Part A: Developing MNC Business Multinational Corporations (MNCs) is doing business globally from a center or home country. A company that maintains significant operations in multiple countries but manages them from a base in the home country is called Multinational Corporation.
It holds ethnocentric attitude. Suppose the Australia based multinational company is a cell phone company. It now wants to sell cell phone in Indian market. As India is a big country so it will be difficult for the company to operate by it self.
So the company should select different ` dealers for their product to sell in the market.The company will set a regional head office and control the dealers form that office. India as a country has experienced the marketing of cell phones. It has a huge population using cell phone for telecommunication. Now a day’s cell phone business in India is growing rapidly and it is very profitable.
The country has 8. 5% GDP growth. It has 5. 3% inflation rate and the gross investment is 29.
2% of total GDP. The country has the export of $112 billion and import of $187. 9 billion. As the cell phones will produce in Australia the company does not need any kind of supplies in India.But it will need necessary supplies for the company in Australia.
Labor force is the essential element for any kind of business!. The company will need skilled labor forces in both Australia and India. In Australia the company will need at least 1500 labors having technological skill because the production of cell phone will need more engineers and experts in related field. In India the company will need at least 2000 labor force having communication skill. India will be the market for the cell phone company. So the company needs more marketing agents in India.
The company will incur primary expenses for producing the cell phones in Australian dollar. The head office and the factory of cell phone will be in Australia. So the executives will use Australian dollar for the company. When the company will go for global operation in India it will use Indian rupees in exchange of Australian dollar. It is assumed that the receivables of the cell phone company recorded in India will be denominated in Indian rupee. Part B: Assessing Country Factors that Will Affect the Demand of the Product: Cell phone business in India is very competitive.
There are more than 15 companies operating in the country. So the company should aware of the factors that can affect the balance of trade between Australia and India. The probable factors are – Economic environment, Political*and Legal environment, Demographic condition, Technological environment and Socio-cultural conditions! -b. Economic Environment: Economic environment provides the idea about the purchasing power and spending pattern of the people of a country. Now a day’s people are more conscious about their spending. People spend carefully and seek more benefit.
If they think the product has grater value only then they will buy it. India is a developing country. The per capita in come of Indian people is $530 per year. So the people of this country will more conscious about their spending.
They will not go for pricey cell phone !!. Political and Legal Environment: Laws, government organizations and pressure groups that affect and limit various organizations and individuals in a given society create political and legal environment. India has its own government and laws relating to the foreign companies. Demographic Condition:The size, density, location, age, gender, race, occupation and other statistics of Indian population will be a major factor for the company. The company should decide which people it will serve.
Moreover occupation is a major factor. Usually people having different occupation use mobile phone. So the company should find employed people and their choices. In India 15, 91, 21,803 people use mobile phone.
The large and highly diverse population poses both opportunity and challenges. So the company should utilize the diverse population to achieve its goal. Technological Environment:Technological environment of India will be a major concern for the company. Approximately 115 million GSM stets are available in India and 4 million CDMA sets are available.
In India the company will launch cell phone, which is already a mature product. So the company will focus more on technological environment. The main task of the company is to develop its own marketing opportunity. Socio-cultural conditions: Society’s basic value, perception, preferences and behaviors quite often affect the demand of product. People of India now have a positive perception about mobile telecommunication.So the company has a great opportunity to utilize the positive behavior and perception of the Indian people to create the demand of its cell phones.
Among the entire factors economic environment will be the major concern for the company. Buying behavior of the consumers is very closely related with their income stream. Demand of a product usually increases with its quality and pricing. According to value marketing where people want satisfaction from the product with low price, the company should analyze the economic condition of the overall mobile user of India!! -b.Cell phone is not the main export product of Australia. But the country has opportunity to export mobile technology to the other countries.
Australia has the 5% export in India on the full import of India. Geographic advantages in Australia have the potential to be one of the leading cell phone exporter nations. By exporting cell phone in India there may be an introduction of export of technological product between Australia and India. An Indian citizen has to spend 20% more on cell phone for the government regulation on the import.
Import duties are one of the major incomes in the developing country.In every country government develop public policy to guide commerce – set of laws and regulations that limit the business for the well being of the society as a whole. The trade regulations are set by the government to protect companies from each other. The second purpose of the government regulation is to protect consumers from unfair business activities.
And finally the purpose of government regulation is to protect the interests of the society against unrestrained business behavior. In India the cell phone company will be affected by the trade regulation of the Indian government and by different government agencies!!!.Indian government has established several regulatory agencies such as Trade Commission, the ICC, the National Communication Commission, the Consumer Product Safety Commission, the Environment Protection Agency and so on. These agencies and commissions create new laws for the trade organizations. So the company should follow those laws and regulations made by the above agencies.
Part C: Using the Foreign Exchange Market: Spot market has two dimensions. First one is market for commodities where the goods are bought and sold for cash and delivered immediately. This market is also known as cash market.Second one is market for commodities where the goods are exchanged on foreign currency.
Structure of the Indian rupee market is about $500 million. To determine the demand and supply of the product, the company has to examine the spot market and foreign exchange rate in India. Risk is one of the major components of spot market. The company should use the spot market trading to overcome the risk of selling the cell phones. Another reason for using the spot market is to avoid the trouble of exchanging the foreign currency.
So the spot market can be the best choice for entering into the mobile phone market in India.State bank of India is a well-known operating bank India. The bank has international branches. It also exchanges the foreign currencies. The bank has link with more than 500 leading banking and financial organizations in the world. Forward market is indispensable for export-import business.
Forward market is a personalize market between the related parties. The business like cell phone is related with future delivery. Forward market will be very helpful for the company ! V. Future exchange of bonds, will be held in the financial market like forward market.Forward market will be the place of bi-lateral contract where both the parties agree upon a future delivery of goods or securities. Over time concern foreign currency can be affected by several factors.
This factor can change the exchange rate between currencies. Especially in India where diverse economy exists the foreign currency can be affected by Current account Balance, Exchange rate, Opportunity cost, Marginal propensity to Import and Reserves. Current Account Balance: Overall current account balance often affects the foreign currency exchange rate of a country. The current account balance of India is $-26. billion (2006 est.
).Change in current account balance in a country changes the exchange rate by two ways. First one is current account surplus. Current account surplus is known as inflows. It would strengthen the domestic currency. If the domestic currency of India will stronger than AUD dollars then the price of AUD dollars will decrease against Indian rupeeV.
Exchange rate: Exchange rate between Australian dollar and Indian rupee will greatly affect the operation of the cell phone company in India.The exchange rate of Indian rupee in term of Australian dollar is about 34. rupee for 1 dollar. If the currency exchange rate decreases against Indian rupees then the turnover will increase.
On the other hand if the exchange rate increases against rupee than the turnover will decrease. Opportunity cost: Total holding of reserve in any country creates opportunity cost. Opportunity cost of holding money is difficult to determine. Countries use different measurement method to measure the opportunity cost. Opportunity cost measured in India is different from Australia. It is difficult for both the countries to adjust the exchange rate of currency.
So opportunity cost will affect the company to set up the benchmark price. Marginal Propensity to Import: One unit import in the national economy will change the deposable income by more then one unit. This is called MPI. If the import in the country increases then the disposable income will increase.
Higher marginal propensity to income needs higher reserve. India always tries to be in the subsistence economy. As a result marginal propensity to import is relatively low in India than other developing countries. Reserve: National reserve of foreign currency is one of the major affecting components of exchange rate.Value of foreign currency greatly depends on the reserve of the country. India has a growing economy and it seems to be a powerful economy of the world.
As a developing country the country can’t reserve as much reserve, as it wants. According to the reserve bank of India the foreign currency reserve and gold stands $165 billion. If the foreign currency reserve of India will increase than the rupee will be more powerful currency. The cell phone company must observe this factor in exchanging The AUD dollars in terms of rupeeV!. Part D: Recognizing Exposure Exchange Rate Risk:Receivables of the cell phone company must be denominated in Indian rupee in India and AUD dollars in Australia for the sale of product in each country.
It will be impossible to record the receivables from sell of goods in Australian dollar in India and vice versa. Bonds and stocks will be affected differently for exchange rate risk. Bonds reflect interest rate effect where interest rate and cash flow effects are reflected by stocks. If exchange rate changes cash flow and interest rate over more than one period, then there may not fully capture exchange exposure.Exchange rate of two currencies will obviously affect the cell phone company. If the value of Australian dollar increases against rupee than the export of cell phone will decrease.
As the power of AUD increases the import of Indian products in Australia will increase. So the increase in the value of AUD will not be profitable for the company. On the other hand if the price of AUD decreases against Indian rupee the export of cell phone will increaseV! -a. The people of India will import more Australian product.
As a result the import of cell phone in India will increase.When a company faces major losses for the change in Currency exchange rate after entering into financial obligation then the risk is called transaction exposure. Again, the risk of changing the value of assets, equities income or liabilities as a result of exchange rate change is called translation exposure. Finally, a company’s cash flow, turnover and foreign investment are affected by the fluctuating exchange rate, which is known as economic exposure. The cell phone business will be the subject to each of these types if the exchange rate will fluctuate frequently.
