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Abstract
Trade is a crucial aspect of globalization given that international trade continues to furnish consumers all over the world, with commodities that are not produced in their countries. It is in this regard that this piece of academic literature seeks to demystify some of the myths of international trade. On the same note, the paper sheds light on the strategies employed in international trade, its merits and demerits, and the overall best practices employed in cross-border trade.
Due to globalization and increased competition in the field of business, international investment has gained popularity as a way of increasing sales. Many firms both large and small have found that to increase demand of their products as well as enjoy economies of scale, they have to invest in various foreign countries.
Besides increasing choices that are available to consumers nowadays, international trade has enhanced efficiency in production thereby improving the quality of products (Onkvisit, 2008). However, before opting to invest internationally, a firm should conduct a feasibility study taking into account the risks involved as well as the pressing reasons for the endeavor. On the same note, it is important to explore the idea of portfolio diversification and the available methods of international investment.
Portfolio diversification in the field of investment is defined as a strategy where an investor invests in various assets, in a move that is aimed at reducing the overall risk of investment.
By investing in many assets, an investor ensures that incase the prices of some assets do not move in his or her favor, the risk is minimized (Brady, 2010). In addition, portfolio diversification ensures that while the overall risk is lowered, portfolio returns remain unaffected. Investing in real estate, infrastructure and commodities in different countries is a good example of portfolio diversification.
Financial analysts highly recommend portfolio diversification because it is common for commodity prices to crush, sometimes by more than 50% (Wang, 2009). Geographical diversification is highly beneficial because besides ensuring that the risks are spread, an investor takes advantage of higher returns in other regions, especially emerging markets.
Many firms have different reasons why they invest in international markets, which range from private to legal. To begin with, firms or individuals invest internationally to enhance the market for their commodities. International investment enables businesses to enjoy economies of scale besides increasing their volume of sales. Therefore, international trade enables businesses to reduce cost of production (Krugman & Obstfeld, 2011).
On the same note, some firms invest internationally because inputs of production are cheaper in some foreign countries compared to their cost locally. Additionally, other investors opt for international investment in order to diversify the risks that face their businesses in their local markets. Furthermore, investors also choose to invest internationally due to the potential of growth as well as the high rate of return in other economies (Wang, 2009).
The major risk of investing in foreign markets is the possibility of exchange rate between the host country and the American dollar fluctuating. Exchange rate fluctuation has the tendency to either scale the return to investments up or down, due to the fact that host countries pay their dividends in local currency.
In this regard, when the local currency strengthens against the dollar the investors get more returns. On the contrary, when the local currency is weaker than the American dollar the returns decline (krugman & Obstfeld, 2011). On the same note, there are usually social and political events that tend to curtail the growth and development of most foreign markets. Civil unrest and political interference in the business environment is common in most developing countries.
Unfortunately, this can stifle investment plans of most companies that branch out to foreign markets. Incidentally, a common business practice by most multi-nationals is to invest in a foreign market during the boom phase of the business cycle (Onkvisit, 2008). However, it is more prudent to invest in markets in the long-term as opposed to short-term initiatives that can be unsavory, especially when insatiability arises.
There are different entry modes that a firm may use when investing internationally. Some governments have enforced laws that protect local industries and do not allow foreign companies to invest directly in their economy (Brady, 2010).
In this regard, a firm that wants to invest in these economies may do so by partnering with a local firm, a mode known as joint venture. On the same note, the firm can decide to license another firm in the target market to produce its commodities. In this case, the licensing firm is paid in exchange for production rights and does not have to incur any expenses.
On the other hand, if there are no restrictions a firm may explore the possibility of direct investment, where a firm establishes a new territory in a foreign country. Furthermore, a firm may decide to continue the production locally but export the commodities when finished to the target market (Wang, 2009). This method does not require investment in the foreign market but tariffs and other trade restrictions might highly affect the firm.
International trade is unavoidable for firms, especially those that will want to increase market for their commodities. However, given the risks that are associated with the investment, good research is vital to ensure that the plan is feasible before money is committed. Additionally, studying the laws and culture of the target market is paramount because it will enable the firm to decide on the entry mode. All in all, foreign markets offer opportunities for firms to expand and take advantage of cheap resources internationally.
References
Brady, D. L. (2010). Essentials of International Marketing. New York: M.E Sharpe.
Krugman, P. R., & Obstfeld, M. (2011). International Economics: Theory and Policy. New York: Pearson.
Onkvisit, S. (2008). International marketing: Analysis and Strategy. New York: Taylor & Francis.
Wang, P. (2009). The Economics of Foreign Exchange and Global Finance. New York: Springer.
Do you need this or any other assignment done for you from scratch?
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