Assignment task: You have been appointed as an advisor to a leading pharmaceuticals manufacturing company MPL - a hypothetical company) established in Malaysia. The company owns a number of reputable vitamin product lines and few Tropical Medicinal product lines which have been protected by international patent right law. The company having greater demand for its products due to current COVID-19 pandemic. However, the fluctuating foreign exchange rate also a greater issue which the company need to address. The company management approaches you and seeks your advice on adjusting its international business and financing activities to face the current global market trends.
The company currently engages in export and import activities using a well-linked international network of agents. The company distributes its product in India, Thailand and United Arab Emirate (UAE) using its own subsidiary and in other south-east countries by using their nominated agents. In addition, they also have a very good presence in the cyber market.
However, the on-going global health crisis has a significant effect on both the firm operation and the cash flow positions. Especially, high volatility of the local currency value in the foreign exchange market have undermined the firm's ability to manage its cash flow positions. On this background, the company have decided to revamp its international trade and finance strategy.
At present, the company uses MYR as their international trading currency. MPL allows three months to settle with their foreign customers. The company's suppliers allow settle their suppliers' invoices in Six months. However, the fluctuation of other currency values against the MYR have forced the company to re-think its invoicing policy. Since, most of its foreign suppliers are invoicing their products in United State's dollar (USD), the management of the company expects invoicing its exports in USD or the currencies used in trading partners' countries. The company management believe, this change will help them to minimise the adverse effect of foreign currency value changes.
MPL expects to expand its operations in India, Thailand, and UAE. In , they plan to establish their own network of small retail outlets in leading supermarkets. Most products for proposed outlets network in UAE are expected to be shipped from its current manufacturing facility in Malaysia.
Currently, the company sources some raw-materials from India. A feasibility study conducted last year revealed that locating a manufacturing plant in India would bring a huge cost advantage on both labour and materials. Therefore, the company will construct a state of the art manufacturing facility in India to produce some of its vitamin products using local labour and materials. The Indian operation will be used to satisfy the growing demand in South-East Asia.
MPL's policy is to review the cash flow situation of all its subsidiaries in every three months and remit any excess cash balances to the head office in Malaysia. Currently, excess cash are transferred any time whenever the subsidiary cash balance exceed the allowed limit. Consequently, the parent in Malaysia transferred cash to the subsidiaries when they are short in cash.
In light of the above background information, you are required to develop a management advisory report addressing the following issues.
1. Identify the main objective of the MPL, the internationalisation objectives (motive for internationalisation), the strategies used for internationalisation (mode of internationalisation), types of cash flows, types of foreign exchange risk exposures which the MNC is facing.
2. Apply internationalisation theories (comparative advantage, product life cycle and imperfect market) to illustrate the possible motives for having foreign operation in India, Thailand, and UAE.
3. Explain possible advantages and disadvantages of MPL's current international trading strategy (subsidiary in India, export & import and online presence).
4. Identify the other main players in the industry which MNC operated and their strategies. Identify most competitive strategy for the MNC to be success in the industry. Identify possible long-term and short term goals for MPL.
5. Why do you think establishing a foreign subsidiary is more appropriate than the other available modes of internationalisation? Explain possible advantages MPL can enjoy through a foreign subsidiary.