MinisterRoseMoose22
Add insight and a question to classmate’s discussion below: …
Add insight and a question to classmate’s discussion below:
1. Based on the information provided in the case, do you think the political risk associated with Thailand is higher or lower for a manufacturer of leisure products such as Blades as opposed to, say, a food producer? That is, conduct a micro-assessment if political risk for Blades, Inc.
a. Based on the information provided the political risk associated with basing a manufacturing outpost in Thailand is greater that associated with being a food producer in Thailand. First, the citizens of Thailand can affect Blades profits by choosing not to consume from a company that is not produced or owned by natives. Additionally there’s the risk of capital controls being implemented by the Thai government, if this were to happen then Blades would see and immediate reduced profit as they must reinvest that profit into the local economy.
2. Without using a numerical analysis, do you think establishing a subsidiary in Thailand or acquiring Skates’n’Stuff will result in a higher assessment of political risk? Of financial risk? Substantiate your answer.
a. Operating in Thailand comes with a greater political risk than a financial risk. This is because the political risk directly creates a financial risk, without the implementation of capital controls or reduced consumerism from natives there is little financial risk associated with operating in Thailand. But because the risk of capital controls and reduced consumerism from natives exists there is a greater political risk that would lead to financial risk.
5. Which method of direct foreign investment should utilize a higher discount rate in the capital budgeting analysis? Would this strengthen or weaken the tentative decision of establishing a subsidiary in Thailand?
Establishing a subsidiary should utilize the higher discount rate as it is associated with greater risks for reduced consumerism and potential capital controls being implemented. At least with the acquisition of skates’n’stuff there is already a brand presence and goodwill within the country that can reduce the risk of reduced consumerism by natives. By using the increased discount rate it would weaken the attractiveness of establishing a new subsidiary in Thailand.
Point Counter Point
I agree with the counter point, country risk should always be assessed. Just because the firm is based in the US and would have greater ability to predict how economic conditions may affect a project does not mean that a risk analysis should be forgone. Without a proper assessment of risks the MNC could potentially lose profits by just assuming the US would be the most beneficial country to complete a project in.
