A large Australian manufacturing firm is keen to internationalise by a Greenfield foreign direct investment via sole ownership in Sri Lanka as a developing country and Taiwan as a developed nation. The essay focuses on advantages and disadvantages of investing in each country, legal systems, and political, cultural, and economic risks. It concludes by showing the best country to host the company’s foreign direct investment.
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Advantages and Disadvantages of Investing in Taiwan and Sri Lanka
The Heritage Foundation 2013 Index of Economic Freedom shows that Taiwan is among the most competitive countries in economic freedom with a score of 72.7, which ranks it 20th (The Heritage Foundation, 2013b). It improved by 0.8 points relative to the previous year’s score. This shows that the country has made significant gains in labour, business, and corruption reforms. Its corporate tax rate is 17 percent.
Taiwan has experienced significant economic improvement since 2009. Improved commercial codes and free market policies have facilitated growth in the private sector. The country has huge growth potential (PKF Taiwan, 2011). Although the government control has declined, corruption has continued to hinder economic growth in the country. In addition, rigid labour market practices have also affected the growth.
According to the Heritage Foundation 2013 Index of Economic Freedom, Sri Lanka scored 60.7 points. The country has improved against its previous score by 2.4 points to claim 81st place in the ranking (The Heritage Foundation, 2013a).
The country made the progress in “fiscal freedom, investment freedom, and the control of government spending” (The Heritage Foundation, 2013a). It has improved on foreign exchange transactions and taxes (top corporate tax is 28 percent).
Sri Lanka has not instituted sound reforms for economic stability. Moreover, the country has weak institutions, which have failed to protect investors against corruption and property rights. Economic reforms have yielded poor outcomes (Balamurali and Bogahawatte, 2004).
Sri Lanka has streamlined procedures for setting up a new business, but licensing could take over 200 days. Still, the labour market suffers major “inefficiency due to discrepancies in supply and demand” (The Heritage Foundation, 2013a).
The country also faces soaring inflation. There are non-tariff barriers that affect investments in Sri Lanka. Although the country has improved in controlling foreign exchange transactions, the state has continued to control credit allocation due to high rates of non-performing loans. Still, it has bureaucratic procedures and poor infrastructures.
The Effects of Legal Systems on the Business
Taiwan has a strong legal system that “protects investors, property rights, and maintains the rule of law” (The Heritage Foundation, 2013b). The country has considerable state involvement in economic activities. Labour laws are not favourable to investors.
Conversely, Sri Lanka has an incompetent justice system that is prone to executive interference and corruption. There are widespread commercial court delays, which results in out-of-court settlements. Sri Lanka has a fair process of registering private property, but it experiences high rates of fraud and document forgery.
There are also rampant “property disputes between the northern and eastern parts of the country” (The Heritage Foundation, 2013a). The public sector suffers drawbacks due to a widespread corruption.
Political, Cultural, and Economic Risks
Taiwan is a multi-party democracy state. The country is not a member of the UN and other international bodies due to influences from China, which continues to pressure it into unification. It has a stable political system, and the political leadership encourages foreign investments through transparent and efficient processes.
Taiwan culture consists of several cultures, but it may not be familiar to a Western company. Hence, it is important to study the culture of the people (Michigan State University, 2013).
Economic reforms have favoured foreign investments. The country protects investors’ freedom to do business through effective rule of law. Business registration is simple in procedures and straightforward. However, the rigidity of the labour market could negatively affect investors.
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Taiwan has monetary stability. In addition, the financial sector has improved in order to offer different financial trade instruments and services. However, government interference has persisted, and it could have negative impacts on FDI (Blaine, 2009; Froot, 2008).
Sri Lanka political system has been unstable because of threats from “the terrorist, Liberation Tigers of Tamil Eelam” (The Heritage Foundation, 2013a). However, this has improved since 2010, but with poor records on human rights. Today, the political leadership encourages foreign investments. The country heavily relies on foreign aid for infrastructure development. There is political interference in the judicial system and heavy state interventions in economic affairs.
Sri Lanka culture differs from Australian culture. Generally, one needs to understand the culture of Sri Lanka in order to conduct business successfully.
Sri Lanka experiences high rates of inflation and constant delays in the justice system and government interference in economic affairs, which affect business activities. Although there is a registration process for private property, cases of fraud and forgery may lead to lose of investments. The country has corrupt public servants and mistrust is widespread. The property disputes may also affect investors negatively.
Challenges in the labour market could also have negative impacts on investors (Board of Investment, n.d). There is also government interference with foreign exchange transactions. The country suffers from poor infrastructure and bureaucracy, which hinder development in the private sector. The government controls credit allocation in the country.
After a careful review of Sri Lanka and Taiwan, the company will establish its Greenfield foreign investment in Taiwan. Sri Lanka is fraught with risks and uncertainties (UNCTAD, 2012). Conversely, Taiwan has relatively favourable economic conditions for Greenfield foreign investment than Sri Lanka (Globlatrade.net, 2013).
Balamurali, N and Bogahawatte, C 2004, ‘Foreign Direct Investment and Economic Growth in Sri Lanka’, Sri Lankan Journal of Agricultural Economics, vol. 6, no. 1, pp. 37-50.
Blaine, H 2009, Foreign Direct Investment, Nova Science Publishers, New York.
Board of Investment n.d., BOI: Sri Lanka. Web.
Froot, K 2008, Foreign Direct Investment, University of Chicago Press, Chicago.
Globlatrade.net. (2013). Foreign Direct Investment in Taiwan. Web.
Michigan State University. (2013). Taiwan: Culture. Web.
PKF Taiwan 2011, Doing business in Taiwan, PKF, Taipei.
The Heritage Foundation 2013a, 2013 Index of Economic Freedom: Sri Lanka. Web.
The Heritage Foundation 2013b, 2013 Index of Economic Freedom: Taiwan. Web.
UNCTAD 2012, World Investment Report 2012. Web.