The document discusses the international expansion plans of Acme Manufacturing Company into either Germany or South Africa. It analyzes the advantages and disadvantages of creating a new manufacturing facility, or "Greenfield," in each country. While Germany provides economic strengths and access to the EU market, operating costs are higher and the Euro's value is uncertain. South Africa offers lower costs and access to the African market, but risks include currency instability and some social and regulatory challenges. Ultimately, the document recommends expanding to South Africa due to its growth potential, natural resources, and ability to reach hundreds of millions of African consumers.
1. Unit 1 IP: International Financial Markets 1
Deveye Hademeon
American Intercontinental University
Unit 1 Individual Project
FIN630-1203A-05: Global Financial Management
Project Type: Unit 1 Individual Project
June 10, 2012
2. Unit 1 IP: International Financial Markets 2
Abstract
The necessity to maximize shareholders’ shares and corporate wealth becomes since the 1980’s
the driven force that pushes companies to operate in the global market, making investments in
countries out of the borders of their homes. Many firms have been interested in making
investments in developing countries in the Middle East, in Africa, in South America to name few
of the regions around the world that have become investment grounds. The Europeans countries
have never been of the rest, as since the creation of the European Union (EU) and the
instauration of the common currency, European nations became and continue to be the center of
business expansion for American firms interested in having branches and subsidiaries in the old
continent.
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Global expansion or being present in the international market becomes the main objet of
business plan for companies throughout the world. In fact, a firm operating in it home country
will implement a plan to extend its business to different other countries in the necessity to
increase its shareholders and market shares. This is the case of Acme Manufacturing Company,
Inc. a metal or steel manufacturing firm with headquarter in Denver, Colorado. After its recent
domestic acquisitions of about 10 other American companies between 2001 and 2010, the firm is
interested in expanding its businesses internationally. The international expansion program of the
U.S. multinational consists in creating a “Greenfield” oversea in either a country within the EU
or in another country non member of the EU. The development over the following lines will
explain what the creation of a “Greenfield” is about, making a comparison of the advantages and
disadvantages of this investment in a developed country like Germany or in a developing country
like South Africa. The result of the comparison will lead to a choice to contribute to the
company’s success.
Germany: A Country Member of the EU.
Covering a total of 138 thousand square miles of territory, Germany is located in Central
Europe between the Alps, the North European Plain, the North Sea, and the Baltic Sea. A
country member of the European Union, Germany shares its borders with others like Denmark,
Poland, the Czech Republic, Austria, Switzerland, France, Belgium, Luxemburg, and the
Netherlands. Advantages about expanding operations to Germany include the country’s
economical strength in both the European and the world’s economy. Known as “…the hub of
global scientific and technological developments Germany’s economy ranks fourth in terms of
nominal GDP and fifth in terms of purchasing power, being the world’s second largest trader
both in terms of imports and exports.” (Economy Watch Content, 2010) Germany’s GDP is
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evaluated at $3.56 trillion with a GDP per capita of $43,741 and a GDP growth evaluated at 3.06
percent based on the 2011 estimation by the International Monetary Fund (IMF).
Demographically, Germany is the largest populated country within the EU with a total of 82
inhabitants that provide a workforce of over 45 million qualified people in different industries.
These advantages are related to the fact that the country’s economy is “…a social market
economy characterized by a highly qualified labor force, a developed infrastructure, a large
capital stock, a low level of corruption, and a high level of innovation.” (Devol & Wong, 2010)
There exist many trade agreements between Germany and the rest of the world to include the
United States, China, Japan, the United Kingdom, and African countries especially its old
colonies, as a member of the World Trade Organization, the G-20, the G-8, and the ACP-EU that
allows free trade between the member countries of the EU and countries of Africa, the Caribbean
and Pacific islands. There are innovations in every sector to include energy, transport, and
infrastructure in the necessity to motivate investment and job creation. The other advantage is the
strength of the euro in the world financial market, where although certain member nations of the
EU are facing financial crisis, that currency still stands strong face to the American dollar. As a
common currency of the European market, “…the euro is trading more than 8 percent above the
average against the dollar since its 1999 creation even after Spain, Greece, Italy and Portugal slid
into recession.” (Mnyanda & McCormick, 2012) Also operating in Germany offers the
advantage to access the whole EU market based on the Schengen Convention that is designed to
be a simple liberalizing measure to promote trade and integration between different nationalities
and to allow the free movement of European citizens across national borders. It’s necessary to
mention the political stability of Germany and the union, stability based on the fact that the
nation members are old democracies far to experiment a political instability like it’s the case in
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many developing countries ruled upon dictatorship. As a member of the European Union it has
been developed to function as a single market through a standardized system of laws which
apply to all member states, guaranteeing the freedom of movement of people, goods, services
and capital. It maintains a common trade policy, agricultural and fisheries policies, and a
regional development policy that benefit multinationals to operate across many national borders.
Nevertheless an expansion to Germany carries some disadvantages in that the country’s
soil is relatively poor in natural resources, situation that create a dependency on others for
material exportation. Also as the third largest country authorizing immigration, there will be
availability of non qualified labor forces because the economy attracts millions of immigrants
from around the world without taking into account immigrants’ job qualifications. The currency
itself carries some uncertainties in that the euro is falling in the currency exchange market over
the recent few months. In the beginning of May 2012 it “…declined 1.3 percent to $1.3084 and
was 1.8 percent lower at 104.49 yen after its drop in the past two years from $1.1877 in June
2010 to $1.4940 in May 2011.” (Brown, n.d.) It is also necessary to consider the impact of
competition in the German market dominated by major global companies in every industry.
These risks along with the linguistics and social barriers associated with the national culture
consist of downfalls to impact and weaken foreign investment. The value of the euro can at any
time be impacted by the financial crisis experienced in some European nations like Spain,
Portugal, Italy, and Greece, crisis that can lead to potential loss in investment.
South Africa: A Country Non Member of the EU.
South Africa (generally the Republic of South Africa) is one of the largest African
countries, located on the southern tip of the African continent. The country benefits from its
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border with two major seas, the Atlantic Ocean and the Indian Ocean that offer a great
opportunity to maritime trade with the rest of the world. With a total population estimated at 49
million people for a total area of 471 thousand square miles, South Africa shares its borders with
Namibia, Zimbabwe, Botswana, Mozambique, and Swaziland, countries that trade commercially
in a direct partnership for a market expansion.
Advantages about expanding manufacturing business into South Africa are associated
with the country’s position in the world, especially on the African Continent where it serves as
the cornerstone of the economy. In fact South Africa plays an important role in Africa’s general
economy by exporting its products that are present in every other African country, in that “the
economy of South Africa is the largest in Africa, accounting for 24% of its Gross Domestic
Product.” (The World Bank, 2012) Expanding into South Africa will thus give the opportunity to
have access to the African vast market. The country’s demography is another advantageous
factor to consider, in that South Africans are most interested in contributing to production and
consumption in their own country. In fact, not only South Africans offer trained and qualified
labors at lower cost, but they are also the first consumers of products manufactured internally.
Beside the demographic factor, it’s necessary to consider the existence of international trade
agreements with all African countries members of the African United Organization, as well as
with countries like Germany, the United States, China, Japan, the United Kingdom and Spain, as
a member of the World Trade Organization, the G-20, and the South African Customs Union
(SACU). The SACU allows free transit of products manufactured in a member country to
another without custom tax. There exists also the Overseas Private Investment Corporation
(OPIC), a bilateral agreement between South Africa and the U.S. to assist U.S. investors in the
South African market with services such as political risk insurance and loans and loan
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guarantees. With its Gross Domestic Product (GDP) estimated at $422 billion with 3.4 percent
growth (U.S. Central Intelligence Agency, 2012) the country’s territory consists of an important
reserve of natural resources with an estimated share of world reserves of platinum group metals
amounted to 89% that include raw materials such as manganese, rutile, coal, phosphate rock,
kyanite, and other more that might be needed in the manufacturing field of Acme. The presence
of these natural resources to include diamond, “…makes mining to become the main driving
force behind the history and development of Africa's most advanced and richest economy.”
(World Bank, 2012). Another factor to consider includes the implication of the Government in
promoting job creation by encouraging foreign investments. There have been major
improvements in government efficiency that led to an infrastructure improvement program and
availability of incentives toward the encouragement of foreign investments especially in
manufacturing. Also it’s necessary to mention the political stability that makes South Africa a
stable democratic country in Africa since the abolition of the “Apartheid” in the early 1990s with
the election of Nelson Mandela as President.
There might be some risks and disadvantages as well. Risks about investing in a
Greenfield in South Africa will be about the instability of the currency, the Rand that continue to
drop in value since the beginning of the 1980s where it was trading at parity with the U.S. dollar.
Ever since after the political pressures and economic sanctions experienced by the country
because of the apartheid, the Rand continue to depreciate until now when it’s trading at over
eight rand for a dollar (1 USD = 8.4730 ZAR according to Google Finance on June 8, 2012). The
Rand carries thus some uncertainty on whether it will continue to drop or not. Other than the
uncertainty on the value of the currency, there exist some trade barriers related to trade policies
and regulations associated with higher corporate income tax evaluated at 28 percent. Another
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barrier is the cultural and the linguistics environment in that South Africans are more affiliated to
their local rites and traditions, and the Zulu and its other variances such as IsiZulu, IsiXhosa,
Afrikaans, and Tshivenda are used as official languages along with English. Other risks exist
especially in relation with the social relations where racial discrimination or social segregation is
still experienced within the society. Corruption is not of the rest although the Government has
been fully engaged to fight practices related.
Conclusion
In conclusion, there is evidence that expanding the manufacturing businesses in either
Germany of South Africa will contribute to success business and growth in the global market
because both countries possess enormous potentialities and advantages to encourage foreign
companies. Nevertheless, after taking into account the risks associated with this expansion plan,
the best and suggested recommendation is to install the new Greenfield in South Africa, a young
economy that attract many investors from every region of the world, with the abundance of
natural resources and lower cost labor forces. South Africa also offers foreign companies the
chance to be present in the whole African market with its hundreds of millions consumers.
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References
Brown, T. (n.d.). Doing Business in Europe. Retrieved on June 5, 2012 from
http://www.chelgate.com/news-articles/public-relations-articles/chelgate-articles/europe/
Devol, R. & Wong, P. (2010). Investments and policies for economic growth and
competitiveness. Retrieved on June 9, 2012 from
http://www.nam.org/~/media/58F813B0D1E643DC91E564FE4C3B3C2F.ashx?utm_sou
rce=nam&utm_medium=alias&utm_campaign=innovationreport
Mnyanda, L. & McCormick, L. C. (2012). Euro Strength Intact as Contagion Ends Aussie Dollar
Haven; in Bloomberg published on May 7, 2012. Retrieved on June 5, 2012 from
http://www.bloomberg.com/news/2012-05-07/euro-strength-intact-as-contagion-ends-
aussie-dollar-haven-1-.html
The U.S. Central Intelligence Agency (2012). South Africa; in The World Factbook published on
April 12, 2012. Retrieved on June 7, 2012 from
https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html
Word Bank (2012). South Africa Economic Update, Focus on Savings, Investment, and Inclusive
Growth http://siteresources.worldbank.org/INTSOUTHAFRICA/Resources/SAEU-
July_2011_Full_Report.pdf