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The Boeing Company is a transnational company based in the United States that sells manufactures, and designs missiles, satellites, rockets, rotorcraft, and airplanes across the globe. The organization also delivers support programs and leasing services for various products. It is considered one of the biggest manufacturers of aircrafts in the world. Additionally, in 2015, the company was the second biggest contractor of defense materials worldwide. Essentially, it is currently, the leading exporter in the US by the value of the dollar. The current company is the product of merger in 1997 between McDonnel Douglas and Boeing. Its corporate head office is situated in Chicago, Illinois and its present CEO and President is Dennis Muilenburg. The firm is a publicly traded company with it’s the firm is structured into five fundamental divisions. In 2016, the firm registered sales worth $94.6 billion. Importantly, despite its international presence, the company is yet to open its operations in countries such as China. Therefore, the paper will focus on the multinational expansion of Boeing Company in China.
Analyze how each of the three major dimensions of international finance can affect your possible venture of your MNC in your chosen new international market, including potential opportunities and risks for each dimension.
The three key dimensions of global finance that can affect the possible venture of Boeing Company in China include extended opportunity sets, market imperfections, and political risks and foreign exchange (Carpenter, Lu & Whitelaw, 2015). Precisely, the dimensions of worldwide finance mainly emerge from the concept that self-governing countries have the power and right to deliver currencies, establish their policies on economy, control the exchange of capital, goods, and people across their borders and enforce taxes (Hilland & Devadoss, 2013).
Political risks and foreign exchange in china introduces new risks for Boeing Company in its international finance. For instance, the exchange rate between the China and United States currencies may vary in the future especially after transactions are completed (Chao & Tung, 2013). For this reason, Boeing Company’s value may be altered because of the nature of exchange rate activities leading to economic exposure. Different establishment of the risk of exchange rate in China may lead to various effects on the company. Such variations will influence the value of investment or the bottom line of the business. Similarly, since Boeing Company will be under the authority of a foreign administration, the organization will also face political risk. In this regard, it must understand the possible costs it may encounter because of policies changes, regime change, and unstable governments (Carpenter, Lu & Whitelaw, 2015).
Market imperfections in China are likely to influence the international finance of Boeing Company. Precisely, market imperfection tends to due to two types of forces which include unnatural and natural failure of the market. In this aspect, the natural failure of the market demonstrate the circumstances where companies possess some intangible assets that have the features of public goods especially, marketing skills, management, technology, information and knowledge (Chao & Tung, 2013). Such company-specific assets are challenging to price because the purchase is unwilling to pay irrespective of whether the seller demands. Although pricing may not be a challenge, the company is at risk of dissipating its critical information and knowledge to others when selling or licensing the intangible assets to others. Subsequently, it contribute to horizontal integration hence it manufacture similar goods as the parent organization throughout the world (Carpenter, Lu & Whitelaw, 2015). In china, another kind of imperfection in the market takes place due to market failure when a company such as Boeing requires an autonomous organization to generate its intermediate items such as raw materials. The supervision and negotiation cost of a contract could be huge to be achieved, so this type of failure in the marker normally contribute to vertical integration where the delivery of intermediate products functions in the internal sector of the transnational company. Failure of the market is also leads to market imperfection which is caused by regulations and interventions of the Chinese government through mechanisms such as tariffs and taxes (Hilland & Devadoss, 2013). Moreover, Boeing Company’s operations can be affected by other dimensions such as extended opportunity sets which refer to an array of all potential portfolios which a person may construct from a particular collection of assets. A company can establish both low and high-threat portfolios from an opportunity set. Offering investors of Boeing Company with an opportunity set may empower them in developing critical investment decisions (Chao & Tung, 2013). Therefore, all factors being constant, an investor will select a portfolio with the largest returns.
Examine the economic trends and impact of globalization in the chosen market and determine which of those emerging factors have potential for disruption that could affect operations.
China has embraced globalization as the main factor contributing to its agenda on economic development and promoting a better life in the future for its huge population. However, china does not have well structure global economic policies which may affect the success of MNCs such as Boeing Company. Fortunately, the company will take advantage of the rising economy which takes place because of lower labor and manufacturing cost (Hilland & Devadoss, 2013). Therefore, Boeing Company can use the cheaper Chinese labor to increase its growth margins. The leadership of the country has also facilitated higher rate of globalization by formulating strategies which enhance economic development and growth. Moreover, China accord to join the World Trade Organization has greatly contributed to enhancement of its economy via the incorporation to the international economy (Carpenter, Lu & Whitelaw, 2015). Therefore, after becoming a member of WTO, it is eligible for non-discriminatory treatment to all international players and other members. It also provides china with a chance to free up its business structure aiming to facilitate integration to the international economy and provide more satisfying environment for multinational companies such as Boeing Company (Morrison & Labonte, 2013).
Assess whether the country you have chosen maintains a fixed or a flexible exchange system and discuss how this monetary system will affect your MNC. Provide a strong rational for possible implications and drawbacks of the existing system.
Empirical evidence highlights that the economic policies in China has been characterized by significant changes in the international market especially in the foreign exchange systems. The Yuan which is its currency have gained significant part in different part of the world and the region (Chao & Tung, 2013). Contrary to most of its global business partners who permit the values of their currencies to be traded freely against other currencies, the country has a severely fixed exchange system where it controls trading actions and attempts to regulate daily flow of the Yuan in the market.
To eliminate economic uncertainty, since 1995 the country maintained an inflexible its exchange rate at approximately one USD to 8 Yuan. The rate was changed in 2005 when it shifted toward a liberalization of its currency by initiating a thin trading band (Hilland & Devadoss, 2013). Therefore, the authority has slightly permitted the trading range to widen from +/-2% to +/-0.3 percent. However, this kind of exchange rate will influence Boeing Company because it tends to bypass the global competitive environment. Moreover, it tends to increase the speculation in the market which affects the growth of business (Carpenter, Lu & Whitelaw, 2015).
Determine how the balance of payments will support the management of your MNC and explain how deficits and surpluses found within the country you have chosen can positively or negatively affect operations of your company.
The BoP refers to an inventory of the fiscal dealings with other parts of the world. In the past period, China has recorded surplus capital account and current account which is quite uncommon. In this regard, it signified the very robust rise of foreign reserves (Morrison & Labonte, 2013). However, in the recent past, the surplus in the capital account has turnout to be a minute deficit because of shrinking foreign reserves. Precisely, the foreign exchange reserves have stabilized at approximately $3 trillion (Lu, Liu, Wright & Filatotchev, 2014). In 2012, the economy witnessed a capital outflow. The country control the renminbi being risen up alongside the foreign currencies normally contributes to higher reserves in foreign exchange. Subsequently, it has reduced the competitiveness of exporter and reduced the balance of trade. Moreover, through currency manipulation the country has influenced the market by maintaining currency at exceedingly low level (Carpenter, Lu & Whitelaw, 2015).
Analyze how the foreign exchange market your company is considering entering can impact international business operations. Examine key foreign market participants and provide recommendations of possible key financing opportunities for your MNC.
Multinational corporations such as Boeing Company face the risk posed by the foreign exchange market in China. The renminbi (RMB) or Chinese currency is kept at artificially low increasing the trade surplus and exports at the detriment of multinational companies. In 2015, the RMB was devalued after the authority made a decision to reduce the trading band (Morrison & Labonte, 2013). Subsequently, the market exchange rate dropped by 4.4 percent in a span of a week. Consequently, exporter acquiring RMB could have suffered a significant reduction in profits also importers potentially took advantage in cost reduction (Chao & Tung, 2013). Essentially, the manipulation of the exchange rate by the Chinese government is intended to facilitate exports aiming to attain growth goals such as the establishment of infrastructure and cottage industries. It also opposes global pressure to influence the policy on exchange rate (Hilland & Devadoss, 2013).
The stock market experienced in china witnessed an asset bubble which affected the exchange rates. Moreover, the stock prices fell by over 30 percent after gaining the highest level. Over 700 firms in the Shenzhen and Shanghai stock exchanges demanded for suspend trading. China is the highest hub of stock trading in the world only after the US. However, the prices changes over 10 percent in a single day. Therefore, it becomes largely volatile to markets (Carpenter, Lu & Whitelaw, 2015). Moreover, it affects new multinational companies who are entering the market. The key financing opportunities for Boeing Company is through the Chinese Banking system that offers credit facilities to foreign companies (Morrison & Labonte, 2013). In addition, non-banking monetary institutions including insurance, funds, and securities can be a source of finance. Finally, Boeing Company can seek funds from American financial institutions.
Carpenter, J. N., Lu, F., & Whitelaw, R. F. (2015). The real value of China’s stock market (No. w20957). National Bureau of Economic Research.
Chao, W. C., & Tung, C. Y. (2013). Does China Really Say No? The Impact of International Political Pressure on China’s Exchange Rate Policy. Issues and Studies, 49(2), 1.
Hilland, A., & Devadoss, S. (2013). Implications of Yuan/dollar exchange rate for trade. Journal of International Trade Law and Policy, 12(3), 243-257.
Lu, J., Liu, X., Wright, M., & Filatotchev, I. (2014). International experience and FDI location choices of Chinese firms: The moderating effects of home country government support and host country institutions. Journal of International Business Studies, 45(4), 428-449.
Morrison, W. M., & Labonte, M. (2013). China’s Currency Policy: An Analysis of the Economic Issues. Congressional Research Service, 49.