Betocomo is a fast growing children educational toys company from UK. The company is growing fast with its expansion in the Americas as well as in Asia. International expansion is indeed important for a company growth prospects as well as profitability in this era of globalization. There are many benefits to be reaped by Betocomo with its global expansion strategies. However, there are risks comes along with the international expansion. One of the crucial risks to be managed properly is financial risks. This essay will discuss the many risks that will be faced by the company in its expansion to Americas as well as the possible expansion strategies to be used to venture into South-East Asia.
In this part, the financial risks of setting up a factory in Brazil by Betocomo will be discussed. In the scenario, Betocomo parent company will be situated in UK, while the subsidiaries, of the manufacturing plant will be situated in Brazil. Thus, there will be risks in the flow of money between the subsidiaries to the parents company, due to the volatility of the exchange rate between Brazil’s Real to UK’s GBP. In the context of financial management, most of the risks will come from this exchange rate risks.
Generally speaking, there are two types of exchange rate risks that may hurt the profitability of Betocomo in its expansion of factory at Brazil, namely: translation exposure, and transaction exposure. For this, translation exposure is about the risks come from translating the accounting or financial figure to the reporting currency (whereby in this case, the reporting currency is the GBP, as the parent company is located in UK) in order to form a consolidated financial statements to be presented for investors (Daniels et. al., 2008). Translation risks can happen to the income or the expense of the firms, and also the items on the balance sheets (such as the assets as well as the liabilities). For example, as the manufacturing arms in Brazil is mostly a cost center, the relative appreciation of the Brazil real or the relative depreciation of the GBP will cause the parent company to report a higher expenses incurred in its operations in Brazil (thus, exerting negative effects to the financial performance of the group of companies in the consolidated income statement of the firm). The second type of is about transaction risks. Transaction risks occur when the company has account receivables or account payables to be settled in a certain date in the future (Daniels et. al., 2008). For example, when the company purchase raw materials from Brazil local suppliers, but the payment terms is 2 months from the date of purchase, the company may suffer if after two months, the Brazil real has appreciated or the UK GBP has depreciated. This will cause the company has to spend more GBP for the purchase, than it is expected two months earlier.
In the section above, it is discussed how the exchange rate risk can affect the profitability of the company. In this section, it will be shown as well on how the means of financing for the investment in new factory in Brazil. Generally speaking, there are two common ways in which Betocomo can finance the required capital for investment in Brazil, namely equity or the debt financing. Equity financing means obtaining the capital from the stock markets while debt financing means issuing bonds to obtain financing from the debt market. In addition to that, Betocomo can choose to finance from these market, either from the UK or Brazil. That means there are four financing options facing Betocomo, as follow:
- Equity financing from UK
- Equity financing from Brazil
- Bond financing from UK
- Bond financing from Brazil
Generally speaking, to finance the required capital via equity is less risky towards the financial management of the firm in the future. This is because once the capital is financed from the equity market, the damaged done to the company financial position is fixed and limited. However, bond financing is different, because the company is subjected to the obligation to fulfill interest payment to the bondholders. Of this, the risks due to financing from debt market in Brazil are the highest. For example, when the Brazil real appreciates, that means the parents company has to come out with more GBP to serve the payment of interest payment to the bondholders in Brazil. In the serious case, if the Brazil real appreciate in a too fast and unexpected manner, the financial position of the parent companies may be threatened when they no longer able to serve the interest payment to bondholders in Brazil with a highly depreciated GBP at that point of time.
There are many ways in which Betocomo can hedge the financial risks. A review of the operations and financial management of Betocomo indicate that there company may be required to hedge three types of different risks, namely: risks due to volatility in exchange rates, interest rates, and commodity prices. In this section, the many possible hedging strategies are discussed.
Remain unhedged. One of the best strategies is to remain unhedged. This is because to implement hedging strategies can be costly. Many of the times, if the volatility of the prices, such as exchange rate, interest rates or the commodity prices is not huge, the company can remain unhedged because hedging can be a waste of financial resources.
Hedge in the forward market. In order to avoid the risk due to adverse movement in the exchange rate in the future, Betocomo can enter into a forward arrangement with the counterparty, in case they are purchasing of raw materials or selling of products to the counterparty. This means the payment shall due in a certain predetermined periods in the future, but at the exchange rate on the day in which the agreement is entered (Stonehouse et. al., 2004).
Hedge in the future market. Similar to the forward instrument that can be used to hedge the currency exchange rate risks, the future contracts works in similar ways. The only difference is that the futures instruments are traded on an exchange, whereby the forward contrasts are traded on an OTC market (Stonehouse et. al., 2004).
Hedge in the options market. The company can also hedge the currency risks by purchasing currency options in the exchange. In contrast to the future or forward contrast, the company may not be obligated to fulfill the settlement of the terms set forwards in the option contrast (Stonehouse et. al., 2004). Thus, the company may choose to exercise the option contract only when they are in a favorable position to do so. However, the cost of purchasing option contracts can be more expensive due to such feature.
As indicated by the scenario, the management wishes to expand to a country in South-East Asia. However, there are a few viable choices for the initial entry purposes. In this section, four of the countries in South-East Asian will be used to illustrate how Betocomo should plan its expansion strategy accordingly into the region. In the following section, it is argued that before Betocomo can decide which country to expand into, it should firstly consider the political, economic, social cultural as well as the technological factors or situation in these countries before choosing the best country for expansion purposes. For this, the statistics of the countries, primarily conc4entrated on the economic and population situation of the four countries are presented in Table 1 below.
Table 1: Economic Situations for Singapore, Vietnam, Indonesia and Philippines
Criteria #1: Economic factors. Of all of the four countries, Singapore is the only developed country in South-East Asia. As shown from the data presented above, it can be seen that even Singapore is a small country, its GDP achievement exceed those of the other country, such as Vietnam and Philippines that have huge population. It can also be noted that despite it is already a developing country, Singapore is growing fast as well. This put Singapore to be the most attractive country to be ventured into from this perspective. Nonetheless, it also cannot be denied that both Indonesia as well as Vietnam is emerging countries that is growing at a very fast rate. The worst performing country is Philippines.
Criteria #2: Proximity to current factory in China. In all of the country, Vietnam is closest to China. It is important to include such criteria because the company has an existing factory in China, and this will affect the logistic planning of the firms. Anyway, due to the increasingly advance transportation systems and infrastructure in the region, the other country, such as Singapore, Indonesia or Philippines can also be reached easily.
Criteria #3: Cultural factors. Of all of the countries evaluated above, the country that has the most contradicting culture perhaps is Indonesia. The people in the nation exhibit an Islamic and Indonesian culture (Mirza et. al., 2004); and as can be seen from news, some portion of the citizen may not be friendly towards westerners (for example, the Bali terrorists bombing to kill westerners). However, the cultural factors of the other nation are more suitable for expansion purposes. For instance, Vietnam, Philippines and particularly Singapore, exhibit a mixture of both eastern and western culture. Singapore again scores the best in terms of cultural or social fitness for foreign expansion by Betocomo, as the people exhibit high openness to foreigners and Western culture. By expanding to country such as Singapore, the risk can be reduced significantly.
Criteria #4: Degree of educational development. As Betocomo is a company operating in the educational toys industry, it is best to select the country that have a huge market for its toys. Thus, it is crucial to understand how the populations in each of these countries place the children education as important when compared to other country. For this, Singapore is undeniable the best country to venture into, as the country is famous for its high educational standards as well as the government’s relentless efforts to enhance the knowledge and competencies of the population in the nation (Shultz et. al., 1997).
Criteria #5: Geographical risks. One of the risks to be considered is to understand if natural disaster may affect the business operations in the foreign country (Dicken, 2007). Two of the countries in our lists, namely Indonesia as well as Philippines suffer badly from volcano as well as earthquake. Certain parts in Vietnam however, are also suffering from earthquake. Singapore is the most fortunate company, whereby the country is free from the natural disasters.
Criteria #6: Political risks. It is also crucial to investigate the political risks facing the nations (Lasserre, 2003). For Philippines, the political risk is somewhat high as although the nation is open to westerner; the country has relatively unstable politics scenario. For Indonesia, it can be seen that the government is becoming more open to FDI; religion factors such as Islamic activists may harm foreign operations. For Vietnam however, it can be seen that political risks are getting lower; as government is getting more open to FDI recently. Singapore is the most stable developed country –where government is open-minded and emphasizes a lot on cultivating a friendly business environment.
Thus, after considering the various factors, it is found that Singapore is the best country to be venture into. The country has the lowest risks from the evaluation process presented above. Besides, it is the easiest target entry for Betocomo.
In this section, several market entry strategies will be discussed in the context of foreign expansion of Betocomo to Southeast Asia. The discussions shall focus on the distribution methods to the target market, and the impacts towards financial risks of these different strategies will be illustrated as well. It shall be noted that since Betocomo does not has factory in Singapore, several market entry strategies such as setting up new factory or direct subsidiaries in Singapore is not a relevant method.
Direct Exporting. Under this method, Betocomo can sell the goods it produces in China to Singapore market. Only a marketing subsidiary or office is required. The company may just need to employ sales representatives to cater for customers need, as well as to penetrate the market in Singapore. Under such method, Betocomo can have better control on the quality of its product. The financial risks however, may involve risk due to currency translation and transactions. If the currency of Singapore (i.e., SGD) depreciates, the profitability of the operations in the nation can be hurt badly.
Licensing. Another viable choice is to provide an exclusive or non-exclusive licensing agreement to a foreign firm, for the rights to distribute its products in Singapore. Very often, such method is considered a relatively easy entry mode to new markets. Again, similarly, the risks faced by such entry mode are due to currency translation and transactions issues. In the similar vein, if the currency of Singapore (i.e., SGD) depreciates, the profitability of the operations in the nation can be hurt badly.
Strategic Alliances. Strategic alliances is becoming a more widely used entry mode to penetrate market in the foreign country, because such entry strategy enable a firm to utilize the skills, experiences as well as the networks of their strategic partners (Howard, 2005). If such method is employed, Betocomo can mitigate the financial risks faced by its expansion to Singapore as well. For example, the exchange rate risks reduced to only issues regarding transferring back the profits from Singapore to UK. As most of the assets or investment will be borne by the strategic partners, the currency fluctuation risks towards the assets or investment value in the foreign operation in Singapore is eliminated/ mitigated.
This paper has discussed the many risks faced by Betocomo in its expansion to other country. There are financial risks as well as other non financial risks, such as political, economic, social and cultural risks. In order to mitigate these risks, proper strategies are also suggested. All the risk management strategies are required to ensure a successful operation in the foreign country in the future.
Chiao, Y. C., Lo, F. Y., & Yu, C. M. (2010). Choosing between wholly-owned subsidiaries and joint ventures of MNCs from an emerging market. International Marketing Review 27, no. 3 , pp. 338-365.
Daniels, J., Radebaugh, L., & Sullivan, D. (2008). International Business: Environments and Operations (12th ed). Upper Saddle River: Pearson Prentice Hall.
Dicken, P. (2007). Global shift: Mapping the changing contours of the world economy (5th ed.). London: SAGE Publications.
Fletcher, R., & Brown, L. (2005). International Marketing: An Asia-Pacific Perspective (3rd Ed.). Australia: Prentice Hall .
Griffin, R., & Pustay, M. (2007). International business: A managerial perspective (5th ed.). New Jersey: Pearson Education.
Howard, S. R. (2005). Foreign Entry Mode and Performance: The Moderating Effects of Environment. Journal of Small Business Management 43, no. 1 , pp. 41-54.
Lasserre, P. (2003). Global strategic management. New York: Palgrave Macmillan.
Luc Arregle, J., Hébert , L., & Beamis, P. W. (2006). Mode of International Entry: The Advantages of Multilevel Methods. Management International Review 46, no. 5 , pp. 597-618.
Mellahi, K. F. (2005). Global Strategic Management. Oxford: Oxford University Press.
Mirza, H., & Giroud, A. (2004). Regional Integration and Benefits from Foreign Direct Investment in ASEAN Economies: The Case of Viet Nam. Asian Development Review, 21(1), 66-98.
Platt, G. (2010). Midsize Companies Going Global – But Not Too Global. Global Finance , p. 12.
Qiu, L. (2010). Cross-border mergers and strategic alliances. European Economic Review 54, no. 6, p. 818.
Shultz, C. J., & Ardrey, W. J. (1997). Asia’s next tiger? Marketing Management, 5(4), 26-37.
SOUTHEAST ASIA’S ECONOMIC PERFORMANCE: Achievements and Challenges. (2004). Southeast Asian Affairs, 20-55.
Stonehouse, G., Campbell, D., Hamill, J., & Purdie, T. (2004). Global and transnational business: Strategy and management (2nd ed.). Chichester: John Wiley & Sons.
Sumantra, G. & Bartlett, C., (2002). Managing across borders: The transnational solution (2nd ed.). Boston, Mass.: Harvard Business School Press.
Toporowski, J. (2010). The transnational company after globalization. Futures 42, no. 9 , p. 920.