assignment question 3

  
Which countries would be unsuitable for a BFSI subsidiary at this time, and what are the basic shortcomings in each case?

BERTOS MANUFACTURING CORPORATION Evaluating Markets to Invest Abroad E. N. Roussakis and Anastasios Moysidis Abstract: This case deals with the key considerations when planning an international expansion through direct investment in foreign markets. These considerations must be addressed by a finance company seeking to establish foreign subsidiaries to support the international sales of its parent firm, a U.S.-based multinational enterprise (MNE). The company already operates three foreign subsidiaries–in Canada, Mexico (both NAFTA members), and the United Kingdom–but wishes to increase this network further through entry into additional markets. Ten candidate countries are being considered to determine the five most suitable for entry. Hence the need for a rational decision of where to invest. Keywords: Subsidiaries; multinational enterprise; transnational activities; foreign direct investment; greenfield investment ; leveraged institution ; wholesale financing ; captive finance company; retail installment contract 1 Introduction Victoria Pernarella is a recent university graduate in business administration and a new hire in Bertos Financial Services, Inc., a major finance company in Nashville, Tennessee. After a month long rotational training to gain insights into the company’s scope o f activities, she was placed in the international department where she has been assigned to work on a project. Bill Pappas, her manager, had asked her to analyze a select number of foreign countries to determine the best pro spects for the local establishment of subsidiary finance companies. He went on to clarify that the mode of entry into the foreign markets– acquisition of an existing company or a greenfield investment (from the ground up, that is, from a green field)–was not a primary consideration at this stage. The candidate countries were Croatia, Chile, Colombia, Serbia, Philippines, Costa Rica, Australia, Malaysia, Qatar, and Nigeria. With finance companies highly leveraged institutions, the firm was prepared to provide the initial amount of equity capital needed for the establishment of five such institutions. At this stage therefore, the study ought to limit its recommendation to a corresponding number of foreign countries. With this information at hand, Victoria started reflecting on the approach to use for her analysis. Sensing the need to prove her capabilities by delivering a high quality study for her first company assignment, she thought appropriate to first familiarize herself with the pertinent literature on the international expansion of multinational enterprises (MNE) in general and banks in particular, and then review background information o n her employer, and the scope of activities of its financial subsidiary. Hence the sequence of the following sections which address the internationalization process (literature review on the development o f MNEs), the modes of bank entry into foreign markets, background of parent company, financial subsidiary and scope of activities, and developing criteria for country recommendation
Internationalization Process–A Theoretical Perspective Recent decades have witnessed the internationalization of operations of many companies around the world, and especially U.S. corporations. Although the extent, form and pattern of their transnational activities vary according t o the characteristics o f the firms, the products they produce , and the markets i n which they operate , they all reflect the dynamics of a changing and increasingly competitive international environment. Of the theories that have sought to explain the transnational activities of enterprises, the eclectic paradigm (Dunning, 1988) enjoys a dominant position. This concept provides a broad framework for the alternate channels of international economic involvement of enterprises and focuses on the parameters that influence individual MNE foreign investment decisions (Buckley and Casson, 1976; Dunning, 1977). Specifically, the eclectic paradigm identifies three important determinants in the transnational activities of firms– ownership, location and internalization (OLI). The first condition of the OLI configuration states that a firm must possess certain owner-specific competitive advantage in its home market that can be transferred abroad if the firm’s foreign direct investment (FDI) is to be successful. This advantage must be firm specific, not easily copied, transferable, and powerful enough to compensate the firm for the potential disadvantages and risks of operating abroad. Certain ownership-specific competitive advantages enjoyed in the home market, such as financial strength and economies of scale, are not necessarily firm specific because they can be also attained by other firms. Similarly, certain types of technology d o not ensure a firm – specific advantage because they can be purchased, licensed or copied. Production and marketing of differentiated products, too, can lose their competitive edge to modified versions of such products promoted by lower pricing and aggressive marketing. The second strand in the OLI model stands for location-specific advantages. That Is, the foreign market must possess certain characteristics that will allow the firm to exploit its competitive advantages in that market. Choice of location may be a function of market imperfections or of genuine comparative advantages of particular places. Other important considerations that m ay influence the locational decision may include a lowcost but productive labor force, unique sources of raw materials, formation of a custom unions or regional trading bloc, defensive investments to counter a firm’s competitors, or centers of advanced technology. The third component of the OLI paradigm is internalization and refers to the importance for a firm to safeguard its competitive position by maintaining control of its entire value chain in its industry. This can b e accomplished through foreign direct investment rather than licensing o r outsourcing. Transferring proprietary information across national boundaries within its own organization would enable a firm to maintain control of its firm-specific competitive advantage. Establishment of wholly owned subsidiaries abroad reduces the financial agency costs that arise from asymmetric information, lack of trust and the need to monitor foreign partners, vendors, and financial intermediaries. Further, if the parent firm funds the operations of its foreign subsidiaries, self-financing eliminates the need to observe specific debt provisions that would result from local financing. If a multinational firm has access to lower global cost and greater availability of capital why subject its operations to local financial norms or share these important advantages with local joint venture partners, distributors, licensees, and banks that would probably have a higher cost of capital.
Of the three premises o f the paradigm described above , the second strand (locational advantage ) has been the subject o f increased treatise . Although i n theory market imperfections and comparative advantage are key considerations in determining the attractiveness of particular locations, in practice firms have been observed to follow a search pattern influenced by behavioral factors. As rational decisions require availability of information and facts, determining where t o invest abroad for the first time i s significantly more challenging than where to reinvest abroad. The implication is that a firm learns from its operations abroad and what it learns influences subsequent decisions. This premise lies behind two related behavioral theories of foreign direct investment decisions–the behavioral approach and international network theory. The former, exemplified b y the Swedish School o f economists (Johansen and Wiedersheim-Paul, 1975; Johansen a n d Valhne, 1977 ), sought to explain both the initial and later FDI decisions of a sample of Swedish MNEs based on these firms‟ scope of international operations over time. The study identified that these firms favored initially countries in “close psychic distance”; that is, they tended to invest first in countries that possessed a similar cultural, legal, and institutional environment to that of Sweden’s, e.g., in such countries as Denmark, Finland, Norway, Germany and the United Kingdom. As the firms gained knowledge and experience from their initial operations, they tended to accept greater risks both in terms of the countries’ psychic distance and the size o f their investments. The development and growth of Swedish companies over time, contributed to a transformation i n the nature of the parent/foreign-subsidiary relationship. The international network theory addresses this transformation by identifying such changes as the evolution of control from centralized to decentralized, nominal authority of the parent firm over the organizational network, foreign subsidiaries competing with each other and with the parent for resource allocations, and political coalitions with competing internal and external networks. Some authors (Eiteman et al., 2010) view the internationalization of operations as an outgrowth o f sequential stages in the development o f a firm. They refer to this progression in the scope of business activity as the globalization process and identify three distinct phases. In the domestic phase, a company sells its products to local customers, and purchases its manufacturing and service inputs from local vendors. As the company grows to become a visible and viable competitor a t home, imperfections i n foreign national markets or comparative advantages of particular locations translate into market opportunities and provide the impetus for an expansion strategy. Entry into one or more foreign markets will make the company attain the international trade phase. At this stage the company imports its inputs from foreign suppliers and exports its products and services to foreign buyers. In this facet, the firm faces increased challenges of its financial management, over and above the traditional requirements of the domestic-only phase . Exports and imports expose the firm to foreign exchange risk as a result of currency fluctuations in global markets. Moreover, they expose the firm to credit risk management; assessing the credit quality of the foreign buyers and sellers is more formidable than in domestic business. When the firm senses the need to set up foreign sales and service affiliates, manufacture abroad or license foreign firms to produce and service its products, it progresses to the third phase, the multinational phase. Many multinational enterprises prefer t o invest i n wholly owned subsidiaries t o maintain effective control o f their competitive
advantage and any new information generated through research. Ownership of assets and enterprises in foreign countries exposes the firm’s FDI to political risk– political events that can undermine the economic viability and performance of the firm in those countries. Political r is k can range from seizure of property (expropriation) and ethnic strife to conflict with the objectives of the host government (governance risk) and limitations on the ability to transfer funds out of the host country (blocked funds). Figure 1 portrays the sequential stages in a firm’s international expansion and provides an overview of the globalization process and the FDI decision. For a firm with a competitive advantage in its home market , a typical sequence in its international expansion would be the reach to one or more foreign markets by first using export agents and other intermediaries before engaging in direct dealings with foreign agents and distributors. As the firm learns more about foreign market conditions, payment conventions and financial institutions it feels more confident in establishing its own sales subsidiary, service facilities and distribution system. These moves culminate in foreign direct investments and control of assets abroad. Some of these assets may have been built from the ground up, or acquired through purchase of an existing firm or facility. As the level of physical presence in foreign markets increases so does the size of foreign direct investment.
Modes of Bank Entry into Foreign Markets Unlike industrial and manufacturing firms, which have expanded internationally along the patterns suggested above (eclectic paradigm and globalization process), financial institutions have entered foreign markets primarily i n response to the needs of their business clients. Indeed, this has been the case for commercial banks, the oldest and most dominant institution of the U.S. financial system. The growth of multinational corporations and the accelerating pace of globalization in business activity increased the demand for international financial services and induced the expansion of banks’ international operations and presence abroad . Whether proactively (to enhance own growth and profitability) or defensively (to deny a competitor the benefit of the client’s business), banks have sought to enter foreign markets early and quickly to gain from the first-mover advantage. The rush of Western banks into Central and Eastern Europe in the 1990s exemplifies the drive to gain this first-mover advantage (Hughes and MacDonald, 2004). In weighing entry into a foreign market a number of factors must be taken into account, including the bank’s resources (both financial and human), projected volume of international business, knowledge o f –and experience with –foreign markets, banking structure and regulation i n the countries targeted for entry , tax considerations, and customer profile. A key variable in the decision process is the vehicle to be used in the delivery of international services. Major banks around the world have used anyone or a combination of vehicles to structure their international operations. The lowest possible level of presence in a foreign market may be attained through a correspondent banking relationship–using a native institution to provide the financial services needed in that market. This approach may be duplicated in one or more countries abroad, as needed, for the processing o f international transactions. It entails n o investment and hence n o
Exposure to the foreign market. Extension of services may be based on a reciprocal deposit account between the banks or an individual fee per transaction. A representative office enables a physical presence i n a foreign market . However, i t cannot provide traditional banking services; it can only engage in such activities as serving as a liaison and performing marketing function for the parent bank. As it does not constitute a legal entity it has no legal or tax liability. An agency may perform more functions than a representative office but cannot perform all banking functions (e.g., in the United States a foreign bank agency may extend local loans but cannot accept local deposits). The principal vehicle used by U.S. banks in the conduct of their activities internationally is the branch office. This office is a legal and operational part of the parent bank, backed the full resources of the parent in the performance of the banking functions permitted by the host country. Although it requires a sizable investment it enables the provision of full banking services, which the prior vehicles d o not. A branch office is subject t o two sets of regulation–those o f the home country and those of the host country. A subsidiary is a separate legal entity organized under the laws, and hence regulated by the authorities, of the host country. It is the second most important vehicle used by commercial banks for the conduct of banking business, and may be established as a new organization or through the purchase of an existing institution. Whatever the approach used in its establishment, a subsidiary offers two important advantages over a branch: it may provide for a wider range of services, and it limits the liability of the parent bank to the amount of its equity investment i n that entity. The main disadvantage o f a subsidiary i s that it must b e separately capitalized from the parent bank, which may often entail a greater start up investment than a branch (Rose and Hudgins, 2010).
U.S. finance companies interested to expand their activities internationally take into account many of the same criteria used by banks. In structuring their international operations U.S. finance companies favor the subsidiary organizational form because of the advantages associated with this type of vehicle. Just as in U.S. financial markets, foreign financial subsidiaries are heavy users of debt in financing their operations. Principal sources of borrowed funds include bank credits and issues of debt (e.g., bonds) in capital markets to finance their lending activities in their respective markets (Madura, 2011; Gitman et al., 2010). Finance companies are extremely diversified in their credit granting activities, offering a wide range of loans, leasing plans and long term credit to support capital investment. One of the most important markets for finance companies has been the extension of business-oriented financial services including working capital loans, revolving credit and equipment lease financing.
Background of Parent Company Bertos Manufacturing Corporation (BMC) is one of the largest companies of the country in the manufacturing of construction and mining equipment, and engines. BMC draws its origin in a California firm organized in 1890 to manufacture steam-powered tractors for farming. The firm was nominally capitalized and aspired to make inroads in the local market by having its tractors plow California fields. However, soon after the turn of the century, a n abandoned manufactur ing plant b y a failed tractor company i n a major manufacturing center in Illinois was instrumental in the relocation of operations in the
Midwest. The location of this center on the Mississippi River made i t a prime transportation hub offering important prospects for the young company. Indeed, the move proved a turning point in the development of the company. Domestic sales grew so significantly that by 1911 the factory employed a little over 600 individuals. A natural consequence o f the domestic momentum was the firm’s entry into foreign markets through tractor exports to Argentina, Mexico, and Canada. World War II was a company milestone as it created a sharp increase in the demand for tractors to built airfields and other military facilities in strategic sites of the Pacific. However, it was during the post-war construction boom that the company grew at a rapid pace. A series of mergers and acquisitions diversified operations into the current scope of products and contributed to BMC’s growth to an industrial company of national and international dimension. A successful export-oriented strategy led to the establishment of a manufacturing venture outside the United States in 1950, which marked the beginning of BMC’s development into a multinational corporation. The company operates in two primary lines of business: machinery and engines. The machinery line of business designs manufactures and sells construction, mining, and forestry machinery, including track and wheel tractors, hydraulic excavators, pipe layers, log loaders, off highway trucks, and related parts. The engines business line designs, manufactures and sells diesel and natural gas engines and gas turbines, which, in addition to their use in the company’s own machines and vehicles, provide power for boats, ships and locomotives. The recent financial crisis (2008) led t o the restructuring of operations and renewed management’s commitment to fuel efficiency, quality, technology and safety of the company’s machinery and engine products. Overall, BMC manufactures some 400 products, which are sold both at home, and abroad through a network of dealers. The company has a worldwide network of 220 dealers: 63 dealers in the United States and 157 in other countries. To accommodate domestic and international demand for its products and components the company has built 109 plants in different part of the world. Of these, 51 plants are located in the United States and 58 in foreign countries, namely, Australia, Belgium, Brazil, Canada, England, France, Germany, Hungary, India, Indonesia, Italy, Japan, Mexico, the Netherlands, Northern Ireland,
the People’s Republic of China, Poland, Russia, South Africa and Sweden. The company also licenses o r subcontracts the manufacture of BMC-branded clothing, hats, footwear, and other consumer products. To support higher volumes , growth and new product introductions , BMC’s worldwide employment is a little over 100,000, split evenly between the United States and the rest of the world. Consolidated revenue last year amounted to about $45 billion and net profit (after taxes) $3.5 billion (Table 1). More than half of the total revenue was generated outside the United States, while the North American market was the single largest source. A breakdown of revenues by geographic region is provided in Table 2. Although this performance represents the culmination of an effective international strategy, BMC has been increasingly concerned about its future potential in the global market place. Its board of directors has recognized that although opportunities for future growth exist, international competition may undermine the maximization of consolidated after-tax returns. To offset the effects of such a trend, the board, in its last meeting, decided t o explore new avenues for growth . A top prospect was the international expansion of financial services to support the overseas dealer sales of BMC products.
Financial Subsidiary and Scope of Activities Following the practice of other industry leaders (e.g., General Electric, Motorola, and Ford Motor Company), BMC established a wholly-owned, and separately incorporated, finance company to perform a dual function–to accommodate the credit needs of the parent but most importantly to finance parent company sales (hence the reference to such a firm a s a captive finance company ). Established i n Nashville , Tennessee , Bertos Financial Services, Inc. (BFSI) promotes the sale of the parent’s products and services by engaged in the extension of credit. Specifically, BFSI extends wholesale financing to, and purchases retail installment contracts from, franchised dealers. Also, it offers various forms o f insurance t o customers and dealers t o support the purchase and lea s e o f equipment. Table 3 identifies the location of BFSI offices in the United States and the geographical market covered by each office. The company’s domestic network includes 10 regional offices and a wholly owned subsidiary, which engages solely in the financing and leasing of construction and trucking industry equipment on a national scale. Table 3 also identifies BFSI’s current presence abroad , which is limited to three subsidiaries located in the following countries–Canada and Mexico (both membe rs o f the North American Free Trade Agreement), and the United Kingdom. In its last meeting the BMC board felt that if the spectrum of credit activities pursued at home could b e duplicated abroad it would add important impetus i n the company’s international growth momentum. The board believes that establishment o f finance companies in a n additional number of select foreign countries would be instrumental in maximizing corporate investment returns. To this end it has requested an in-house study to screen foreign prospects and expressed the interest to review recommendations in its forthcoming meeting. It was under these circumstances that Bill Papas assigned the task for this study to Victoria.
Developing Criteria for Country Recommendation To screen the best five prospects among the ten candidate countries for the establishment of subsidiary finance companies, Victoria thought appropriate to develop a set of criteria on which to base her recommendation. Although she could read idly identify several key criteria, she felt she should give also due consideration t o the rules and regulations governing bank operations in the candidate countries. Granted that the objective was not to set up commercial banks but finance companies; however, the banking regulatory framework provided a n indication of the kind o f credit and financial environment prevailing in these countries. Although the focus of her study was the best five foreign prospects, she felt important t o defend her recommendation by also addressing the weaknesses o f the excluded countries. She realized that this classification was only pertinent under present circumstances and that some of the excluded countries could realize latent opportunities to qualify for entry at a later time.
Figure 1 The FDI sequence: foreign presence and foreign direct investment Source: Eiteman et al (2010), Figure 16.8 © 2010 Pearson Education, Inc. Reproduced by permission of Pearson Education, Inc. Table 1 Financial highlights of BMC ___ _ _ _ _ _ _ _ _ _ _ __ Items Billions of dollars Total revenues $44.9 Profit after taxes 3.5 Assets 56.1 Stockholders‟ equity 8.9 ___ _ _ _ _ _ _ _ _ _ _ __ Source: Authors‟ analysis Table 2 Breakdown of revenues by geographic region ______________________________________________ __ Region Billions of dollars Percent North America $19.7 43.88 EAME* 14.3 31.85 Latin America 4.5 10.02 Asia Pacific 6.4 14.25 Total $ 44.9 100.00 ______ _ _ _ _ _ _ _ _ _ _ _ _ _ ____ *Europe, Africa, and the Mi Table 3 Bertos Financial Services, Inc.: Operations in the United States and abroad ___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ Domestic Offices and Market Area Covered Charlotte, North Carolina: Charlotte Area Tempe, Arizona: Denver Area Weatogue, Connecticut: Hartford Area Houston, Texas: Houston Area Jacksonville, Florida: Jacksonville Area Rancho Santa Margarita, California: Los Angeles Area Lenexa, Kansas: Minneapolis Area Brentwood, Tennessee: Nashville/Indianapolis Area Peoria, Illinois: Peoria Area Bellevue, Washington: Seattle Area Atlanta, Georgia: U.S. Equipment Financing Inc. Subsidiary Companies Abroad Canada Bertos Financial Services, Inc. Toronto, Ontario Mexico Grupo Financiero Bertos Mexico, S.A. de C.V. Monterrey, Nuevo León United Kingdom Bertos Financial Services Limited Birmingham, West Midlands ___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _Mexico Grupo Financiero Bertos Mexico, S.A. de C.V. Monterrey, Nuevo León United Kingdom Bertos Financial Services Limited Birmingham, West Midlands ___ _ _ _ _ _ _ _ _

Fountain Essays
Calculate your paper price
Pages (550 words)
Approximate price: -

Why Work with Us

Top Quality and Well-Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional and Experienced Academic Writers

We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.

Essays

Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

Admissions

Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

Reviews

Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

Reviews

Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.