International Business Finance: A Joint Venture

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Introduction

Joint venture is one of the methods of corporate restructuring. A joint venture is described as one of the business agreements between the parties in which parties agree to create a new business or we can say a new company in which both parties share the assets (Beamish, 1987). Both the parties contribute the equity to generate the assets. It can also be said that a joint venture is also one kind of temporary partnership to run any project (Hennart, 1988). But that venture doesn’t need to be always for the specific project it can be for the continuing of business as well (Pfeffer, 1976). Most of the time it is observed that large corporations go for joint ventures but some time medium organizations also go for joint venture (Inkpen, 1997). In joint venture there is a strong requirement of high negotiating skills about the patterns of investments and how both companies share their management. It is also a common practice that in joint venture one party wishes to acquire the share of the other partner (Harrigan, 1988).

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There have been different companies and organizations which have been involved in the practice of joint venture in response to the changing and challenging environment. In response to the increasing economic and other risks the companies are going for the joint ventures in order to increase the financial resources and at the same time share the risk. Apart from this joint venture enables the organizations to widen or broaden the scope of the business and the organization can enter into other markets and can target large group customers which were not possible for the organization to achieve alone.

The joint ventures also allow the organizations and companies to acquire new expertise, knowledge, information, and capacity. The organizations can opt for limited joint venture in order to fulfill only certain goal and aim. This allows the organizations to have control over the commitment to other party and can also limit the amount of exposure of the business to the other party.

Apart from this the joint ventures also have some limitations or drawbacks. It involves high time and extensive effort on part of the company to find for the right opportunity for the joint venture. Both parties involved in the joint venture have their own personal goals and aims and at times overlook the benefits of the other part in order to achieve a certain personal goal. There are also cases in which one of the parties has tried to take over the business of the other party.

Hence one has to be careful and considerate while deciding for joint ventures and should have clear goals and aims. Apart from this the companies and organizations should also be careful in selecting the right party for the agreement of the joint venture which complements the goals and aims of the company.

Benefits of Joint Venture

There are different benefits of joint venture. Companies can grow or expand their business through joint venture and it permits companies to enhance the scope of their expertise (Reich, 1993). It is very difficult for the companies to generate the finance or resources to expand in business so joint venture helps companies to share their capital and expertise to achieve their goals which may be impossible to achieve individually (Contractor, 2002).

Drawbacks of Joint Venture

There are different reasons because of which companies don’t go for the joint venture although they have the capabilities. Some of the reasons are:

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  • Partners have different goals and their expectations may differ from each other.
  • May be one partner has high level of expertise and skills than the other and the investment level can also be different (Kogut, 1989)
  • Different issues of the management teams (Kogut, 1991).
  • Conflicts related to culture differences and operational styles (Ding, 1997).

Challenges

There are different kinds of issues that company faces when going for the restructuring or for the joint venture. Some of them are:

  • Issues of strategic control, that who will get the control.
  • Issues of the organization structure that what will be the new organization structure. Parties may have conflict on this.
  • Issues of the intellectual property (Inkpen, 1995)
  • Issues of the operational management.
  • Challenges of the new market competition.
  • Issues of the funding. (Level of funding/compensation from each party).
  • Issues of the human resources.
  • Issues of the taxation especially when you are going to do joint venture in foreign country.
  • Issues of the duties of the directors.
  • Issues of the confidentiality.
  • Challenges of the minority protections.
  • Issues of the termination of the joint venture (Geringer, 1989)

Joint Venture in Switzerland

It is the view of most of the business professionals that for the foreign corporations Switzerland is the best place and considered to be the most attractive place to establish their business (Lhabitant, 2003). For companies the attractive things in Switzerland are the standard of living and attractive tax rates. There is no country in the world which has such a combination of location. The region of Switzerland in which most of the foreign as well as local companies are operating is ZUG because of the considerable tax incentives and favorable location. This region has also high international reputation.

According to the World Bank and IFC, Switzerland is the 27th best place to do business out of 183 countries in the world. In Switzerland, the completion period of the process of incorporation is 20 days.

It is also the view of the most of the researcher that Switzerland presents the attractive, encouraging and favorable environment for the joint ventures. Some of the positive points of joint ventures in Switzerland are:

  • Attractive legal rules
  • Attractive tax rules
  • Favorable political environment (it is considered a tax haven because of low tax rates , 805% on profit)
  • Stable economy
  • Country provide the highly qualified labor force
  • Quality of the financial services

Switzerland does not provide the specific laws, rule and regulation regarding the joint ventures. However business only has to follow the Swiss code of obligation.

Forms of Joint Venture in Switzerland

There are two main forms of joint ventures in Switzerland.

  • Corporate joint venture which is also known as equity joint venture.
  • Contractual joint venture

Corporate joint venture

This is a kind of the long term relationship between the parties in which both parties agree to form long term corporation. In such joint ventures, the distribution, manufacturing and marketing of the products carried out by the partners. This type of joint venture companies are organized as Stock Corporation in Switzerland.

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Contractual joint venture

This type of joint venture is basically base on the contract. And most of the time companies create this type of joint venture for the short term project. These kinds of projects are limited in scope and do not require permanent structure. This type of the joint ventures is not suitable for the long term corporations (Harrigan, 1985).

Establishing a Subsidiary in Switzerland

There are different steps in the formation of subsidiary in Switzerland.

  • Assign two entities or persons to act as the incorporators.
  • Form the article of association
  • Government of Switzerland charges the fee which is 0.1% of the capital.
  • Decide the paid up capital which should be at least CHF 20000
  • Complete the registration of tax
  • Enroll the employees in social insurance system.

There are 26 different regions in Switzerland with different tax laws so it depends on the company that which site company will choose based on its operations. There is a requirement of the comprehensive planning of the legal, tax and operational aspects in the integration of the Swiss operations into the international value chain.

Analysis of Switzerland Telecom Market

There is too much growth of competition in the various sectors of Switzerland telecommunication market. The dominant player of Switzerland telecom market is Swiss com. Swiss com is enjoying high market share in the industry. But on the other hand there are also so many rivals of the company operating in the market. Switzerland telecommunication market is continuously expanding because of the high demand in the market.

Economy of Switzerland

Whenever we are going to start business in foreign country, the economy of that country plays an important role. If the economy of that country is strong then there are more chances of business being successful. As far as the economy of the Switzerland is concerned, it is one of the world’s best economies and it is because of the political stability and best policies of monetary security. That’s why it is considered as the most attractive place for foreign investment. The main part of the Switzerland economy consists of trade and industry. The per capita income of Switzerland is also highest in the world and Switzerland has very low unemployment rate. Its unemployment rate is just 4%. Its budget is also surplus. Its inflation rate is so low which is 0.7% and GDP growth rate is 2.6%. Overall economy rank is 27th in the world.

Challenges in Switzerland

The main challenge that most of the multinational companies in Switzerland is facing during their operations is the HR services. In Switzerland the cost of the HR services is very high and it is very crucial for the organizations feasibility to find the right talent for the multinational companies. Another challenge is that in Switzerland cost of living is very high there is also the element of focused media attention. In Switzerland the expectation of salaries of staff is also very high. In last few years companies in Switzerland had also faced many challenges because of the financial and economic crisis but that was short term.

Establishing a Business in Hong Kong

It is the belief of most of the researcher that Hong Kong is an excellent place where corporations can run their vehicle of international business in an excellent tax efficient environment. There are not too much regulations of the business in Hong Kong and the economy of the country is also stable. Hong Kong has also signed treaties with many countries regarding the avoidance of the double taxation. Business in Hong Kong is also one of the ways to enter into china. In Hong Kong business establishment is also very quick and easy and it has been proved by the World Bank’s doing business survey 2011. In Hong Kong it is compulsory for every new business to register themselves in the registration office of the Inland Revenue department (IRD).

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The four types of business structures available in Hong Kong are:

  • Sole proprietorship
  • Joint venture or partnership
  • Limited liability company
  • Branch office of an overseas company.

Most of the business professionals have written that the doing business in Hong Kong is very bright in future because:

  • Hong Kong is located in the fastest growing region of the world strategically.
  • Superior infrastructure.
  • Business friendly tax and regulatory environment.
  • Hong Kong is the fourth largest banking sector in the world.
  • It is the 7th largest stock market in the world in term of market capitalization.

Economy of Hong Kong

Whenever someone is going to start business in foreign country, the economy of that country plays an important role. If the economy of that country is strong then there are more chances of business being successful. Hong Kong is considered as one of the leading international financial centers (Beamish, and Wang, 1989). The economy has low tax rate and it is basically a capitalist service economy. The main drivers of the Hong Kong economy are international trade and finance. Hong Kong has sound banking system. As far as the GDP (PPP) is concern it is ranked 7th in the world. Its inflation and unemployment rate is very low 2.4% and 3.4% respectively. It is consider as the world’s freest economy (Yeung, 1997).

Business Risks in Hong Kong

There are 3 main types of risks involved in any business. Hong Kong has a low risk profile because it has stable political environment and government and has relatively wealthy population (Min, & Winston, 1993).

Regional summary

Hong Kong lies in Eastern Asian region. In this region most of the economies are world’s largest and advanced economies. As China and Japan also lie in this region and they are considered as the world’s top countries on the basis of GDP. In the late 1990s financial crisis has created very negative effects on the economies but this region (Eastern Asian Region) battered the global financial crisis well. Government has given incentives to meet the local demand and helped to maintain the positive economic growth.

Economic risk

In Hong Kong economy risk is low. In Hong Kong there is stable society and very clear, effective and apparent legal system so it is very favorable location for most of the foreign companies which also allow companies to do business with mainland china and other Asian location. There is also no restriction of capital flow in Hong Kong. Because of all these reasons capital inflow in economy is high. Hong Kong main export market is china which plays an important role in the economic performance of the country.

Political risk

In Hong Kong political risk is also low. There is an efficient regulatory government in Hong Kong and Hong Kong also has open economy with supple labor and product market. There is a complicated situation of monetary policy in Hong Kong because its currency is pegged with the US dollar. There is more involvement of private sector in Hong Kong economy (Woodward and Lui, 1993).

Financial risk

The financial risk in Hong Kong is very low. In the last few years Hong Kong has faced the real state crisis because of climbing property prices but the government has taken the appropriate measures to ease the upward price pressures.

Transfer pricing

Price of goods is set through transfer pricing between different division and different business units of the corporation (Mjoen, 1997). Almost all the corporate world is using this. There are three main areas in which transfer pricing impacts.

  • Taxation
  • Cost management
  • Performance management.

Transfer pricing is basically the adjustments and setting of the charges between the parties. Transfer pricing is also used for the allocation of the resources. In order to adjust the taxes of domestic and multinational taxpayers, most of the governments have made the transfer pricing rules. In Hong Kong there is existence of Inland Revenue Department (IRD) so Inland Revenue department has unrestricted the long awaited departmental interpretation and practice notes (DIPN) No.46 on transfer pricing guidelines and methodologies and issues. Hong Kong is using the OECD transfer pricing guidelines in which the transfer pricing methodologies has been described. According to the guidelines there are three main methods of transfer pricing:

  • Comparable uncontrolled price method
  • Cost plus method
  • Resale price method

Euro Value Against Swiss Franc

As the euro is decreasing its value in several factors like Greece debt issue, the value of Swiss franc against the euro is higher. It is also the view of researcher that the value of the Swiss franc will depend on the oil and gold prices. On the basis of the present indicators the researchers have predicted that the Swiss franc will strengthen as compare to the euro in the future. If the perception of the market is that there will be low interference then the value of franc will be stronger as compared to the value of the Euro. But on the other hand the government of the Switzerland is also trying to weaken the Swiss franc to head off deflation risks.

Hedging Currency Risk

Whenever any multinational is going to operate in different countries, it always faces the currency risk. Hedging currency risk is very important and everyone involved with the foreign currency must have idea about this especially multinational companies. This is also known as exchange rate risk, so one should know that how to hedge this risk. There are two possibilities, home currency can appreciate against another or it can depreciate. You must ensure that the currency of the country in which an individual is going to operate must appreciate. One can minimize this risk by using the foreign exchange hedging tools.

There are many options available to hedge the foreign currency risk. Some of the methods are:

  • Internal hedging strategies: Companies make strategies that when they think that their home currency is going to depreciate against foreign currency, they pay all payments in advance.
  • Forward transactions: This is also one of the strategies to mitigate the risk in which companies decide the specified rate of future and lock their payments and receipts. This is basically called forward contract. In this the fluctuations in the income and expenditures become minimize.
  • Currency future: It is almost similar to the forward contract, but in this type of contract the date has been pre-set in the future. In this the counter party risk is eliminated because these are exchange traded. It is also easily available to all market participants.
  • Currency swap: Swap is basically the contract in which both the parties exchange the cash flows. As far as the currency risk is concern, swap is used to exchange the real time exchange rate transactions (Shenkar, 1990).
  • Currency options: These are basically kind of the financial instruments which are not obligatory. In this owner has a right to buy or sell a specific foreign currency but the rate will be prearranged. There are two types of the options call and put. Call option gives the holder right to buy and put option gives holder right to sell.

Financial Feasibility of Switzerland Project

Total investment (in Swiss Franc) = 4.0 million

Total investment in EURO = 1.3107 * 4.0 million = 5.2428 million euro

Capital structure: (in Swiss Franc)

Equity 0.4*4= 1.6 million

Debt 0.6*4= 2.4 million

Total 4 million

Cost of capital

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
Revenue 1.275 1.46625 1.686188 1.939116 2.229983
Operating expense 0.2687 0.2768 0.2851 0.2936 0.3024
Depreciation expense 0.046923 0.046923 0.046923 0.046923 0.046923
Interest expense 0.144 0.144 0.144 0.144 0.144
Pbt 0.815383 0.998573 1.210208 1.454584 1.736643
Tax 0.048923 0.059914 0.072612 0.087275 0.104199
Pat 0.76646 0.938658 1.137595 1.367309 1.632444
Add depreciation 0.046923 0.046923 0.046923 0.046923 0.046923
Net cash inflows 0.813383 0.985581 1.184518 1.414232 1.679367

Since the interest rate in Switzerland is 6% so it’s better to finance more from debt than equity.

  • WACC = 0.4(15%) + 0.6(6%)
  • WACC = 6 % + 3.6%
  • WACC = 9.6%

Capital Budgeting of Project in Switzerland

(In Million Swiss Francs)

Net Present Value of Project: (In Swiss Franc, Million)

  • NPV = PV OF INFLOWS – PV OF OUTFLOWS
  • NPV = 5.014176 m – 4.0 m
  • NPV = 1.014176 million

Conclusion

On the basis of the above research and calculation this project is feasible for the company. As the calculation shows that NPV of the project is positive, this is a positive indicator for the company to go for this project. On the basis of the analysis of the Switzerland country and its economy one can conclude that company can run its operation because businessman can get the tax advantages, market is also strong, and purchasing power of the people is also high because of high income level, so these all are the indicators which reflect that companies with good strategies can become profitable in this economy. Also there are also no strict barriers for the foreign companies in Switzerland, just there are little registration requirements. Also interest rate in the country is very low as compared to other countries that minimize the cost of capital. So these all are the ideal conditions for any company to operate in foreign country.

References

Beamish, P. and Wang, H. (1989). Investing in China via Joint Ventures. Management International Review, 29(1), 57-64.

Beamish, W. (1987). Equity joint ventures and the theory of the multinational enterprise, Journal of International Business Studies, Web.

Contractor, F. (2002). Cooperative strategies in international business: joint ventures and technology partnerships between firms, Web.

Ding, D. (1997). Control, conflict, and performance: A study of US-Chinese joint ventures, Journal of International Marketing, Web.

Geringer, J. (1989). Control and performance of international joint ventures, Journal of international business studies, Web.

Harrigan, K. (1985). Strategies for joint ventures, Web.

Harrigan, K. (1988). Joint ventures and competitive strategy, Strategic Management Journal, Web.

Hennart, J. (1988). A transaction costs theory of equity joint ventures, Strategic Management Journal, Web.

Inkpen, A. (1995). Believing Is Seeing: Joint Ventures and Organization Learning*, Journal of Management Studies, Web.

Inkpen, A. (1997). Knowledge, bargaining power, and the instability of international joint ventures, The Academy of Management Review, Web.

Kogut, B. (1989). The stability of joint ventures: Reciprocity and competitive rivalry, The Journal of Industrial Economics, Web.

Kogut, B. (1991). Joint ventures and the option to expand and acquire, Management Science, Web.

Lhabitant, F. (2003). Doing business in Switzerland. Thunderbird International Business Review, 45(6), 757–778.

Min, C. & Winston, P. (1993). Understanding the process of doing business in China, Taiwan, and Honk Kong a guide for international executives. Mellen Press: UK.

Mjoen, H. (1997). Control and performance in international joint ventures, Organization Science, Web.

Pfeffer, J. (1976). Joint ventures and interorganizational interdependence. Administrative Science Quarterly, Web.

Reich, R. (1993). Joint ventures with Japan give away our future, Transnational Corporations, Web.

Shenkar, O. (1990). International joint ventures’ problems in China: Risks and remedies. Long Range Planning, 23(3), 82-90.

Woodward, D. and Lui, B. (1993). Investing in China: Guidelines for success. Long Range Planning, 26(2), 83-89.

Yeung, H. (1997). Business Networks and Transnational Corporations: A Study of Hong Kong Firms in the ASEAN Region. Economic Geography, 73(1), 1–25.

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