A Chinese steelmaker is considering its strategy to expand globally. It is considering two possible choices....

A Chinese steelmaker is considering its strategy to expand globally. It is considering two possible choices. Choice A involves acquiring mining assets in Canada. Choice B involves acquiring a mining company in Australia. Forecasts indicate that the Canadian dollar is expected to appreciate while Australian dollar is expected to depreciate substantially over the next 3 years. Should the Chinese company expand into Australia or Canada? What factors may affect its decision?

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Given Data:

A Chinese steelmaker is considering its strategy to expand globally. It is considering two possible choices. Choice A involves acquiring mining assets in Canada. Choice B involves acquiring a mining company in Australia. Forecasts indicate that the Canadian dollar is expected to appreciate while Australian dollar is expected to depreciate substantially over the next 3 years.

Should the Chinese company expand into Australia or Canada?

Ans: Based on given data and an assumption that all other factors influencing investment decision are similar in both the country (i.e. Australia & Canada), the Chinese company should expand into Canada since Canadian dollar is expected to appreciate over next 3 year. Which means that there will be foreign exchange gain if the Chinese company invest in Canada now.

In other case if the Chinese company invest in Australia it will suffer foreign exchange loss over next 3 year since the Australian dollar is expected to depreciate over time.

What factors may affect its decision?

Ans: Apart from the above factor there are other various factors which should be considered while taking decision on investing in a different country to expand globally. Some of them are given below.

Tax rate: Higher tax rate of a country attracts less investments whereas lower tax rate of country attracts more investments in that country.
Infrastructure: Better infrastructure in a country like transport facilities, communication facilities, water & electricity facilities etc. attracts more investments in that country globally.
Political Stability: Country with political instability seems less attractive to the global investors.
Exchange Rate: a weak exchange rate in a country attracts more investments in that country.
Wage Rate: Wage rate is a vital factor for taking decision on whether to invest in a country or not after all money matters.

jeff jeffy answered 3 months ago

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