Introduction
The American Multinational Corporation of choice is International Business Machine (IBM). IBM manufactures and sells computer soft wares and hard wares as the corporation’s main products. IBM also offers Data center infrastructures and consulting services. IBM plans to expand its international business to New Zealand. New Zealand has been chosen as a business destination for IBM Corporation because of its favorable international business policies (Tamirisha 70-72). The main product IBM wants to extend to New Zealand market is IBM data servers. The most effective international business method is direct exportation. Exporting is the process of selling an organization’s products to domestic markets of other countries (Buckley and Chapman 234). Other methods of international business include foreign direct investment, relocation of production, management contracts, licensing and franchising (Buckley and Chapman 237-241).
Direct export is preferred because it provides the first experience for IBM with global business environment in New Zealand at low costs. It is also preferred because of the low business risks involved. Other international business methods involve a lot of costs and risks. For instance, Foreign Direct Investment (FDI) involves many commitments in terms of money, personnel transfer, and equipment (Peltomaki and Nummela 443). Direct export requires IBM to carry out marketing in New Zealand and arrange for export of the products upon identification of the market. Payment is made depending on the agreed terms of the transaction and payment methods.
Factors that will affect the Demand of IBM data servers in New Zealand
Trade barriers in international business include tariffs, nontariff barriers, and quotas. A tariff is a tax imposed on imported goods. Tariff raises the domestic prices of imported goods thus lowering their demand. A quota is a limit of the quantity of goods that can be imported to a country from other countries (Larson 155). Nontariff barriers are shipping regulations and quality controls that hinder free trade. All the above three trade barriers affect the demand of IBM products in New Zealand. Exchange barriers include capital and exchange controls. The effects of capital and exchange controls to international business depend on the structure of the economy (Tamirisha 70). Exchange controls are taxes imposed on the foreign currency used for purchasing imported goods. Exchange controls raise domestic prices of imported goods leading to a decrease in trade (Tamirisha 71). Exchange and capital controls can also reduce international trade through exchange rates, transaction costs, trade financing, and risk hedging (Barry and Ryan 11-17).
New Zealand is one of the most liberal markets in the world in international business. Due to its small size, New Zealand’s economy relies on foreign capital inflow and importation of goods (Tamirisha 70). In 1984, New Zealand undertook international business reforms to increase capital inflow in the economy. One measure was the elimination of all quantitative restrictions. This has enhanced free entry of foreign goods without restriction on the quantity. Tariff barriers were also reduced to 4.1% in 2002 under the Most Favored Nation (MFN) Program to ease international trade flow. New Zealand and United States of America are members of World Trade Organization (WTO). According to the conventions of WTO, member states should employ MFN treaty to their others in international trade. The application of this treaty between New Zealand and the United States of America makes IBM business in New Zealand easier.
. The only business barrier that IBM will face in the new market is foreign exchange rates of the New Zealand dollar and the United States dollar. However, the New Zealand dollar is one of the stable currencies in the world as shown in the figure 1.
Foreign Market Exchange
A floating exchange rate system is an exchange regime in which the value of a currency is allowed to vary according to the market exchange rates. In this system, the value of a current is subjected to the global economic forces. A managed floating exchange rate is an exchange regime where the government controls the fluctuation of the value of a currency. Managed exchange rate is also called fixed exchange regime.
Figure 1 shows the fluctuations in the exchange rates of the New Zealand dollar. The value of New Zealand dollar was at 1.349 in December 2011. It dropped to 1.193 in February 2012. This was followed by a sharp increase to 1.315 in June. It was at 1.209 by the end of November 2012. From the above trend, a managed exchange rate is preferred for IBM business in New Zealand. This is because it will guarantee the multinational technology corporation a fixed profit margin on its sales. The uncertainty of the value of the New Zealand dollar is risky for IBM. The following are the implications of floating exchange regime according to the trend of figure 1.
At a fixed price of IBM data servers, the American multinational would have made a big profit in December 2011 and June 2012. The fluctuations in the value of New Zealand dollar experienced in February and October 2012 could mean low profit margins or losses. In order for IBM to sustain its profit margins, it would be forced to increase the prices of its products in February and October 2012. This will lead to a decline in the demand of IBM data servers in New Zealand. A fixed exchange regime controls the demand of IBM data servers by fixing their prices. The government of the United States of America can intervene in the fluctuation of the New Zealand dollars by buying excess New Zealand Dollars in New Zealand economy.
Exchange Market Derivatives
A derivative is an instrument for financial payments whose value depends on an underlying asset (Dow and Kunz 37). In this case, the underlying asset can be the IBM data servers supplied to a client in New Zealand. Companies use derivatives to hedge themselves against foreign exchange risks. Foreign exchange risks are losses, which arise from unfavorable changes in the value of a payment currency before the payment date. For example, IBM may suffer a foreign exchange risk if the value of the New Zealand dollar depreciates before the client makes payment. A hedge is a derivative used by business corporations to shield themselves against foreign exchange risks. Futures and options are the two common types of hedges (Hull 12-21). The value of a financial instrument changes with change in the price of value of the underlying asset. A future is a contractual agreement between the buyer and the seller to exchange the merchandise at a fixed price at a predetermined future date (Joyce 26). The fixed price is invalid beyond the set date. On the other hand, an option is a contractual agreement between the seller and the buyer of the merchandise to exchange the commodity at a price subject to the market exchange rates of the payment currency (Dow and Kunz 37-39).
Hedging against receivables
In this case, IBM expects a cash inflow of $10 million after supplying data servers to a client in New Zealand. The payment is to be made 30 days after supplying the data servers. During this time, the value of New Zealand dollar is expected to depreciate. In this case, a future contract is the best measure to hedge IBM against losses arising from depreciation of the value of New Zealand dollar. A futures contract allows IBM, and the foreign client to reach an agreement of paying for the goods at a fixed exchange rate. In this case, the client is expected to pay IBM an amount equivalent to $10 million irrespective of the fluctuations in the value of New Zealand dollar.
Hedging against payables
IBM is expected to pay an amount equivalent to $ 2 million for supplies from New Zealand after 30 days. During this period, the value of the New Zealand dollar is expected to appreciate. In this case, IBM can hedge itself against overpaying for the supplies by option derivative. Option allows, IBM to pay the foreign supplier at a market price determined by the market exchange rates of the New Zealand dollar. Option will allow IBM to pay an equivalent amount less than $ 2 million.
Conclusion
In conclusion, New Zealand is the preferred foreign market for IBM data servers. This is because of the favorable international business policies of New Zealand. There are no nontariff trade barriers in New Zealand. The New Zealand government eliminated all trade barriers in 1984 in a bid to increase foreign direct investment and free importation of goods. The only barrier is a tariff of 4.1% subject to MFN treaty of WTO. A managed or fixed exchange regime is preferred for IBM business in New Zealand because it fixes the exchange rate of New Zealand dollar. A fixed exchange rate stabilizes the market demand and profit margins for IBM goods. There are two types of market exchange derivatives. They include future contracts and options. A future contract is a contractual agreement between the buyer and the seller to exchange goods at a fixed price at a predetermined date. On the other hand, an option is a contractual agreement between the buyer and the seller to exchange goods at a future price subject to market exchange rates.
References
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