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4. International Business Strategy Implementation:

4.a. Financial Consideration:

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4.a.1. Please forecast the future currency rate of the
host country, using

Relative – PPP.

 

Relative purchasing power parity examines the relative
changes in price levels between two countries and maintains that exchange rates
will change to compensate for inflation differentials.

 

Relative purchasing power parity is an economic theory
which predicts a relationship between the inflation rates of two countries over
a specified period and the movement in the exchange rate between their two
currencies over the same period. It is a dynamic version of the absolute
purchasing power parity theory. This purchasing power will directly impact the
future currency rate of the host country. SGD currency will depreciate against
MYR as the purchasing power is much lower.

 

4.a.2. Develop the Pro-forma Income statement of the
company in the HOST country, at least for two years.

 

PETRONAS INCOME STATEMENT

 

 

Fiscal year ends in December. SGD in millions
except per share data.

2018
(‘000)

2019
(‘000)

Revenue

          
25,171

          
21,787

Cost of revenue

          
23,138

          
19,648

Gross profit

            
2,033

            
2,139

Operating expenses

 

 

Sales, General and administrative

            
1,266

            
1,315

Total operating expenses

            
1,266

            
1,315

Operating income

                
767

                
824

Interest Expense

                  
10

                      2

Other income (expense)

                
328

                
391

Income before taxes

            
1,085

            
1,212

Provision for income taxes

                
290

                
297

Net income from continuing operations

                
795

                
915

Net income from discontinuing ops

 

                  
31

Other

                  
(5)

                  
(2)

Net income

                
790

                
945

Net income available to common shareholders

                
790

                
945

Earnings per share

 

 

Basic

                      1

                      1

Diluted

                      1

                      1

Weighted average shares outstanding

 

 

Basic

                
993

                
993

Diluted

                
993

                
993

EBITDA

            
1,095

            
1,214

 

4.a.3. Forecast the export or import business whether
it is viable or not using

Capital Budgeting method, IRR, and NPV

 

The internal rate of return (IRR) is a discount rate
that is commonly used to determine how much of a return an investor can expect
to realize from a particular project. Strictly defined, the internal rate of
return is the discount rate that occurs when a project is break even, or when
the NPV equals 0. Here, the decision rule is simple: choose the project where the
IRR is higher than the cost of financing. In other words, if your cost of
capital is 5%, you don’t accept projects unless the IRR is greater than 5%. The
greater the difference between the financing cost and the IRR, the more
attractive the project becomes.

 

The IRR decision rule is straightforward when it comes
to independent projects; however, the IRR rule in mutually-exclusive projects
can be tricky. It’s possible that two mutually exclusive projects can have
conflicting IRRs and NPVs, meaning that one project has lower IRR but higher
NPV than another project. These issues can arise when initial investments
between two projects are not equal. Despite the issues with IRR, it is still a
very useful metric utilized by businesses. Businesses often tend to value
percentages more than numbers (i.e., an IRR of 30% versus an NPV of $1,000,000
intuitively sounds much more meaningful and effective), as percentages are more
impactful in measuring investment success. Capital budgeting decision tools,
like any other business formula, are certainly not perfect barometers, but IRR
is a highly-effective concept that serves its purpose in the investment
decision making process.

 

On the other hand, the net present value
decision tool is a more common and more effective process of evaluating a
project. Perform a net present value calculation essentially requires
calculating the difference between the project cost (cash outflows) and cash
flows generated by that project (cash inflows). The NPV tool is effective
because it uses discounted cash flow analysis, where future cash flows are
discounted at a discount rate to compensate for the uncertainty of those future
cash flows. The term “present value” in NPV refers to the fact that
cash flows earned in the future are not worth as much as cash flows today.
Discounting those future cash flows back to the present creates an apple to
apples comparison between the cash flows. The difference provides you with the
net present value.

 

The general rule of the NPV method is that independent
projects are accepted when NPV is positive and rejected when NPV is negative.
In the case of mutually exclusive projects, the project with the highest NPV
should be accepted. This shows that is it viable to forecast using the capital
budgeting method, IRR and NPV for this purpose.

 

 

4.b. Explain what kind of export type you are going to
implement. Why?

 

DIRECT EXPORT

INDIRECT
EXPORT

 Meaning:
Export
marketing is undertaken directly by the manufacturer.

 
The
manufacturer exporter exports the goods through intermediaries.

2. First Hand
information:
The
manufacturer exporter can get first hand information on the importer’s
requirement.

 
The
manufacturer exporter may not get first hand information as he has to depend
on intermediaries.

3. Control:
The
exporter can exercise direct control over packaging, pricing, promotion,
after sale service, etc.

 
The
manufacturer may not be able to exercise direct control over packaging,
pricing, promotion, etc.

4. Reputation:
The
direct exporter can earn goodwill in international markets.

 
The
manufacturer may not earn reputation in overseas markets. The intermediaries
gets the reputation.

5. Risks:
There
are more risks as the exporter has to assume production and marketing risks.

 
The
risks involved are less as the manufacturer has to bear only the
manufacturing risks.

6. Investment:
It
requires more investment for manufacturing as well as for distribution
network.

 
The
manufacturer requires less investment as he has to look after only the manufacturing
aspects.2

7. Incentives:
The
direct exporter can claim a number of incentives such as income tax benefits,
duty drawback. special licences etc.

 
The
manufacturer may not be able to claim various incentives unless the export
documents are in his name.

8. Overheads:
The
manufacturer/exporter has to bear production and distribution overheads.

 
The
manufacturer has .to bear only production overheads.

9. Specialisation:
It
requires concentration on both marketing and production aspects and as such
lacks specialisation.

 
In
indirect marketing, the manufacturer can specialise in manufacturing aspects.

10. Suitability:
It is
more suitable and feasible for large-scale exporters.

 
It is
more suitable and feasible for small scale exporters.

11. Prices:
Exports
can fetch high prices if sold directly by manufacturer.

 
Exports
may fetch lower prices due to intermediary’s margin.

 Meaning:
Export
marketing is undertaken directly by the manufacturer.

 
The
manufacturer exporter exports the goods through intermediaries.

2. First Hand
information:
The
manufacturer exporter can get first hand information on the importer’s
requirement.

 
The
manufacturer exporter may not get first hand information as he has to depend
on intermediaries.

3. Control:
The
exporter can exercise direct control over packaging, pricing, promotion,
after sale service, etc.

 
The
manufacturer may not be able to exercise direct control over packaging,
pricing, promotion, etc.

4. Reputation:
The
direct exporter can earn goodwill in international markets.

 
The
manufacturer may not earn reputation in overseas markets. The intermediaries
gets the reputation.

5. Risks:
There
are more risks as the exporter has to assume production and marketing risks.

 
The
risks involved are less as the manufacturer has to bear only the
manufacturing risks.

6. Investment:
It
requires more investment for manufacturing as well as for distribution
network.

 
The
manufacturer requires less investment as he has to look after only the
manufacturing aspects.2

7. Incentives:
The
direct exporter can claim a number of incentives such as income tax benefits,
duty drawback. special licences etc.

 
The
manufacturer may not be able to claim various incentives unless the export
documents are in his name.

8. Overheads:
The
manufacturer/exporter has to bear production and distribution overheads.

 
The
manufacturer has .to bear only production overheads.

9. Specialisation:
It
requires concentration on both marketing and production aspects and as such
lacks specialisation.

 
In
indirect marketing, the manufacturer can specialise in manufacturing aspects.

10. Suitability:
It is
more suitable and feasible for large-scale exporters.

 
It is
more suitable and feasible for small scale exporters.

11. Prices:
Exports
can fetch high prices if sold directly by manufacturer.

 
Exports
may fetch lower prices due to intermediaries’ margin.

 

The advantages of direct exporting for a company
include more control over the export process, potentially higher profits, and a
closer relationship to the overseas buyer and marketplace. These advantages do
not come easily, however, since the company needs to devote more time,
personnel, and corporate resources than are needed with indirect exporting.

 

When a company chooses to export directly to foreign
markets, it usually makes internal organizational changes to support more
complex functions. A direct exporter normally selects the markets it wishes to
penetrate, chooses the best channels of distribution for each market, and then
makes specific foreign business connections in order to sell its product. The
rest of this chapter discusses these aspects of direct exporting in more
detail. Thus, direct export is the best way to be use.

 

 

4.c. Explain what contractual entry mode you are going
to implement. Why?

 

As a global market entry and expansion strategy,
licensing has a great appeal. The most common reasons for a licensor to enter
into a licensing agreement are to benefit from better manufacturing capacity,
wider distribution outlets, greater local knowledge, and the management
expertise of the licensee. Therefore, the licensor may, through the licensee,
expand into markets more effectively and with greater ease (Nakra, 2006).

 

As in this mode of entry the transference of knowledge
between the parental company and the licensee is strongly present, the decision
of making an international license agreement depend on the respect the host
government show for intellectual property and on the ability of the licensor to
choose the right partners and avoid them to compete in each other market.
Licensing is a relatively flexible work agreement that can be customized to fit
the needs and interests of both, licensor and licensee.

 

The main advantages of international licensing for
expanding internationally are able to obtain extra income for technical
know-how and services, reach new markets not accessible by export from existing
facilities, quickly expand without much risk and large capital investment, pave
the way for future investments in the market, retain established markets closed
by trade restrictions, political risk is minimized as the licensee is usually
100% locally owned and is highly attractive for companies that are new in
international business.

 

International licensing is a foreign market entry mode
that have its’ own disadvantages due to loss of control of the licensee
manufacture and marketing operations and practices leading to loss of quality, risk
of having the trademark and reputation ruined by an incompetent partner and the
foreign partner can also become a competitor by selling its production in
places where the parental company is already in.

 

Compared to licensing, franchising agreements tends to
be longer and the franchisor offers a wider set of rights and resources which
are usually equipment, managerial systems, operation manual, initial trainings,
site approval and all the support necessary for the franchisee to run its
business in the same way it is done by the franchisor. In addition to that,
while a licensing agreement involves things such as intellectual property,
trade secrets and others while in franchising it is limited to trademarks and
operating know-how of the business.

 

Advantages of the international franchising mode low
political risk, low cost, allows simultaneous expansion into different regions
of the world and well selected partners bring financial investment as well as
managerial capabilities to the operation.

 

Disadvantages of franchising to the franchisor are maintaining
control over franchisee may be difficult ,conflicts with franchisee are likely,
including legal disputes, preserving franchisor’s image in the foreign market
may be challenging, requires monitoring and evaluating performance of
franchisees, and providing ongoing assistance and franchisees may take
advantage of acquired knowledge and become competitors in the future

 

A turnkey project refers to a project when clients pay
contractors to design and construct new facilities and train personnel. A
turnkey project is a way for a foreign company to export its process and
technology to other countries by building a plant in that country. Industrial
companies that specialize in complex production technologies normally use
turnkey projects as an entry strategy.

 

One of the major advantages of turnkey projects is the
possibility for a company to establish a plant and earn profits in a foreign
country especially in which foreign direct investment opportunities are limited
and lack of expertise in a specific area exists.

 

Potential disadvantages of a turnkey project for a
company include risk of revealing companies secrets to rivals, and takeover of
their plant by the host country. Entering a market with a turnkey project can
prove that a company has no long-term interest in the country which can become
a disadvantage if the country proves to be the main market for the output of
the exported process

 

           

4.d. Explain the Investment entry mode. Why?

 

Many businesses reach a point in their growth where
they want to expand internationally and enter markets in other countries. There
are several significant barriers to entry that present problems for these
businesses. Often, there are already established markets in other countries
that sell similar products or services and businesses may have a difficult time
competing. In situations like this, many companies decide to pursue an
investment strategy to enter the market successfully (Lacoma, 2017).

 

Joint Ventures

According to Forbes, joint ventures (JVs) can be a
rapid and very effective mechanism for strategic growth. Such unions can enable
fast access to new skills and technologies. Beyond that, JVs can secure
production capacity and lower cost production; offer access to both local and
distant markets; and offer ways of creating economies of scale and market
power.

 

FDI Establishment

Foreign Direct Investment (FDI) is a direct investment
of funds into the foreign market. Businesses that have significant funds often
pursue FDI by creating a new business plant in the foreign country. This is
expensive, but allows the business to organize operations the way it wants and
use its own people the run the business (Lacoma, 2017).

 

FDI Acquisition

This method may mean short-term cash, but it won’t
necessarily guarantee future stability. Around 50% of merged businesses never
achieve their projected financial and market goals. When acquiring a company, it
is also inclusive of acquiring their existing problems as well. It can be
decided whether the acquisition should be financed by cash or stock (Irwin,
2012).

 

Exportation

Exportation is a simple form of direct investment
where businesses establish just part of their operations in the foreign
country. For instance, the business may make its products in its home country,
then ship them to a business center in the foreign country. Businesses may also
make parts in other countries and ship them internationally for assembly.

 

Licensing

Licensing requires less investment than other
investment entry modes, but also works in reverse, allowing a business to enter
new home markets by using the brand, patents and other materials from another
company, possible foreign. In this case, the entering business pays only
licensing fees and possibly extra expenses for technical assistance.

 

 

 

4.e. Explain the Export/Import Financing that you
would implement. Why?

 

Import and export financing is much different, for
example, than commercial lending, mortgage lending or insurance. There is a
longer order-to-delivery cycle on products that are sold and shipped overseas,
therefore, it takes longer to get paid. Extra time and energy are required to
make sure that buyers are reliable and creditworthy. Careful financial
management can mean the difference between profit and loss on each transaction.

 

All sellers want to get paid as quickly as possible,
while buyers usually prefer to delay payment, at least until they have received
and resold the goods. This is true in domestic as well as international
markets. Increasing globalization has created intense competition for imports
and exports. Importers and exporters are looking for any competitive advantage
that would help them to increase their sales. Flexible payment terms has become
a fundamental part of any sales package.

 

Selling on open account, which may be best from a
sales standpoint, places all of the risk with the seller. The seller ships and
turns over title of the product on a promise to pay from the buyer.

 

 

Financing can make the sale. Favourable payment terms
make a product more competitive. If the competition offers better terms and has
a similar product, a sale can be lost. 
In other cases, the exporter may need financing to produce the goods or
to finance other aspects of a sale, such as promotion and selling costs,
engineering modifications and shipping costs. Various financing sources are
available to exporters, depending on the specifics of the transaction and the
exporter’s overall financing needs.

 

Financing costs will vary. The costs of borrowing,
including interest rates, insurance and fees will vary. The total cost and its
effect on the price of the product and profit from the transaction should be
well understood before a pro forma invoice is submitted to the buyer.

 

Financing costs increase with the length of terms.
Different methods of financing are available for short, medium, and long terms.
Exporters need to be fully aware of financing limitations so that they secure
the right solution with the most favorable terms for seller and buyer.

 

The greater the risks, the greater the cost. The
creditworthiness of the buyer directly affects the probability of payment to an
exporter, but it is not the only factor of concern to a potential lender. The
political and economic stability of the buyer’s country are taken into
consideration.

The main instrument in export and import financing is
Letter of Credit. This instrument is the best way to be implemented. This
instrument is issued by a bank at the request of an importer. The bank promises
to pay a beneficiary (usually the exporter or the exporter’s bank) after
receiving certain documents specified in the Letter of Credit.

 

The bank puts itself in the middle between the buyer
and the seller. Exporter likes it because it reduces the risk of non-completion.  Even if there is foreign exchange blockages
the exporter is more likely to get paid since banks have more access to foreign
exchange than most companies.

Exporter may also get pre-export financing easier. Importer
will often not have to pay until the bank receives the proper documents and all
conditions stated in the LC have been satisfied.

 

4.f. Does the HOST country has a Free Trade Agreement
(FTA) with the HOME Country in regards to the service or product that you are
going to do import or

export? Please explain.

 

There
is a Free Trade Agreement (FTA) between Malaysia and Singapore. A free-trade
area is the region encompassing a trade bloc whose member countries have signed
a free-trade agreement (FTA). According to International Enterprise Singapore,
such agreements involve cooperation between at least two countries to reduce
trade barriers – import quotas and tariffs – and to increase trade of goods and
services with each other. If people are also free to move between the
countries, in addition to a free-trade agreement, it would also be considered
an open border. It can be considered the second stage of economic integration.

Thus
far, Malaysia has implemented 7 bilateral FTAs and 6 regional FTAs. In terms of
trade with Malaysia’s free trade agreements (FTAs) partners, Malaysia’s total
trade value stood at RM935.3 billion in 2016, with exports valued at RM490.1
billion while imports totalled RM445.3 billion. FTA partner countries contributed
62.3% of Malaysia’s total exports in 2016. Malaysia registered increases in
exports with FTA partners such as Viet Nam, Singapore, Myanmar, the
Philippines, Cambodia and Laos (ASEAN Member States) as well as Turkey,
Pakistan and India. The main exports to the FTA partner countries in 2016 were
E products, petroleum products, chemicals and chemical products, LNG and
manufactures of metal.

 

 

 

 

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