Discussion: "Investments in Global Markets"
Please respond to the following:
• Use the Internet to research capital investments in global markets. Next, analyze the main factors that an organization should consider in determining the required rate of return for evaluating projects in global markets and the impact that this will have on decision making.
• Imagine that you are the Chief Financial Officer (CFO) of a U.S.-based international manufacturing company. Propose two actions that you would take in order to defend the difference in the required rate of return for your company on similar projects in an established market as compared to the same investment in an emerging market. Provide a rationale for your response.
Please watch this lecture video on Globalization to guide your understanding our week discussion:
www.youtube.com/watch?v=VqXQP3eB9W0
Please watch this video on "Globalization: Impact of External Competition in Global Markets Lecture" to aid your response to our week discussion questions:
https://www.youtube.com/watch?v=52lENJAsdLc
Response for the following 2 posts:
Post 1
Globalization is providing a multitude of low-risk high-reward investment and trade opportunities. The opportunity that anyone in any country can invest even small amounts.
The question is how to invest in Global Markets? I believe international investing can be a tricky endeavor, from language barriers, culture, and currency conversions to foreign exchanges and regulations. Most financial advisors recommend holding at least some foreign stocks in a diversified portfolio. However, the easiest and most common way to invest in foreign markets is by purchasing exchange trade funds (ETFs) or mutual funds that hold a basket of international stocks and bonds. "Investors looking for relatively safe bets can seek out larger established companies with American Depository Receipts (ADRs)."
I believe the main factor that an organization should consider in determining the required rate of return for evaluating projects in Global Markets is riskiness of a capital budgeting.
1. Market Risk
2. Project Risk
3. International Risk
If a company's capital budget project will involve in Global Businesses (another country), it will be exposed to international risk. This entails political and exchange-rate risk of the investments.
Imagine that you are the Chief Financial Officer (CFO) of a U.S.-based international manufacturing company. Propose two (2) actions that you would take in order to defend the difference in the required rate of return for your company on similar projects in an established market as compared to the same investment in an emerging market. Provide a rationale for your response.
As a CFO of a U.S based international manufacturing company, I would consider the risk factors between the emerging markets and established market. "Emerging markets are often grouped together and acronyms are attached to them." Many investors consider emerging markets funds to be an essential part of their portfolio, but this often depends on their risk profile.
Another factor will be cultural and political issues in an International manufacturing company. Emerging markets are often in countries that have shaky political systems, or companies in those markets can be subject to the whims of whoever is in charge.
Post 2
Direct investors tend to look at a number of factors relating to how they will be able to operate in a foreign country. Thus, the main factors that an organization should consider in determining the required rate of return for evaluating projects in global markets are;
The rules and regulations pertaining to the entry and operations of foreign investors;
Standards of treatment of foreign affiliates, compared to "nationals" of the host country;
The functioning and efficiency of local markets;
Trade policy and privatization policy;
Business facilitation measures, such as investment promotion, incentives, improvements in amenities and other measures to reduce the cost of doing business. For example, some countries set up special export processing zones, which may be free of customs or duties, or offer special tax breaks for new investors; and
Restrictions, if any, on bringing home ("re-patriating") earnings or profits in the form of dividends, royalties, interest or other payments.
Therefore, the impact that this will have on decision making is to accept projects in global markets whose rate of return on investments equals or exceeds the required rate of return. In other words, this is the rate of return management expects on investments, sometimes called the discount rate or cost of capital. The discount rate is the interest rate used to determine the present value of future cash flows in standard discounted cash flow analysis, whilst the cost of capital refers to the actual cost of financing business activity through either debt or equity capital.
The two actions that I would take in order to defend the difference in the required rate of return for my company on similar projects in an established market as compared to the same investment in an emerging market would be; (1) Risk Analysis and (2) Post-Audit of Investment Projects.
One approach for dealing with such uncertainty would be a risk analysis, which is a thorough evaluation of how well a project's actual performance matches the original projections. In so doing, I will be able to asses the risk factors involved in both an established market compared to the same investment in an emerging market. For instance, higher-risk project would be evaluated using a higher discount rate.
The other approach would be performing a post-audit for a variety of reasons because if managers know that the company will compare their estimates to actual results, they will be more likely to submit reasonable and accurate data when they make investment proposals. Also, a post-audit provides a formal mechanism by which the company can determine whether existing projects should be supported or terminated. Third, post-audits improve future investment proposals because, by evaluating past successes and failures, managers improve their estimation techniques.