Investment in International Venture (Essay Sample)

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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...