Comp Tech is an IT solutions provider that has been in operation for the past 10 years. It provides networking solutions, e.g., database systems, and data management services to small and medium clients. Comp Tech has partnerships with hardware manufacturers and offices in three locations in the USA. The firm’s mission is to offer integrated IT solutions to support secure data exchange, communication, and customer care. Comp Tech plans to set up an office in a foreign location in line with its internationalization strategy.
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The Higher Ranking Country’s Major Trade
Singapore is an export-driven economy. Globally, it is ranked the 21st largest exporter with an average annual export valued at over $257B (globalEDGE, 2016b). It exports “refined petroleum, integrated circuits, computers, and medicaments”, accounting for over 50% of its exports (globalEDGE, 2016b, para. 4). Refined petroleum and microcircuit products export amount to $62B and $39.4B annually. The country is a net importer of crude oil and gas turbines from its trading partners, including South Korea and the US. Singapore exports the manufactured products to the Asian markets in China, Malaysia, South Korea, and China as well as international destinations such as the US.
The Higher Ranking Country’s Report
The country’s risk depends on economic, political, and financial factors. Singapore is a higher-ranking country globally in terms of risk rating. The South Asian country has a risk rating of A1, which indicates a favorable political and economic environment (globalEDGE, 2016b). Singapore has a good business environment characterized by low corporate default rate and institutional efficiency. About the ease of doing business, Singapore is ranked the best country globally based on business registration days, access to credit, and investor protection, among others. The report on the corruption perception index ranks Singapore at position eight out of 168 economies (globalEDGE, 2016b).
In the economic rankings, the country comes in second worldwide in the global competitiveness index and economic freedom index, making it an attractive hub for multinational enterprises and foreign direct investment.
The higher ranking can be attributed to the country’s developed infrastructural facilities, skilled labor, a stable political regime, and favorable tax rules. These factors have enhanced Singapore’s global competitiveness and supported a steady economic growth and development over the years. The robust manufacturing and service industries drive the Singaporean economy. According to globalEDGE (2016b), about one-fifth of Singapore’s GDP is contributed by the manufacturing industry. In contrast, the service sector accounts for two-thirds of its GDP (globalEDGE, 2016b). Export trade to regional and international markets drives the Singaporean economy. The country is a leading exporter of electronic items and petroleum products, which constitute about 65% of its annual production output (globalEDGE, 2016b). The knowledge-based economy invests heavily in R&D, education, ICT, and health care.
Existing Trade Agreements
Singapore has ratified 21 free trade agreements (FTAs) with regional and international economies to expand the export market for Singapore-based firms. It has FTAs with China, India, the GCC bloc, Japan, and the US, among others. The country is a member of the Trans-Pacific Partnership (TPP), an international trading bloc that brings together 40% of the world’s economies (Singapore Government, 2016). The proposed venture will benefit from the FTAs in two ways: cut down the cost of import components (import duties) and expand overseas markets for the company’s products through export quotas.
The Lower Ranking Country’s Major Trade
Paraguay’s export trade, a country in Latin America, is dominated by agricultural exports. Its exports in 2015 were valued at over $9B with Uruguay, Brazil, Russia, and Chile being the three top destinations (globalEDGE, 2016a). It also exports to the US and Canada. The country is the sixth-largest exporter of soy and to regional and international markets, which constitutes about 42% of the country’s exports annually (globalEDGE, 2016a). Its export trade also features beef (13%), cereals (11%), and liquid oils (6%) (globalEDGE, 2016a). The import trade comprises of finished products such as construction equipment and chemicals primarily from the EU.
The Lower Ranking Country’s Report
Paraguay, a Latin American country, has a risk rating of C. Its political and economic environment is not conducive for business and corporate malpractice is common. The business climate is also rated C, which implies that the country has a high-risk destination. It has a corruption perception index of 130 out of 168 and its ease of doing business score is 95 out of 177 (globalEDGE, 2016a). In the Global Competitiveness Report, Paraguay is ranked position 117 out of 140 nations. Its economic freedom rating is moderate at 83 out of 178 while its international property rights rating is considerably low at 89 out of 97 countries (globalEDGE, 2016a).
The country’s potential for FDI inflows is low. It is ranked at position 108 out of 141 in the inward FDI potential index. In the global enabling trade report, Paraguay comes in at number 105 out of 138 economies.
Paraguay’s low ranking in the major indices could be attributed to overreliance on the agricultural sector. The country exports soy and beef without value addition, which significantly reduces its foreign income. Also, Paraguay relies on imported machinery and chemicals for its infrastructure and agriculture, a scenario that tilts the balance of trade in favor of the EU and the US (Vousden, 2001). The country’s political instability and weak governance system could also hamper the ease of doing business, leading to its current low rating.
Existing Trade Agreements
Paraguay has signed bilateral and multilateral trade agreements with regional and international powers. It is a member of the Mercosur, Latin American Integration Association, Union of South American Nations, and Organization of American States, among others. Besides Paraguay, the other Mercosur members include Chile, Peru, and the EU, among others (Latin American Monitor, 2012). The FTAs accord Paraguay trade privileges and preferential treatment when exporting to member countries. In particular, the Mercosur market is considered one of the largest trading blocs in the world, contributing over 6% of the global GDP (Latin American Monitor, 2012). This performance makes the bloc an attractive destination for FDI. In this view, the FTAs will help support the proposed venture through cheap imports (machinery and inputs) and export markets.
The Major Risks Associated with Starting a New Location
Singapore is one of the most attractive business destinations in South East Asia. The country has a relatively low risk of doing business and a stable political climate. However, in starting a new business location in Singapore, one may be faced with the challenge of stagflation. In 2015, the country experienced a sharp rise in property prices and inflation attributed to the drop in global oil prices (globalEDGE, 2016b). The Singaporean dollar has also dropped in value relative to major international currencies, which makes imports expensive. Therefore, the new venture will incur extra costs when importing equipment and materials for the start-up.
In contrast, a new location in Paraguay will face political, economic, and financial risks. Paraguay’s political climate is unstable due to the ouster of its president in 2012. As a result, Agro-Marxist organizations, e.g., the EPP, have risen in some parts of the country (Latin American Monitor, 2012). These violent groups are a threat to new businesses because they attack capitalism and landowners who play a significant role in the economic growth of the country. The political risk also relates to the tensions between foreign settlers and landless peasants. Skirmishes may arise in some areas posing a risk to foreign-owned businesses.
Economic risks are also likely to affect business startups because of the minimal protection accorded to investors. The prolonged drought hit Paraguay in 2012, causing a significant reduction in agricultural production and exports (Latin American Monitor, 2012). The persistent droughts also affect the production of cotton and soy, water transportation, and hydroelectric power generation. In particular, frequent power outages will affect the growth of the new venture. The country’s weak governance system characterized by corruption will reduce the ease of registering the venture, obtaining credit, and trading across the borders. Additionally, poor corporate laws could lead to supply chain breakdowns. Thus, based on the economic indicators, the risk to new businesses is significant in Paraguay.
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Global expansion often involves establishing a store or factory in overseas locations with varying degrees of risk. One way of managing political risk is through investment agreements with the authorities. According to Howell (2002), the investment agreement stipulates the rights and regulatory obligations of the MNEs and the government. The agreement outlines the ownership type, export rights, price controls, and royalty/dividend payments, among others. Therefore, by signing an agreement with the host nation (Paraguay or Singapore), the new venture will be protected from risks because it stipulates the obligations of either party.
The company will also patent its key technologies and processes as a way of reducing political and economic risk. By using advanced solutions, the firm will be able to protect its investment from copyright infringement in the host country. Besides, the firm will build its brands to benefit from a monopoly in the host nation. Having a strong brand, such as Comp Tech, will enhance the firm’s bargaining position and avoid political and economic risks.
The Better Choice for the Company’s Next Location
The better choice between the two countries for Comp Tech’s next location is Singapore. The rationale for this choice is that the Singaporean economy has a low-risk rating and a business environment conducive for MNEs. It is ranked the best country in the ease of doing business globally. Its political stability, developed infrastructure, favorable regulatory regime, and skilled labor favor FDI inflows. Also, Singapore has signed several FTAs with many countries, which could support the company’s import and export trade. On the other hand, Paraguay’s low-risk rating, political instability, and weak governance are constraints to foreign investments. The key rewards that will result from opening the new location include unrestricted access to the large Asian market, low taxes, and availability of labor and raw materials.
globalEDGE. (2016a). Paraguay: Risk Assessment. Web.
globalEDGE. (2016b). Singapore: Risk Assessment. Web.
Howell, L. (2002). Political Risk Assessment: Concept, Method, and Management. New York: Political Risk Services. Web.
Latin American Monitor. (2012). Risk Summary: Paraguay. Southern Cone Monitor, 29(3). 8-18. Web.
Singapore Government. (2016). Benefits of Free Trade Agreements (FTAs). Web.
Vousden, N. (2001). The Economics of Trade Protection. New York: Cambridge University Press. Web.