Question
| Paper details: | Over the past two decades, the economy has increasingly become global in nature. Companies have consistently been able to generate more income from overseas operations. If fact, companies such as General Electric, 3M, and Caterpillar are earning more than half of their annual revenues from overseas operations. For this Discussion, imagine the following scenario: You are the director of new business development for your company, and your vice president wants to expand into new markets overseas. Your company’s core competency is in the area of constructing, staffing, and operating customer call centers. Your VP reasons that since the cost of labor is cheaper overseas, the company will automatically generate a higher rate of return by investing overseas. Post by Day 3: NB))) Your reactions to the following questions and concerns: ◦A)) What is your reaction to the vice president’s premise? True? False? Why? Is it really that simple? ◦B)) Describe other types of risk that play a role in making such a decision to expand internationally. ◦C)) Should you always assume that foreign projects need to generate higher returns when compared with equivalent projects in the U.S.? Why or why not? ◦D)) Be sure to support your arguments from the readings and outside research. REFERENCE: Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning. ◦Chapter 19, “Multinational Financial Management” (pp. 648-677) Javidan, M., Teagarden, M., & Bowen, D. (2010). Making it overseas. Harvard Business Review, 88, 109–113. Moeller, M., Harvey, M., Griffith, D., & Richey, G. (2013). The impact of country-of-origin on the acceptance of foreign subsidiaries in host countries: An examination of the ‘liability-of-foreignness.’ International Business Review, 22, 89–99. Quer, D., Claver, E., & Rienda, L. (2012). Political risk, cultural distance, and outward foreign direct investment: Empirical evidence from large Chinese firms.Asia Pacific Journal of Management, 29(4), 1089–1104. doi:http://dx.doi.org/10.1007/s10490-011-9247-7 |
Answer
Foreign Projects: Expanding Overseas
Over the past two decades, the American economy has increasingly become global in nature with more and more companies succeeding in their efforts to generate significant income from foreign operations (Quer, Claver & Rienda, 2012). In line with this development, my company has created a new business development that seeks to expand overseas. The Vice President’s expectations are that since the cost of labor is cheap overseas, the company will automatically generate a higher rate of return by investing there. This argument is not necessarily true as there a number of other factors that come into play when dealing with foreign operations. Although the cost of labor may be significantly lower than there than in the United States, this difference is quickly made up for by the investment needed in order to learn and understand the new market through carrying out market research and analysis (Javidan, Teagarden & Bowen, 2010). The cost of raw materials and distribution may also be significantly higher than anticipated either due to poor transport networks or unestablished distribution routes. So, the low cost of labor may not necessarily translate to higher returns.
The decision to expand internationally is also met with certain controllable and uncontrollable risks. The company aiming to expand into a new market may be faced with stiff competition from the current players in that field which may result into resistance of the products or services on offer (Brigham & Houston, 2012). The new labor force, which more often than not is comprised majorly of locals, may be hard to train and orient to the foreign company’s organizational culture and work ethics. This negatively affects productivity and hence returns are lowered. The expanding company may also be met with cultural barriers in the foreign market that may be difficult to overcome. Differences in language, beliefs, customs, work habits and human relations may create strife between the local workforce and the employees from the country of origin (Moeller, Harvey, Griffith & Richey, 2013).
Companies should not always assume that foreign projects will automatically generate higher returns than equivalent projects in the United States. This assumption does not factor in the volatility of the new markets as well as the research, start-up, training, orientation and breakthrough costs. If anything, the cost of operation in foreign markets may end up being significantly higher than that of operations in local markets due to the additional overhead costs incurred.
References
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning
Moeller, M., Harvey, M., Griffith, D., & Richey, G. (2013). The impact of country-of-origin on the acceptance of foreign subsidiaries in host countries: An examination of the ‘liability-of-foreignness.’ International Business Review, 22, 89–99.
Javidan, M., Teagarden, M., & Bowen, D. (2010). Managing Yourself Making it overseas. Harvard Business Review, 88, 109–113.
Quer, D., Claver, E., & Rienda, L. (2012). Political risk, cultural distance, and outward foreign direct investment: Empirical evidence from large Chinese firms. Asia Pacific Journal of Management, 29(4), 1089–1104.
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