Fluent Essays

PRIORITISE TOP TUTOR The a-s-s-e-s-s-m-e-n-t will be 2000words long. Please see the questions shown in the screenshot. I will send you all info after being hired, eg PPTs, student access etc. Please send a draft in 12hrs -1 day time, day 2, and day 3 as well. + Will need to draft some questions to ask the teacher and revise base on feedback (Send bk ard in 1 day max) Country Risk incorporating into capital budgeting 1 Country Risk incorporating into capital budgeting 8 Foreign Direct Investment is an investment that a multinational corporation makes in a host country where they act as a parent company and have control and earn a private return. The collaboration between companies, the cross-border partnership can facilitate long-term business solutions. Foreign firms through geographic diversification can safeguard themselves from supply chain disruption and can enhance the economic prospects of both host country and parent country. One of the perplexing issues faced in international business lies within the political and financial risk in project investment. Political risk can be defined as the risk which affects the cash flow of any company dealing in international business and investment which is affected by a change in government action. A subject matter of paradox gets its exposure when several authors and scholars vouch for the way capital budgeting is explained and practiced. The general observation in a corporate finance world is the increase in the value of shareholders with NPV being positive. The project cash flow can be forecasted followed by discounting method at a discounting rate to reflect the price that the capital market is charging for the risk in cash flow; hence the derivation for NPV (Guo & Zheng,2020). The investors only consider the systematic risk of the project while ignoring the imperfection that is captured in the capital market in the case of capital budgeting. It is also believed that that quantification of the political risk is a difficult task even for investors. In this paper, we will explore the country's risk in a broader aspect and incorporate it with the concepts of capital budgeting. It will also contain empirical evidence of FDI for an Australian company, AUF, investing in a software development business in India. The aim is to investigate the country-specific political and financial risk associated with India and its effect on the capital budgeting decision-making process. To ensure optimality, the key decision-makers often use a rule of thumb while dealing with the high deliberation cost involved in the political risk; thereby supporting the concepts of bounded rationality. Reviewed Literature FDI involves mergers and acquisitions, reinvesting profits earned from operations carried out in the different countries, the building of new facilities, and company loans. FDI is the control over the firm and can be in any form including joint venture, technological transfer, and enterprise. Globalization has made a severe impact on living standards and trade and has raised the FDI in the international market as well. 1.1. Theories The competitive position of the Australian firms in the global market makes it an acquirer of companies in host countries where the parent firm through its dynamic capability owing to their knowledge and utilization of the available resources helps it gain a competitive advantage in the international business. Therefore, FDI can promote the conjunction of the competitive position between a parent and a host country (Muzi, Kizil& Ceylan, 2021). The foreign firms can reduce their set up costs by integrating technological advantage and know-how which will reduce the price in the host country. the consumers will enjoy a higher quality of goods at lower prices. The output of an MNC can be the input of a host country, this implies that FDI has the potential to create demand in such countries leading to an upward shift in the upstream and downstream domestic investment in the host country. The product life cycle is a firm concept that describes any change in a country’s trade position in the long run (Paul & Singh, 2017). It asserts that there is a shift in the competitive advantage from one nation to the lower cost nations as a product matures through its life cycle. The comparative advantage lies with the parent country due to the technological know-how over the other. in the third stage of the product life cycle, the less developed nations become the manufacturing hub for the MNC’s pertaining to the advantages where they indulge in exporting the manufactured products to the advanced nations. Market imperfect trade theory arises from the international market where several companies are the owners of market shares (Bajrami, 2019). Firms have shown imitative behavior were to sustain competitive advantage firms are often observed to have followed the internationalization of competitors. 1.2. Country Risk The country risk is the degree of uncertainty involved with the cash flows of the MNCs due to the adverse impact on the country’s environment (Deligonul, 2020). A country runs a risk analysis while starting a new project in some country or for decision making to continue the existing business. Political risk factors Literature on the concepts of corporate valuation and the effects of political factors is a growing concept and is available in decent ransom. (1) Blocked Funds: Blocking of funds arises when the government of the host country restricts the remittance of funds to the foreign country (Clark, 2018). However, it does not affect the ownership rights of the parent company. the MNC can alternatively invest the funds in any security locally, however, the returns will be comparatively lower. (2) Changing Tax Laws: A change in the tax law can have a positive or negative impact on the investment (Guo & Zheng, 2020). A country with a rigid or poorly designed tax system will discourage the investments which will bring more uncertainty and added project costs (3) Public attitude towards the firm: It can be in form of purchasing tendency of the consumers which has shifted to local goods. The exporters have very little to do with this risk as every country motivates its consumers to purchase local goods (Giambona, Graham & Harvey, 2017). Therefore, the parent company in Australia must assess the loyalty o the consumers in the host country and enter into a joint venture with a local company instead of exporting goods. (4) Wars: Any political changes like wars and public revolt against firms can lead to higher taxes, expropriation, reduced FDI incentives, tariffs, and difficulty in currency conversion. It can lead to termination of operation, loss of assets, the decline in income after tax, higher cost for imports, higher operational costs. The MNC is indirectly affected due to additional costs for its employee safety. (5) Changing attitude of the host government toward the Multinational Corporation: The host government has the power to control the cash flow of the parent company. it can be in the form of additional taxes, even withhold it, restrict fund transfer, and a new pollution control standard. Financial Risk Factors Besides political risk, financial risks must also be considered by the MNC before deciding to invest further or make a new investment decision in a host country (Rafat & Farahani, 2019). An MNC which exports goods to a foreign country is concerned with the demand for its product which is influenced by the economy of the host country. 1. Inflation: The consumers’ purchasing power is affected by the rates of inflation which influences the demand for MNC goods. There is an indirect influence over the country’s interest rates and currency valuation. High inflation rates are directly related to a fall in economic growth. 2. Interest Rates: A higher rate of interest reduces the growth of the economy and lowers the demand for MNC’s products and vice versa. 3. GDP Growth: The real GDP growth, has a positive relationship with the FDI and increases the FDI inflow for a host country. 4. Exchange Rates: The rate of exchange also impacts the country’s export which affects the production of the country and the revenue from it. When the currency is strong, the export demand reduces, and the import increases which causes a decline in the overall production and national income of the host country. 5. Labor Costs: If the labor cost is low, the foreign firms can earn higher output by providing extra incentives to employees. This will help in creating higher revenues. Analysis Country risk of India The OECD risk grade of the country is at 3 indicating a situation that the country can be unable to meet its external debt obligation and can default (exportfionance.gov.au). Figure 1: Country Risk rating of India (exportfionance.gov.au). According to the reports from the World Bank’s ease of doing business, India has improved its position and is ranked 63rd. There are few benefits like handling cross-border trading, construction permits, protecting the interests of minors, and easy electricity and credit availability. However, the challenge is associated with starting a new business, registering property, and the tax structures of the country. Figure 2: Ease of Doing Business (exportfionance.gov.au). Incorporating country risk into capital budgeting Country risk can be incorporated into capital budgeting using the adjustment of estimated cash flows or discount rates (Espinoza et al.,2020). Adjustment of the Discount Rate The discount rate and the country's risk can be adjusted with each other. Lower the credit rating, more is the perceived risk, and a greater discount rate will have to be applied to the cash flow of the project. there is no precise formula for calculating the discount rate and can lead to the cancellation of a feasible project. Adjustment of the Estimated Cash Flow The feasible method to incorporate country risk is using the cash flow estimation. Assuming that there is a 15% chance that the Indian government will block the fund's transfer to the parent country, the parent company in Australia must assess the NPV of the project considering the condition. The Australian government must assess the NPV of the foreign project if there is a chance for the takeover of the software business. Every possible impact on the cash flow and the NPV must be calculated to derive the probability distribution of the NPV. The probability of the project will assess NPV and its size. In this way, the country's risk can be incorporated into the cash flow. Australia has a 40% chance of withholding tax imposed by the Indian government which will be 30% instead of 20%. There is also an additional 42% chance that the host country will provide Australia a salvage value payment of $6million instead of $12million which is country risk. Year 0 Year 1 Year 2 Year 3 Year 4 $ remitted by a subsidiary $8,000,000 8,000,000 $6,600,000 $7,800,000 The withholding tax imposed on remitted funds(20%) $1,600,000 $1,600,000 $1,320,000 $1,170,000 $ remitted after withholding tax $4,400,000 $4,400,000 $5,280,000 $6,630,000 Salvage value $12,000,000 Exchange rate of $ $0.50 $0.50 $0.50 $0.50 Cash flow to the parent $2,200,000 $2,200,000 $2,640,000 $9,315,000 PV of parent cash flow @15% rate of discount $1,913,043 $1,663,516 $1,735,843 $5,325,881 Initial Investment by parent $10,000,000 Cumulative NPV -$8,086,957 -$6,423,441 -$4687,598 $638,283 If there is an imposition of 20% of withholding tax by the Indian government, the NPV for a 4-year project will be at $638,283. If the salvage value is reduced to $10,000,000 with a 10% withholding rate of taxation. Based on the following criteria, the estimated NPV for the project will be $943,421. Year 0 Year 1 Year 2 Year 3 Year 4 $ remitted by a subsidiary $8,000,000 $8,000,000 $6,600,000 $7,800,000 A withholding tax imposed on remitted funds (10%) $800,000 $800,000 $660,000 $780,000 $ remitted after withholding tax $7,200,000 $7,200,000 $5,940,000 $7,020,000 Salvage value $7,500,000 Exchange rate of $ $0.50 $0.50 $0.50 $0.50 Cash flow to the parent $3,600,000 $3,600,000 $2,970,000 $7,260,000 PV of parent cash flow @15% rate of discount $3,130,434 $2,722,117 $1,952,823 $4,150,929 Initial Investment by parent $10,000,000 Cumulative NPV -$6,869,566 -$4,147,449 -$2,194,626 $1,956,303 Finally, considering the withholding tax at a higher level and a lower salvage value together, the NPV will be at Year 0 Year 1 Year 2 Year 3 Year 4 $ remitted by a subsidiary $8,000,000 8,000,000 $6,600,000 $7,800,000 A withholding tax imposed on remitted funds (20%) $1,600,000 $1,600,000 $1,320,000 $1,560,000 $ remitted after withholding tax $4,400,000 $4,400,000 $5,280,000 $6,240,000 Salvage value $7,500,000 Exchange rate of $ $0.50 $0.50 $0.50 $0.50 Cash flow to the parent $2,200,000 $2,200,000 $2,640,000 $6,870,000 PV of parent cash flow @15% rate of discount $1,930,435 $1,663,516 $1,735,843 $3,927,945, Initial Investment by parent $10,000,000 Cumulative NPV -$8,069,565 -$6,406,049 $4,670,206 $742,261 The first scenario portrays a situation of joint probability with a $12 million salvage value and a withholding tax rate of 20%. There is a 12% chance that the value of the firm will be affected by the project. therefore, the firm can accept the software business project in India since it has a positive NPV and there is an anticipation of limited loss. No Withholding tax rate Salvage value of the project NPV Joint probability 1 10% $12,000,000 $2,229,867 42% 2 20% $12,000,000 $638,283 18% 3 10% $7,500,000 $1,956,303 28% 4 20% $7,500,000 $742,261 12% India has a comparative advantage of low labor costs where the employees are paid higher by the foreign firms in comparison to the domestic firms. The employees can be encouraged to produce higher output. Therefore, the Indian government can attract more foreign investors if they cut down their tax rates to reduce the import duties and property rights enforcement. Recommendations To reduce the exposure of country risks, the Australian firm must consider the following strategies: (1) Rely on Unique Innovative Technology: The subsidiary company can employ advanced and innovative technology which will provide the company a competitive advantage over the domestic firms and the government (Muzi, Kizil& Ceylan, 2021).. In case of unfair treatment, the MNC can cut off the supply of this technology. (2) Use short-term horizon: The Australian company must be reluctant to recover its cash flow at a frequent and quick period such that the losses are minimized at the time of adverse situation. The company can also sell its assets to create further investment. (3) Hire Local Labor: The local employees must be preferred such that in case o adversity of government takeover, the parent company can pressurize the government to consider the future of the employees (Giambona, Graham & Harvey, 2017). This can delimit the government takeover. Conclusion To invest in a foreign country, the subsidiary company must have a competitive advantage over the host country. Through international diversification, an MNC can reduce its exposure to threats of domestic economic condition and can spread its losses. The credit rating for the country is at BBB- rating which reflects a situation of weak revenue generation for the country. However, the debt stock will remain steady with better progress to be seen in the upcoming years. After measuring the country's risk, it can be incorporated into capital budgeting. The investors must be well informed about the policies that are announced by the government for a safe business environment within the country. India needs to improve its credit rating and explore more productive methods to combat the challenges posed by the growth and its tax structures. References Bajrami, H. (2019). Theories of foreign direct investment (FDI) and the significance of human capital. Clark, E. (2018). Political Risk in Hong Kong and Taiwan: Pricing the China Factor. In Evaluating Country Risks for International Investments: Tools, Techniques and Applications (pp. 203-219). Country Risk Retrievd from https://www.exportfinance.gov.au/resources-news/country-profiles/asia/india/country-risk/#:~:text=India's%20political%20risk%20is%20low,and%20undermine%20the%20economic%20recovery. Deligonul, S. Z. (2020). Multinational country risk: Exposure to asset holding risk and operating risk in international business. Journal of World Business, 55(2), 101041. Espinoza, D., Morris, J., Baroud, H., Bisogno, M., Cifuentes, A., Gentzoglanis, A., ... & Vahedifard, F. (2020). The role of traditional discounted cash flows in the tragedy of the horizon: another inconvenient truth. Mitigation and Adaptation Strategies for Global Change, 25(4), 643-660. Giambona, E., Graham, J. R., & Harvey, C. R. (2017). The management of political risk. Journal of International Business Studies, 48(4), 523-533. Guo, S. Y., & Zheng, M. (2020). Political Risk and Corporate Tax Behavior: Firm-Level Evidence. Michael, Political Risk and Corporate Tax Behavior: Firm-Level Evidence (December 30, 2020). Muzir, E., Kizil, C., & Ceylan, B. (2021). Role of International Trade Competitive Advantage and Corporate Governance Quality in Predicting Equity Returns: Static and Conditional Model Proposals for an Emerging Market. Journal of Risk and Financial Management, 14(3), 125. Paul, J., & Singh, G. (2017). The 45 years of foreign direct investment research: Approaches, advances and analytical areas. The World Economy, 40(11), 2512-2527. Rafat, M., & Farahani, M. (2019). The country risks and foreign direct investment (FDI). Iranian Economic Review, 23(1), 235-260. COUNTRY RISK INCORPORATING INTO CAPITAL BUDGETING 1 Foreign Direct Investment is an investment that a multinational c orporation makes in a host country where they act as a parent company and ha ve con trol and earn a private return. T he collaboration between companies, the cross - border partners hip ca n facilitate long - term bu siness solutions . F oreign firms through geographic di versi fication can safeguard themselves from supply chain disruption an d can enhance the economic pro s p ects of both host country and parent country. One of the perplexing issues faced in international business lies within the political and financial risk in project investment. Political risk can be defined as the risk which affects the cash flow of any company dealing in international business and investment which is affected by a change in government action. A subject matter of paradox gets its exp osure whe n several authors and scholars vouch for the way capital budgeting is explained and practiced. The general observation in a corporate finance world is the increase in the value of shareholders with NPV being positive. The project cash flow can be forecaste d followed by discounting method at a discounting rate to reflect the price that the capital market is charging for the risk in cash flow; hence the derivation for NPV ( Guo & Zheng,2020). The investors only consider the systematic risk of the proj ect while ignoring the imperfection that is captured in the capital market in the case of capital budgeting. It is also believed that that quantification of the political risk is a difficult task even for investors. In this paper, we will explore the coun try's risk in a broader aspect and incorporate it with the concepts of capital budgeting. It will also contain empirical evidence of FDI for an Australian company, AUF, investing in a software development business in India. The aim is to investigate the co untry - spec ific political and financial risk associated with India and its effect on the capital budgeting decision - making process . To ensure optimality, the key decision - makers often use a COUNTRY RISK INCORPORATING INTO CAPITAL BUDGETING 1 Foreign Direct Investment is an investment that a multinational corporation makes in a host country where they act as a parent company and have control and earn a private return. The collaboration between companies, the cross-border partnership can facilitate long-term business solutions. Foreign firms through geographic diversification can safeguard themselves from supply chain disruption and can enhance the economic prospects of both host country and parent country. One of the perplexing issues faced in international business lies within the political and financial risk in project investment. Political risk can be defined as the risk which affects the cash flow of any company dealing in international business and investment which is affected by a change in government action. A subject matter of paradox gets its exposure when several authors and scholars vouch for the way capital budgeting is explained and practiced. The general observation in a corporate finance world is the increase in the value of shareholders with NPV being positive. The project cash flow can be forecasted followed by discounting method at a discounting rate to reflect the price that the capital market is charging for the risk in cash flow; hence the derivation for NPV (Guo & Zheng,2020). The investors only consider the systematic risk of the project while ignoring the imperfection that is captured in the capital market in the case of capital budgeting. It is also believed that that quantification of the political risk is a difficult task even for investors. In this paper, we will explore the country's risk in a broader aspect and incorporate it with the concepts of capital budgeting. It will also contain empirical evidence of FDI for an Australian company, AUF, investing in a software development business in India. The aim is to investigate the country-specific political and financial risk associated with India and its effect on the capital budgeting decision-making process. To ensure optimality, the key decision-makers often use a