A firm is considering to entry into a particular c...

A firm is considering to entry into a particular country for the first time. While the senior management thinks that there is great potential for expansion and profit in the country, they are concern with the risk and their own ability to function in that unfamiliar business environment. There are two options available to the firm. One is joint venture and the other wholly owned subsidiary. Which of the two choices do you recommend and why?

In attempting to choose a country for investment, firm ABC decides, to use a matrix for country selection. It decides to look at the following factors: 1-economics 2-political risk, 3- cost of labor, 3- tax structure, and 4- country similarity to home country. On the scale of 1 to 10 (1 being very unattractive and 10 being very attractive) management has ranked each factor and has decided importance of each one (again 1 unimportant and 10 very important) for the company. Below is table showing management’s assessment. Company only chooses a location if its weighted average is 7 or higher. Would company ABC select country 1 or country 2?

Country 1 Ranking
Country 2 Weight
Economic growth 8 6 9
Political Stability 4 8 7
Low Labor Cost 8 6 5
Attractive Tax structure 6 7 6
Similarity to home country 7 9 8

- Considering the Integration Responsiveness Strategy Grid, what is the recommended strategy for a firm with low pressure for national responsiveness and high pressure for global responsiveness, (explain your answer).

Question Two:

- How balance of payment deficit is dealt with and equilibrium is reached in case of fix and flexible exchange rate?
- If the exchange rate between dollar and Euro is 1.30 $/Euro and inflation rate in US is 4% and Europe 3% forecast expected exchange rate in one year using relative purchasing power parity.
- If the interest rate in the U.S. is 5% what should be the interest in Europe to discourage capital flow between the two countries?

Question Three:

- How can internationalization help a firm that has built its strategy on competing as a low cost/low price competitor in the industry.
- Firm XYZ has identified a major opportunity in country A for business activity. However, it is concern that the opportunity may slip away if they do not respond to this opportunity. After evaluating various choices the two possibilities emerge as strategically attractive: acquiring a business in that country or building the business ground up (Greenfield development). Which one do you recommend and why?
- In making foreign direct investment XYZ has to decide whether it raises capital from home or from the host country. If home country interest rate is 2% and host country interest 5%, and the host country exchange rate is expected to devaluate by 4%, should XYZ raise capital from home or from host country?

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