Investment & Budgeting
A joint venture is a business arrangement entered into by two parties being either individuals, corporations or organizations sharing the losses incurred or profits earned from the business arrangement. Theses arrangements may either be official or even unofficial to the extent of handshakes or even sharing a public utility. These arrangements may take place locally or in an international business environment which definitely exposes the transaction to foreign exchange risks. A joint venture is one of the strategies businesses adopt when entering into businesses which operate in international business environment. Others include exporting, licensing and foreign direct investment. A firm willing to operate in an international business environment always has the above options when making a decision of entry. The decision that is finally adopted may have implications on the success and profitability of the firm.
In the case study, NTG is currently in a joint venture with the Brazilian firm to produce the toys. However, it wants to change its entry mode into the international business environment. Since it wants to venture directly in Brazil and avoid joint ventures and of course exporting which was its initial entry mode strategy, NTG will use the foreign direct investment strategy. Foreign direct investment is where a company directly owns facilities in the target country of business. It will, therefore, involve the transfer of the necessary resources which include personnel, technological capacity and the necessary capital.
The above decision will definitely have impacts on the business in various dimensions including financial, logistical etc. To analyze this deeply, a review of the advantages and disadvantages of foreign direct investment will be critical. The major benefits NTG will accrue from investing directly in Brazil include control of business processes. Many companies would like to control their business in order to gain competitive advantage against competitors. NTG will be able to run the day to day operations of its business on its own. This is an advantage over the former arrangement of joint ventures where control of the affairs of your business in the international market is difficult. In joint ventures, the partners manage their interest in the business through negotiations and coordination where each partner prefers sticking to his conservative hierarchical structure when doing business.
The second benefit NTG will get from directly establishing a firm in Brazil is better knowledge of customers in its target market. From economics basics, analysis of the ever-changing consumer preferences is very important for any business which is serious and wants to remain a going concern for the foreseeable future. Since the customer is no longer a slave but king, it leaves the business managers with no option but to produce products that consumers want and not what they can produce cheaply and effectively. If this is ignored, then the business will risk exiting the market prematurely. NTG will, therefore, get the opportunity to conduct its own market research and get the preferences of the customers. This will improve its competitiveness in the foreign market by retaining the existing customers and even increasing its market share. Other benefits from the above will include customer satisfaction, increased turnover, and reduced marketing costs among others.
The third major benefit NTG will get from directly investing in Brazil is the knowledge of competitors. For a business to perform financially and continue to exist in a business environment, it must know who its competitors are. When NTG carries out a SWOT (strength, weakness, opportunity and threats) analysis, it will know businesses which competitors in the market and even know its market share. This will enable the business review its policies in order to reduce costs and thus making the products cheaper at the market place as compared to those of the competitors.
The other advantage is the fact that the business will be exposed to a wider market for its products. When NTG establishes a firm directly, it will study the market itself and come up with different strategies it will use to access a wider market for the products. This may include advertising, promotions, personal selling among other product promotion strategies. At the same time, the demand for the products may be higher than expected therefore call for the increase in production of the toys. The wider market will boost the business turnover thus increasing operating profit.
Another advantage is the fact that the firm may find cheap materials, labor and other production costs. You might find that in the United States, the cost of labor, raw materials and other overheads is than that in Brazil. Cheaper cost of production means that the products unit cost will reduce considerably thus attractive in the market. This will increase the profit margin and therefore net profit.
Last but not least, the company will save on logistical and distribution costs to a great deal. The fact that NTG has no establishment in Brazil, it is forced to make logistical and distribution arrangements which are definitely costly to the business thus raising the unit cost of the company products.
On the other hand, foreign direct investments have shortcomings just like the other international business entry modes. The first disadvantage is definitely the high level of resources that will be committed by the firm in establishing its sister company. In foreign direct investments, the company transfers capital, technology and personnel to the foreign country in establishing the company. Therefore, the company will commit a lot of finances hoping that the investment will generate enough returns to replace the capital committed. Just in case, the returns do not materialize then the company will really lose financially. In addition, the company will also incur technological costs.
NTG will also be required to have a high degree of commitment as opposed to the current arrangement of joint ventures where the company trusts another company in a different country to carry out the operations of the company and thus does not waste a lot of time running the business in the foreign country.
Just in case there is political unrest in the foreign country, the operations of the company in that country will definitely be hampered since the enabling environment is lost and thus the company might be forced to reconsider its investment. If this happens, the company will incur a considerable financial loss.
The legal environment is a factor that affects the carrying out of businesses in a country. If a country outlaws the sale of certain products, this will force the company to exit the market since their objects are contrary to the law. A good example is the processing of bhang products which are legal in Jamaica and Netherlands and illegal in most of other countries in the world including the United States. NTG will be forced to content with the fact that different countries have different cultures and therefore you cannot introduce a new culture to people who are used to a different culture. If the company was to retain its current arrangement of joint venture, then its partner in Brazil will be aware of the local culture as opposed to NTG which is a foreigner and might involve in activities that may lead to a cultural clash.
In conclusion, there are different international market entry modes or strategies which can be adopted by any company willing to make an entry into the international business environment. These modes include exportation, licensing, joint ventures and foreign direct investment. Basing on the analysis of the advantages and disadvantages of these modes, a company can now make a choice of the best option which has merits outweighing shortcomings. In the NTG case, investing directly in Brazil is more advantageous than the current joint venture arrangement since the advantages outweigh the demerits.