing in foreign country either directly or indirectly. For example, some restrict raising capital from public unless you sell part of ownership of the investment to be able to raise capital from the local public. Therefore, it is important to do more analysis on regulation regarding foreign company raising capital from the targeted country. Currency difference also is another factor that affects since it brings difficulty in reconciling parent accounts and subsidiaries in other countries. The company faces translation risk, transaction and economic risk. Translation risk is the risk that occurs due to the difference in the original recorded transactions in books of account and the already converted books of accounts into parent currency that is in dollars in preparation of consolidated accounts. This exposure will affect the overall company if not managed since it reduces reported earning and as a result lowers share price due to negative signal to investors. Economic risk includes change in economic conditions of the country the investment is situated since increase in inflation rate will lead to weaker currency exchange rate therefore, loss of revenue during conversion. Economic exposure can also alters the approximated future cash flow from the venture since the country currency may weaken against the dollar thus leading to lower future value than the estimated present value of the investment, which might lead to huge losses if the profit margin was narrow. Transaction exposure involves the difference that arises due to changes in currency exchange rate between contractual transactions such as contract on supply of materials. The change can result to either foreign gain or loss depending on the trend of the currency exchange rate. Contingent exposure is risk that can arise in certain country investment and affect its other subsidiary and parent company or the effect that can arise from parent and affect its subsidiary ventures, it usually affect company that does direct investment in a foreign country thus it is important to have minimal attachment with its subsidiary investments. Therefore, IBM carries in depth analysis on these factors and makes provisions in their records for example use of Value at risk techniques and derivative market to hedge itself from the above exposure since it will affect overall financial position of the company. (Duffie, J. D., Li, A. & Lubke, T. 2010) Foreign exchange market It concerns the broadness and the depth of the financial market of the targeted country. Broadness depends on competitiveness in the financial market that is the number of participators in the market since large number of competitors leads to low transaction cost because buyer have a variety of securities to choose from and every investor price his security at an attractive price. Depth of financial market is the number of product available in a given financial market, deep market allows one to diversify investment and thus reduce prevalence in case the economic conditions worsen. Depth is determined by the availability of spot market instruments and derivative market instruments. Spot market where the transaction is completed within two working days for example commercial papers. Derivative market includes use of swaps, options, forwards and futures. Derivative market aims at hedging investor on exposure to the risk associated to fluctuation in the market thus cushions the company on economic risk and transaction exposure. Most of the African countries which is IBM major target market have shallow and narrow financial with some not having derivative market therefore, exposed to many risk associated to fluctuation on the currency exchange rate. Therefore, IBM makes provision on the uncertainties that may occur in the course of business and use available methods in forecasting and determining the course of action in case a risk occurs. (Duffie, J. D., Li, A. & Lubke, T. 2010) Currency convertibility Central bank determines the ease of converting its local currency to foreign or from foreign to local currency. Volume of conversion depends on foreign exchange reserve available and policies on the balance of payment regulation. Developing countries mostly regulate amount of currency converted with aim of reducing the deficit and improving its foreign exchange reserve since it does not allow bulky conversion. Therefore, IBM takes into consideration this factor in order to avoid delays by avoiding accumulation and converts its transactions regularly to US Dollars to avoid accumulation. (Duffie, J. D., Li, A. & Lubke, T. 2010) Advantages of foreign investment venture When the currency of the country of investment appreciates against the dollar, company gains since less domestic currency for 1 dollar. For example a transaction was done when exchange rate is 1USD= 0.7 Euros, during conversion to US dollars the rate is 1USD= 0.5 Euros. Therefore, the gain will be 0.2 Euros for every Euro converted to US Dollar. Therefore, international investment results to foreign gain, which is a profit to the company. Foreign investment policies of the country can be advantageous to the investor since the country may encourage foreign investment in order to create employment and avail the product to consumer. For example, most of African countries are less equipped on computing machine and knowledge on how to operate computers. Therefore, country may encourage such investment by easing trade restriction e.g. reducing corporate tax this increases profit margin of the company. Absence of sanction imposed to the country by US government also improves company’s penetration and growth of the investment in the country since one gains support from foreign country government and inhabitants therefore, increase in sales, enhancement of its ability to implements its programmes and security of investment. Interest rate parity is the difference between the spot exchange rate and forward exchange rate between currencies of two countries. Forecast of negative change in interest difference between US and country of investment might lead to company entering into forward exchange rate in order to avoid foreign exchange loss due to appreciation of the local currency against US dollar. Disadvantages of foreign investment venture Appreciation of the local currency against US Dollar cause foreign exchange loss during conversion of money into US Dollars therefore, reduces earnings of the company. The difference between previous exchange rate and the current rate gives the amount of loss incurred for every US Dollar. Sanctions imposed to the country by US government impart the business negatively due to destruction of investment property and reduction in demand of the product. It also affects the working conditions and implementation of the programmes in the country. Inability to forecast the interest rate parity accurately can result to loss. For example, if the company estimates that interest rate will reduce and therefore, enters a forward foreign exchange rate since the local currency will strengthen against US Dollar, but in return increases thus company will lose the extra foreign gain got from the difference between forward exchange rate and the current exchange rate. Conclusion In conclusion, it is evident that for every company wishing to venture into a foreign country need to consider a wide scope of factors affecting its operation. The company should also have strong management to forecast and develop strategies of avoiding impact of foreign exposure to its investment and overall performance of the whole company. REFERENCE Beckwith, C. I. (2011). Empires of the silk road. Princeton, NJ [u.a.]: Princeton Univ. Chemmanur, T. J., Hull, T. & Krishnan, K. (2010). Do local and international venture capitalists play well together? A study of international venture capital investments. IBM. Investor relation [online] available from: http://www.ibm.com/investor/ Chairman letter, 2012 IBM annual report [online] available from: http://www.ibm.com/annualreport/2012/bin/assets/2012_ibm_annual.pdf Duffie, J. D., Li, A. & Lubke, T. (2010). Policy perspectives on OTC derivatives market infrastructure. Read More