Effect of dimensions of international finance on the corporation
The multinational corporation that has been selected for this study is Wal-Mart. The country that this corporation should expand to is New Zealand. One major aspect of international finance that may affect the expansion of Wal-Mart to this country is the foreign exchange risk and also the political risk. For the foreign exchange risk, Wal-Mart will be dealing with the exchange rate between two currencies - the New Zealand Dollar and also the US Dollar. Given that this currency pair is traded in major forex platforms in Europe and the US, its value will be based on market forces. This implies that Wal-Mart could incur high import costs when the value of NZD decreases, relative to the US dollar.
As far as the political risk is concerned, the factor that Wal-Mart should be wary of is the shift in policy making by the National Party government. Any internal issues in this party may lead to protests by the public which will affect the performance of Wal-Mart. However, there are opportunities for Wal-Mart in this aspect. The corporation can hedge its currency in order to minimize the effects of NZD volatility. For the political risk, the corporation should follow the regulations and avoid any political alignments. This will ensure that any it does not suffer losses whenever there are protests. The risks are that Wal-Mart may lose to restrictive policies in New Zealand given that it is not a local company. In addition, currency fluctuations may alter its returns by a high degree.
The other aspect of international finance that is crucial for Wal-Mart is market imperfections in New Zealand. A challenge that Wal-Mart may face in this aspect is the discriminatory taxation. This is because the country applies different tax rates depending on whether a corporation is local or international. In this case, Wal-Mart may be taxed at 5% above the rate for the local companies. However, an opportunity exists in market imperfection. This regards information asymmetry. In New Zealand, consumers are not as informed as in the US. This asymmetry implies that Wal-Mart may price its products at a higher price than the competitors’ price and benefit from its brand recognition. The only risk in this case is that the corporation could incur high amount of corporate taxes, due to discriminatory taxation.
The final aspect of international finance that Wal-Mart must look at is the expanded opportunity set. In this country, this corporation may benefit from the increased opportunities in the retail market. By utilizing its experience in other countries, Wal-Mart can manage high sales volumes. This is because of the relatively low level of competition in New Zealand. Wal-Mart can maximize on this opportunity. However, there is a risk in that the future market environment may be very competitive. If this corporation may succeed initially, then other competitors may come in so as to benefit from the market that is yet to be exploited fully.
Economic trend and impact of globalization
An economic trend that has characterized New Zealand is an increase in international trade between the country and Australia. In addition, the country has been keen on exporting agricultural products to Australia and importing household supplies. This trade has contributed to an increase in investments in New Zealand by up to 10.5% as of 2012. Most of the investors are from Australia; due to the trade relations between the two countries. Wal-Mart should seize this opportunity by providing goods at its outlets to these consumers at a convenient and relatively cheap manner. The New Zealand consumers will have an option of choosing their preferred household supplies and appliances at Wal-Mart stores. Wal-Mart will have a competitive edge in that the consumers will have goods near to them as opposed to importation.
The other economic trend in New Zealand is the increase in GDP per capita. Over the past five years, this figure has increased by an average of 15.6% to US $ 28,800 in 2012. However, the income inequality in the country has increased over the past decade. For Wal-Mart, the increase in GDP per capita implies that the purchasing power of the consumers has increased. However, the increase in income gap means that Wal-Mart will face distinct consumer groups which are based on income. Therefore, the company must choose its location in a region frequented by the upper middle class since this forms its major clientele. This is a disruption to its operations in the US where location is normally based on accessibility of its customers.
As far as globalization is concerned, cross border integration has increased in New Zealand. This has been enabled by telecommunication advancement; which has promoted the communication between the citizens of New Zealand and other countries. Through this communication, there has been a lot of information sharing in the business arena, hence transforming the nature of conducting business. There has been an unprecedented exchange of skills and development of technological applications that have altered business operations. As a result, business operations are being conducted in a fast and effective manner. Automation has taken over many retail outlets operations. For Wal-Mart, this is an opportunity to capitalize on the technological applications. By so doing, the corporation will avoid the high operational costs that it would have incurred had it expanded into the country five years earlier. Over this period, automation of business processes has increased by over 27%. Therefore, this technological advancement that has been brought about by globalization would enhance cost saving for Wal-Mart.
The other globalization trend is the increase in affluence of consumers. This has also been caused by globalization. In this case, New Zealand consumers have shared information with their counterparts in Europe and the US. They have also witnessed the changing patterns of consumption such as buying dependent on fashion and luxury. In addition, these consumers have become sensitive on the rating of a company or its ethical standards. Due to the global trend, the New Zealand consumers are shunning those corporations with negative publicity. The effect of this trend could have on Wal-Mart is that the corporation has to maintain high standards in this country. The New Zealand consumers are very sensitive, and this could negatively affect Wal-Mart if it does not live up to the high benchmark set by the consumers. This implies that Wal-Mart must maintain an excellent reputation by paying attention to employee relations, uncontroversial adverts and following regulations.
Exchange system and the multinational corporation
New Zealand maintains a flexible exchange rate regime. This system has an immense implication for Wal-Mart. This is because Wal-Mart will face a high currency risk. Wal-Mart will be at a risk of having its import costs fluctuating with the market. In this regime, the currency rates vary on a daily basis as dictated by the market forces. Since Wal-Mart will be importing most of its supplies, the exchange rate between the New Zealand Dollar and other currencies will influence the import costs directly. Given that Wal-Mart will be importing most of its products from the US, the exchange rate between the US dollar and the NZD will be critical for this multinational corporation. If the NZD increases its value relative to the US dollar, Wal-Mart will incur less import costs since the local currency will be strong. However, with a decrease in value of NZD, Wal-Mart will incur high import costs. The implication in this case is that Wal-Mart will have to cushion itself from the market forces by purchasing in bulk and holding reserves of the US dollar. This will ensure that the corporation does not have to make very frequent purchases. The US dollar reserves will be used when the NZD has depreciated. The draw backs of the flexible exchange system are that Wal-Mart will incur high opportunity costs in holding the USD reserves. In addition, the corporation will not be in a position to respond to market demand rapidly. This will decrease the profit opportunities for Wal-Mart in the New Zealand market.
The effects of balance of payment on the multinational corporation
The balance of payment for New Zealand was equivalent to US $ - 7,989 in 2012. The balance of payments figure will affect the management of Wal-Mart. The management will be applying this economics figure to make managerial decisions such as opening of another branch within New Zealand. It will also be an indicator of the expected patterns of demand in the country. The deficit has an effect on the operations of Wal-Mart. The effect is based on the reason that caused the deficit. In the year 2012, for instance, the deficit was caused by capital expenditure. This implies that the New Zealand deducted a huge chunk of its public funds towards this expenditure. For Wal-Mart, this is an encouraging factor because the productivity capacity has been increased. This is a positive factor since the corporation will benefit from other complementary factors such as improved infrastructure. However, if the deficit will be occasioned by consumer spending, Wal-Mart will be concerned since the future outlook will be negative under such circumstances. This is because the sustainability of consumer spending will be hard and the productive capacity will not have been increased.
Impact on international business operations
The key foreign market participants in this market are Progressive Enterprises Ltd and Foodstuffs NZ Ltd. These two companies have market share of over 45% in the New Zealand retail market. Wal-Mart has several key financing opportunities. A major option is using the retained earnings it has accumulated from its operations. This option will provide the required funds in a fast and relative cheap manner since there will be no issuance costs. Wal-Mart had retained earnings of US $ 72,798,000 in 2012. These funds can be used in its expansion plans. The other key financing opportunity is via equity issuance. This corporation can issue new stock in the New Zealand Stock Exchange. This method would be effective since it would not require pledging of assets and it would provide funds adequately.
References
Clare, G. (2009). Exchange Rate and Political Risks in New Zealand. Political Risk Road Map , 31-33.
Cole, A., & Tracy, S. (2012). Impact of Globalization on Business Operations. The Wall Street Journal, 12-14.
McKinnon, A., & Malcolm, S. (2012). Financing Channels in New Markets. Journal of Finance, 116-117.
Morrison, J. (2010). Currency Fluctuations in International Business. The Management Guide, 28-30.
Townsend, P. (2011). The Dimensions of International Finance. International Corporate Finance, 45-47.
