Paintco Investment Options in Brazil & External Business Environment (Term Paper Sample)

ASSESSMENT OF PAINTCO INVESTMENT OPTIONS IN BRAZIL AND EXTERNAL BUSINESS ENVIRONMENT THAT MAY AFFECT ENTRY
Table of Contents TOC \o "1-3" \h \z \u EXECUTIVE SUMMARY PAGEREF _Toc10824369 \h 3INTRODUCTION PAGEREF _Toc10824370 \h 4BODY PAGEREF _Toc10824371 \h 4DIVERSIFICATION OPTIONS PAGEREF _Toc10824372 \h 4Exportation to Brazil from US PAGEREF _Toc10824373 \h 4Establishing of a subsidiary in Brazil and Acquiring Colorado PAGEREF _Toc10824374 \h 5Proposal to have a joint venture or purchase of Grossquimica PAGEREF _Toc10824375 \h 5EXTERNAL BUSINESS ENVIRONMENT FACTOR INFLUENCING INVESTMENT IN BRAZIL PAGEREF _Toc10824376 \h 6Political Environment PAGEREF _Toc10824377 \h 6Legal Environment PAGEREF _Toc10824378 \h 6Economic Environment PAGEREF _Toc10824379 \h 9Social-cultural Environment PAGEREF _Toc10824380 \h 11CONCLUSION PAGEREF _Toc10824381 \h 12REFERENCES PAGEREF _Toc10824382 \h 13APPENDICES PAGEREF _Toc10824383 \h 14
EXECUTIVE SUMMARY
The report was conducted to assess the investment decision that were available to PaintCo and the factors that could influence the final decision that could be reached. The analysis found that the major findings that were recorded from evaluation of different investment decisions to include; a need to expand capacity by 12 million litters which would cost $11.25 million. However, the estimated demand would be below capacity for the first few years. Thus, the excess supply should be sold in other PaintCo markets. The firm despite having an attractive opportunity for investment in Brazil there were major issues that needed to be addressed including; strict trade, economic and political barriers that made the opportunity bald. Therefore, it would risk financial and profit loss. The report hence recommended for takeover of Colorado which could increase local inventory and reduce the trade barriers restricting entry.
INTRODUCTION
Globalisation has opened the will to invest in other countries. An understanding of political, legal, economic and cultural environment are fundamental of successful entry to the global market (Bremmer, 2005). The main purpose of the current report is to evaluate investment options available to PaintCo in Brazil and to assess the external business environment that may affect venturing into the new market. This objectives will be achieved by use of case study analysis. The structure of the report will begin by looking at the investment options in section 1 then the external environment in section 2. The external environment will be divided into political, legal, economic and cultural environment.
BODY
DIVERSIFICATION OPTIONS
Investment options include; A= export from US, B= purchase of Colorado, C= buying Grossquimica and D= joint venture with Grossquimica.
Exportation to Brazil from US
The export plan required an increase in production calling for $11.25 million extra investment ((De La Torre et.al, 2001, p.242). The major opportunities for the option was increased local stock and customer satisfaction. Consequently, buyers would be willing to take long-term investment risks to quire quality products ((De La Torre et.al, 2001, p, 247).
Assuming a 20% inflation rate, devaluation of currency at 20% and a discount rate of 12.5%, the net present value of the option was 6.59, the internal rate of return was 20% while payback period was 8.37years as shown in appendix 1. A change of inflation to 30% holding others constant lead to NPV of 11.1, IRR of 23% and pay pack of 7.91 years. Increasing devaluation to 30% leads to NPV of 6.58, IRR of 20% and pay back of 8.37 years. With a devaluation of 30% and inflation of 20% NPV is 5.09, IRR 19% and payback period 8.54 years. This is an indication that exportation is highly reliant on the economic trends in the country and thus need to be considered before the option is taken up.
Establishing of a subsidiary in Brazil and Acquiring Colorado
This would help the firm overcome the trade barriers by the government on imports, service restrictions and capital transfers. The firm would fully recognise the opportunities of increased local. Though the profits was the main opportunity for investment, competition was expected to be high ((De La Torre et.al, 2001, p.247).
The firm also had the option to make a full purchase of its Brazilian distributor. It had been highly affected by hyperinflation and recession hence changing the management ((De La Torre et.al, 2001, p. 243). The purchase will provide the firm with an investment that will provide a strong social base ((De La Torre et.al, 2001, p.238
With an inflation of 20%, devaluation of 20% and discount rate of 12.5%, NPV is 0.34, IRR of 13% and payback period of 9.9 years. If inflation changes to 30%, NPV is 6.67, IRR 18% is and payback period is 8.75 years. Change of devaluation to 30%, NPV is -2.07, IRR is 10% and payback period is 10.66 years. If inflation went down to 20% and devaluation up to 30% NPV would be -4.95, IRR 7% and payback period would be 12.23 years. The option is highly affected by currency devaluation which is an occasional economic trend in Brazil.
Proposal to have a joint venture or purchase of Grossquimica
A purchase required $30million as stated by the owner due to the booming economy and speculated high growth in the industry ((De La Torre et.al, 2001, p.245). The proposal would help the firm take advantage of diversification and thus produce more specialities. The main risk would be high competition in the area.
With the purchase, a high devaluation rate above the inflation rate would leads to a negative NPV an indication that the investment will not be profitable in situations of economic instability. If they were to take the option of forming a joint venture, devaluation of currency despite a decline in inflation would lender the investment no-profitable.
EXTERNAL BUSINESS ENVIRONMENT FACTOR INFLUENCING INVESTMENT IN BRAZIL
The external environment could be political, legal, economic or social. This section will assess this aspects and look at possible risks and opportunities available to PaintCo.
Political Environment
Observed features of political environment

Opportunities for paint Co? why (high, medium, low)

Risk for PaintCo? Why?
(Low/medium/high)

Presidents anti-inflation program((De La Torre et.al, 2001, p.238)

High opportunity of increased investment

high risk of currency devaluation

Change of franchise rule by Brazilian congress

High opportunity for profit expansion

High risk of new entry to market and expansion leading to high competition

Political dominance in two major areas that is Sao Paulo and minas Gerais

low opportunity for increased infrastructural development

High risk of political instability, rise of popular movements (Bremmer, 2005) and military coup.

Radical political philosophies

Low opportunity for economic growth

High risk of conflicts and market shocks (Bremmer, 2005).

Reduction of multiparty to two

High opportunity for investment

High risk of dictatorship thus unfavourable terns of trade

Legal Environment
Observed features of legal environment

Opportunities for paint Co? why (high, medium, low)

Risk for PaintCo? Why?
(Low/medium/high)

Free trade between US and Canada((De La Torre et.al, 2001, p.237)

High opportunity for use of US policies hence easy entry to market

Low risk due to the increased US investments.

Import licenses from US were restricted in 1990((De La Torre et.al, 2001, p.238). Later they were opened

The open market led to high opportunity for direct investment by setting up paint factories and making imports to the country.
High opportunity of acquiring information on customers tastes and preferences (Khanna et.al, 2005)

Medium risk of business closure in cases where the government decides to return the restrictions.

Service barriers

Low opportunity for investment

High risk of lack of technical support or hiring them at a high cost (Khanna et.al, 2005). Could also lead to high unrest risk (Bremmer, 2005).

Institutional voids

Can develop and strengthen infrastructure as that in home country.

In most emerging markets the infrastructure is underdeveloped or missing (Khanna et.al, 2005).

Investment barriers

Low investment opportunities

High investment risk, high production costs and market instability leading to financial crises (Bremmer, 2005).

Export subsidies

High opportunity for permanent local investment due to lack of subsidies.

Risk high production cost since have to use material sin brazil.

Copyright

High diversification opportunities.

Low risk of theft

Reduction of withholding tax on profits from 60% to 15% ((De La Torre et.al, 2001, p.238)

Increased profits and high investments opportunities.
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