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INTERNATIONAL BANKING AND FINANCE (BAO3402) GROUP ASSIGNMENT GROUP 3 Team Members

VU ID

Binali Ambulpura

4610258

Ishini Gunathilake

4610264

Kavindya Yapa

4610282

Udara Abeykoon

4610251

Table of Contents 1.

Introduction.......................................................................................................................................2

1.1

Short term and Long-Term Goals................................................................................................2

1.2

Advantages and Disadvantages of SGL’s current trading strategy............................................2

1.3

Theories of International Business...............................................................................................4

1.4

Modes of Internationalization.......................................................................................................5

1.5

Advantages of a foreign subsidiary..............................................................................................7

2.

Country Analysis...............................................................................................................................8

2.1

Considerations for overseas investment.......................................................................................8

2.2

Comparative analysis of Sri Lanka, Bangladesh and Kenya......................................................8

2.3 Economic and political risk exposure comparison between Garment manufacturer and pharmaceutical manufacturer................................................................................................................12 2.4 3.

Country Risk assessment information to evaluate proposed investment.................................14 Foreign Exchange............................................................................................................................15

3.1

Types of foreign exchange rate exposure for SGL.....................................................................15

3.2

Evaluation of Exchange Rate Behavior......................................................................................17

3.3

Evaluation of current and proposed international invoicing policy.........................................22

3.4

Factors affecting Exchange Rate................................................................................................23

3.5

International Parity Theories.....................................................................................................25

3.6

Managing Foreign Exchange Rate Exposure.............................................................................27

4.

References........................................................................................................................................30

5.

Appendix..........................................................................................................................................32

5.1Appendix 1- Important country risk assessment information................................................................32 6.

Record of Group Meetings..............................................................................................................33

1

1. Introduction 1.1 Short term and Long-Term Goals Short term goals  Finding reliable distributors  Showcase a range of products  Testing new ideas  Increase social media following Long term goals  Identify consumer trends  Survive in a profitable industry  Brand recognition

1.2 Advantages and Disadvantages of SGL’s current trading strategy

Importing raw materials

Trading

Manufacturing for International

Strategy

Garment Distributors

Advantages

Simplicity

Reduction in manufacturing costs

SGL can access the international markets

It is more affordable for SGL to import

while avoiding logistic issues and many

materials than producing them locally.

trade related risks (Sun Fast International

Ability to market products of high quality.

LLC 2020).

Since the reputation of the SGL depend

Established reputation

largely on the quality of the garments they

Since SGL deals with well reputed

produce, importing high quality raw

international distributors who have good

materials is one of the best options.

contacts list, could easily introduce SGL brands to the market.

2

Warehousing and inventory control Distributors buy in bulk and take care of warehousing and inventory control in the overseas market (NIBUSINESS INFO.CO.UK n.a). Disadvantages

Not guarantee the business placement

Exposure to foreign exchange risk

When working with a distributor, SGL

If the currency of the material supplier is

does not have control over the stores that

appreciating SGL will have to bear higher

they end up in. There’s no obligation for

import costs which would lower their profit

many international distributors to tell the

margins.

local business about the stores they are selling the respective products of this business to. Limited focus on SGL’s brand International distributors represent thousands of brands. Therefore, they may not put their full effort on marketing only SGL’s brand because they represent other competitor brands too. Request generous credit terms and heavy discounts In return for taking on trade related risks and burdens, these distributors will expect generous credit terms and heavy discounts from SGL which would be costly for the business (NIBUSINESS INFO.CO.UK n.a).

3

1.3 Theories of International Business 1. Theory of comparative advantage Comparative advantage is referring to an economy’s ability to produce goods and services at a lower opportunity cost than that of trade partners (Hayes 2019). SGL plans to have a manufacturing facility in Bangladesh because Bangladesh is specialized in high quality materials and cheap and skilled labor, therefore by operating production in such a country SGL could exploit low opportunity cost than operating in Sri Lanka. Kenya also has good economic reforms and low-cost labor which specializes it as a good marketplace to establish SGL’s subsidiary. 2. Imperfect markets theory Firms become MNCs to capitalize the market imperfections. SGL became an MNC for reasons such market seeking and raw material seeking. It plans to establish subsidiaries in Bangladesh and Kenya so that it can access the imperfect skilled and experienced labor and high-quality garment material markets in those countries. By introducing SGL’s own brand and internationalizing it through e-commerce on Amazon, SGL seeks to reach large scale customer markets more efficiently. 3. Product life cycle According to this theory, as a firm matures, it may recognize additional opportunities outside its home country (Course Hero Inc 2020). Initially, SGL was only selling its garments to international distributors. Later SGL had identified market opportunities in Bangladesh and Kenya therefore, with its proposed expansion they have decided to establish subsidiaries in these two markets. Also, to access a wider market they are planning to sell their garments globally through online trade on Amazon. This would extend the product life cycle of SGL’s garments.

1.4 Modes of Internationalization Advantages

Disadvantages 4

International Trade



Importing and Exporting

Relatively conservative approach

risk when importing and exporting

exporting) and to obtain supplies

products. 

Relying totally on foreign suppliers and customers would make the firm

Helps to obtain goods which they

vulnerable to sudden changes in import

cannot produce in their own

prices or such changes in foreign

country due to higher costs. 

Firm will be exposed to exchange rate

to penetrate markets (by at low cost (importing). 



customer demand patterns.

Risk is minimal since the firm does not place any of its capital at risk



Specialization and division of labor causes goods to be produced efficiently and at a comparatively

Licensing

Business arrangement in which one company

low cost Fast way to grow a 



permission to manufacture its product for a





Intellectual property theft since there

income.

is no full control over how the

Creates business and generate

licensee conducts operations. 

Difficult to ensure quality control in

manufacturing involved.

foreign production process,

Requires less money from them to

therefore any shortcomings of

start a business opportunity.

licensee could damage licensor’s

Fewer risks in the service of what

reputation.

is being offered and selling.

specified payment. Franchising

Increases opportunities for

Creates an opportunity for passive

income since there is no sales or

gives another company





Offers the independence of small



Bad performances by other

type of license that

business ownership supported by

franchisees may affect the

a franchisee

the benefits of a big business

franchise’s reputation.

acquires to allow

network (Supertron Infotech

them to have access

2020).

to a franchisor’s



Less investment needed

proprietary 5

knowledge, processes and trademarks in order to allow the party to sell a product or service under the business’s name. Acquisitions of



existing operations

Allow firms to have full control

Culture and value of other company

over their foreign businesses and

may clash with the existing

to quickly obtain a large portion of

business. 

foreign market share. 



Creates economies of scale, which means increasing production by

foreign subsidiary performs poorly. 

Broadening target audience



When the second business is

Risk of large losses because of large investment

lowering production costs. 

Liquidation may be difficult if

acquired, the same marketing and sales strategies can be implemented for the new company as well. This will lower costs and Establishing new



foreign subsidiaries 





help to boost productivity. Gives the holding company an



Requires large investment

international presence.



The parent company must conduct

Help the organization widen its

feasibility studies in order to

reach and expand into a market to

determine not only the costs to get

expand a presence.

the subsidiary up and running but

If the company incur losses, the

also the costs to sustain the

assets of the parent company will

subsidiary at least for the next five

remain untouched.

years.

Operations can be tailored exactly



Cultural and political challenges in the host country.

to the firm’s needs

6

1.5 Advantages of a foreign subsidiary Establishing a foreign subsidiary would be more beneficial for SGL than international trade because by setting up the subsidiary in Bangladesh and Kenya SGL can directly serve their customers rather than exporting. This would mean that customers generate good trust with SGL since they have part of their company in the customer’s country. It would be more advantageous than licensing and franchising because by establishing a subsidiary SGL could tailor their foreign expansion to exactly meet the parent company’s needs. In contrast in licensing and franchising SGL would not have full control over how the licensee or the franchisee would operate in the foreign country. It requires smaller investment to setup a foreign subsidiary than acquiring a foreign firm. In addition, working abroad as a subsidiary of a company does not have to deal with complex process of setting up a company in a new location. Unlike acquiring, the subsidiary is a legal entity separate from the parent company. Therefore, in conclusion establishing foreign subsidiary would be a more affordable mode of internationalization for SGL.

2. Country Analysis 2.1 Considerations for overseas investment Political  Law 

Cultural  Language

Economic  Per capita income

Licensing and



Taste



permitting



Age



Taxes



Regional values



Supply and demand



Fees



Consumer habits



Financial transaction

Relevant class structure

7



Political stability



Investment



Wage rates

restrictions



Taxes

Discriminatory



Exchange rate





Age/demographic

and branding

restrictions

2.2 Comparative analysis of Sri Lanka, Bangladesh and Kenya Economic Factors Sri Lanka

Bangladesh

Kenya

2014

3,608

956

1322

2015

3,820

1093

1434

2016

3,839

1220

1433

2017

3,871

1372

1528

2018

4,102

1521

1681

2014

7.0%

7.5%

5.7%

2015

2.8%

7.0%

6.9%

2016

2.2%

6.2%

6.6%

2017

4.0%

5.5%

6.3%

2018

6.6%

5.7%

8.0%

Economic factors 

GDP Per capita [USD]



Inflation [CPI annual variation]



Unemployment 8



2014

4.4%

4.43%

11.7%

2015

4.3%

4.43%

11.6%

2016

4.7%

4.35%

11.5%

2017

4.4%

4.37%

11.5%

2018

4.2%

4.31%

9.3%

2014

71.8%

35.8%

44.5%

2015

72.2%

35.3%

45.9%

2016

78.5%

33.7%

50.2%

2017

79.6%

33.3%

54.5%

2018

79.1%

32.5%

56.1%

2014

3.45%

6.0%

5.9%

2015

5.0%

6.1%

5.4%

2016

5.0%

6.6%

5.7%

2017

4.5%

7.1%

5.9%

2018

3.4%

7.3%

4.9%

Public debt [% of GDP]



Economic growth

After looking at these figures, Kenya maintains a higher level of GDP per capita than Bangladesh meaning the average economic position of Kenya is much higher than Bangladesh,

9

with Bangladesh people being likely to have less disposable income. Kenya is currently experiencing a high unemployment rate, and while this has decreased from 11.5% to 9.3% in the last year, it remains a challenge for the government and foreign sellers seeking to reach this younger demographic. Greater unemployment rate reduces the labor cost so Kenya can get labor for low cost. Bangladesh unemployment rate

Kenya unemployment rate

Bangladesh has greater market stability with a lower inflation rate than the Kenya. So, purchasing materials from Bangladesh would be cheaper than in Kenya. Political factors

Bangladesh

Major Risks face  Recurrent political instability and violence 

Overdependence on garment sector



Vulnerable to natural disasters



Low fiscal revenues penalize infrastructure development

10

Kenya



Terrorist threat



Improving governance, but persistent corruption



Ethnic divisions

Bangladesh -In a country traditionally divided between two parties which have alternated power since independence, namely the ruling secular Awami League (AL), and the Islamic, political turmoil and violence are recurrent. The Nationalist Party of Bangladesh (BNP) The Bangladesh currency, the taka, will be fully convertible by Oct. 1, although experts fear some initial chaos in the inexperienced foreign exchange market in the country. The government, which targeted the taka's free float for this month, has delayed the move to allow foreign exchange dealers to acquire adequate free market knowledge. Bangladesh Bank (BB) has further limited the electronic use of transaction settlement cards abroad. On November 14, BB instructed commercial banks to take OTAF (Electronic Transaction Authorization Form) from customers for any international payment, regardless of its size, in order to address illness. The recent political transition in Kenya resulted from the adoption of a new constitution in 2010, which established a bicameral legislative house, devolved country government, a constitutionally tenured judiciary and electoral body. Residents and non-residents in Kenya are allowed to purchase or sell foreign exchange to and from authorized dealers up to the equivalent of US$ 10,000 without restriction. Amounts beyond that cap require documentation to prove the transaction intent. (International Trade Administration n.a).

2.3 Economic and political risk exposure comparison between Garment manufacturer and pharmaceutical manufacturer Economic and political risk associated with pharmaceutical industry Kenya; 11



Few commercial pharmacy and plant management specializations


...