Question

(i)“The cost of capital for multinational firms usually higher than domestic firm”. Explain why the cost of capital is different between each country. (10 POINTS WITH EXPLANATION MUST)

(ii)Neelofa Hijab is one of the local brands which are very successful in Malaysia. Since the brand was very strong in the local market with the achievement average sales of RM5 million from the overseas market. Thus Neelofa Hijab was decided to expand their brand into another country which is Indonesia. Discuss several strategies Neelofa Hijab used to expand its market into the global.(10 POINTS WITH EXPLANATION MUST)

Answer 1

(i) Cost of capital difference of MNC's

* Access to International Capital Markets:

In view of easier access to international capital markets, MNCs are in a position to
obtain funds at lower cost than that paid by the domestic firms. Further, international
availability permits MNCs to maintain the desired ratio, even if substantially large
funds are required. This is not true in the case of domestic firms. They have either to
rely on internally generated funds or borrow for short and medium-term from
commercial banks. Furthermore, subsidiaries may be in a position to procure money
locally at a lower cost than that available to the parent company if the prevailing
interest rates in the host country are relatively low. For example, the Coca-Cola
company, because of its global presence and strong capital position and therefore,
having an easy access to key financial markets, could raise funds with a lower
effective cost.

* International Diversification:

MNCs, by virtue of their diversified operations, are in a better position to reduce their
cost of capital in comparison to domestic firms for at least two reasons:
A firm with cash inflows pouring in from different sources across the world
enjoys relatively greater stability, for the fact that total sales will not be greatly
influenced by a single economy. Less cash flow volatility causes the firm to
support a higher debt ratio leading to lower cost of capital;
International diversification (by country and by product) should lower the
systematic risk of the firms, thus lowering its beta coefficient and consequently
the cost of equity.

* Exposure to Exchange Rate Risk:

Operations of MNCs and their cash flows are exposed to higher exchange rate
fluctuations than domestic firms leading to greater possibility of bankruptcy. As a
result, creditors and stockholders demand a higher return, which enhances the MNC's
cost of capital.

* Exposure to Country Risk:

The total country risk of foreign investment, as noted earlier, is greater in the case of
foreign investment than in similar domestic investment because of the additional
cultural, political and financial risks of foreign investments. Thus, risks increase the
volatility of returns on foreign investment, often to the detriment of the MNC. To
what extent international diversification minimizes the impact of country-specific and
currency-specific risks would depend on the magnitude of capital market
segmentation and how widely the firm's investments are locally or globally
diversified. Where a firm's investment is concentrated in a local economy and
markets are partially segmented from other capital markets, country-specific and
currency-specific risks cannot be diversified and hence the firm's exposure to these
risks cannot be eliminated. In contrast, a firm with globally diversified investors
especially in integrated financial markets can eliminate these risks and the cost of
capital of such firm will obviously be low. According to a large body of literature,
MNCs have lower systematic risks in relatively integrated financial markets, such as
the UK and the USA than comparable domestic companies, presumably, due to
benefits of international diversification.

(ii) Strategies for Business in Global expansion

1. Develop a game plan.

Formulating a strategy for going global requires the same kind of planning and market analysis needed for success in domestic markets. There are also some nuances that factor into the equation, such as logistics, customs duties and currency conversion. But the good news is that there are a number of free or inexpensive resources available to help you get started.

2. Identify the product or service you have to sell.

It may seem self-evident, but you need to have a viable product or service, and know there is a market for whatever it is you hope to export. In general, many American exporters already have developed a domestic market for their products or services before venturing overseas.

3. Develop an export plan.

A free government resource to help you prepare an export plan is the Basic Guide to Exporting. The guide includes an outline of 11 questions that potential exporters may want to ask as part of the export plan development process. By answering these key questions, you may gain a better understanding of everything from product and licensing requirements to logistics and pricing strategies.

4. Conduct market analysis.

As the Basic Guide to Exporting notes, some companies rely on secondary data sources because they are more readily available—and less expensive—than conducting primary market research. Whether you conduct your own research or rely on secondary data sources, conducting market analysis can help you to determine what the top countries are for products similar to yours. Other research should focus on your price competitiveness, potential distribution channels, and duties, taxes or regulations that may constrain entry into a particular market.

5. Segment potential export markets.

Another key component in assessing export opportunities is to estimate the potential size of your market in the countries you have targeted. Market segmentation can provide insight about how many potential customers you have in a given country and, more importantly, how to reach them. One resource to consult when developing an export marketing plan is Exporting: The Definitive Guide to Selling Abroad Profitably by Laurel Delaney, founder of international consulting agency GlobeTrade.

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6. Assess your competition.

Whether you sell in the United States or in some other global market, you need to understand who your competitors are. Every export market will have a unique set of competitors and understanding the competitive landscape is important before trying to sell in another country. In fact, a detailed competitive analysis should be conducted for every potential new export market you are considering. One tool for assessing the competition is the book Import/Export Kit for Dummies by John Capela.

7. Determine if there are packaging, labeling or regulatory requirements.

Labeling, for example, may need to be customized for a particular market, and the term "Made in the USA" may not be acceptable on the packaging. One best practice is to plan on labeling products in the language of the country you are selling to. It is also important to determine if there are special labeling requirements, as is often the case with food and pharmaceuticals exports.

8. Use trade shows to test markets for your product or service.

In addition to traditional market research, one way to test the potential for your products overseas is to participate in industry trade fairs in the markets you are considering. One starting point for identifying potential trade shows is the Trade Show News Network website.

9. Test your strategy in a single market with low barriers to entry.

U.S. companies often start expanding internationally by exporting to Canada. Geographic proximity, along with cultural and language similarities, help make Canada a good proving ground for American companies venturing across the border for the first time. Regardless of which market you plan to enter first, set realistic goals and take baby steps first.

10. Leverage free and low-cost resources from government agencies.

The Small Business Development Center (SBDC) network is one starting point for new-to-export companies. Many states also provide free counseling for companies interested in exporting. A list of those resources can be found on the State International Development Organizations website.