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International Financial Management – Rainbow Company Report


Introduction

In contemporary business environment multinationals are establishing their manufacturing plants in countries with cheap factors of production and whose international and local markets are booming; India and China are among the most favored countries by multinationals. Current campaigns to conservation the environment have grown renewable energy industry in different parts of the world.

Rainbow Power Company is an Australian multinational that manufactures and sells renewable energy products; the company wishes to establish whether it should follow other multinational strategy of establishing production lines in either China or India (Charles, 2011). This paper discusses the opportunities and threats that Rainbow Company could face after establishing production line in either India or China; at the end of the report, the report will give recommendations to the company on the best country of the two to establish a production line.

The nature of the renewable/sustainable energy technology market

India and china have the potential of using renewable energy sources as they have solar, wind, water, and geothermal energy potentials. India and China have sunshine throughout the year a factor that favor a production of solar panels; India has the capacity of producing 250KWH per month with only Rs. 5 Lacs.

China has over 400 photovoltaic (PV) which in 2007 was able to produce 1700 MWs of solar panels where 99% of them were exported. The main manufacturers of solar panels that the Rainbow would have to compete with include GCL-Poly Energy Holdings Limited, Yunnan Semi-conductor Parts Plant, and Guofei Green Energy Source.

India is considered as the “wind Superpower:, the country has a potential of developing 45000MW from its 13 main states. Such a potential is the opportunity that Rainbow Company should utilize on and come up with gadgets to tap the potential. India has potential of producing hydro-energy with only 20% of the country’s potential having been utilized; this shows that if Rainbow was to venture in the market, there are some blue oceans that it can take advantage (Gevorg, 2011).

China on the other hand has wind potential that in 2010 wind energy accounted for 41.8 gig watts (GW) of the national electricity production; the government has plans to have the production and use of wind energy increased to 100 gig watts (GWs) by 2015. With the prospects that the government has, Rainbow Company has the opportunity of selling its products to the fast growing demand of the renewable energy products. The chart below shows the tread of use of wind energy in china:

Chart 1

Wind power in the PRC
2005 2006 2007 2008 2009 2010
Capacity (MW) 1,260 2,599 5,912 12,170 25,100 41,800
Production (GW·h) 1,927 3,675 5,425 12,425 25,000

India produces high fiber wastes from sugarcane, food grains, vegetables and fruits among other agricultural products; the wastes can be fermented to produce biogas that can be used as another source of energy. The main companies that Rainbow will have to compete with in India include Suzlon Energy, Moser Baer, Tata Power / Tata BP Solar, and Orient Green Power (Ranjini, 2007).

Chart 2

Ten of the largest hydroelectric producers as at 2009
Country Annual hydroelectric
production (TWh)
Installed
capacity (GW)
Capacity
factor
% of total
capacity
China 652.05 196.79 0.37 22.25
Canada 369.5 88.974 0.59 61.12
Brazil 363.8 69.080 0.56 85.56
United States 250.6 79.511 0.42 5.74
Russia 167.0 45.000 0.42 17.64
Norway 140.5 27.528 0.49 98.25
India 115.6 33.600 0.43 15.80
Venezuela 85.96 14.622 0.67 69.20
Japan 69.2 27.229 0.37 7.21
Sweden 65.5 16.209 0.46 44.34

Currently China produces 197 GW of hydropower generating capacity; this only caters for the country’s power usage of 23%; with such a statistic, the country has potential of using more of the energy thus if rainbow was to establish its business in the country there are high chances that it will benefit from the increased demand of electricity (Gevorg, 2011).

The country situation and risks in India and China

According to Ease of Doing Business Index is an index created by the World Bank in 2011, for 183 countries India was ranked 134, 133, and 132 in the years 2008, 2009, and 2010 while China was ranked 79, 89, and 86 for the years 2008, 2009, and 2010; the index considered different parameters that are likely to affect business and new establishments.

China and India have highly modern developed infrastructures; these are both of transport and those of communication. The systems are advanced so well that asses to the countries from any corner of the world is highly enhanced, the airports, the sea port, and internal transport are well managed and assessable. The communication network within and without is of high-tech.

This is an asset to the business since it reduces the cost of doing business, on the other hand the international market are enhanced at all lengths. The sectors have seen the private and public participation, this boosts the efficiency of the systems and thus one can trade with approximate assumptions. There is what the government refers to as private public partnership that is aimed at maintaining the infrastructures.

Chinese and Indian governments are offering incentives to those companies that are making products to increase the use of renewable energy. Indian policy on encouraging the use of renewable policy has been for long been influenced positively by world trade organization requirement. There are direct incentives that Rainbow is likely to get from the two countries governments. Some of the incentives are direct for example taxes and those to facilitate trade.

The taxes that have been reduced include, corporation taxes, value added taxes as well as customs. An example to portray the above incentive is the Corporation tax of 15% that is subsidized from the general rate of 30% when an investment is done in the Special Economic Zones at the southern part of the country. For instance getting a visa and business permit to China is one of the simplest ways. No restrictions and thus trade is highly advantaged. This will be of great assistance in tapping world carpet business (Barney, 2007).

Indian and Chinese financial sectors are well developed with the privatized and government participation in the sector. The banks are stable enough to sustain the growing economy. On the other hand, although this may not have a direct impact on our business there is the emergence of micro finance institutions in the country, the institutions are giving a lot of support to the small scale trader evident in the country.

Thinking of the economy from that angle, it means that the manufacturing businesses will eventually benefit. Insurance companies are also a backbone of investment sector of an economy. The insurance companies are stable enough and can handle big losses without going under. At the same time, there are reinvestment insurance companies that help in maintaining stability even further. The banking sector has enabled firms to get loans at favorable rates.

The insurance and the banking sectors will thus have a direct and indirect effect. From a direct point it means we stand to benefit the efficiency of this institutions and from an indirect point is that as the other sectors get empowered the benefit trickle down to my business. China was among the few world countries who were able to record an increased economic growth; the exchange rates in the countries remained relatively stable than the case was for India.

The type of FDI to further minimize risks

The demand for reliable energy source in China has made the country’s government to develop some incentives to FDI to minimize their risk in doing business in the country. Some of the policies that the government has enacted include investment deductions, zero rating of photocell products and offering taxation holidays to foreign companies in the economy.

The government of India on the other hand is sensitive on its needs to energy and seems to engage in transactions that involve the development of renewable energy sources; the government has joint ventures with renewable energy producers in the efforts of reducing risks associated with the business and encourage them produce further. In the Indian budget, the government allocates some funds for the use by renewable solar energy products manufacturers in the efforts of supporting their moves and availing funds at an affordable competitive rate (Zachary and Katrin, 2008).

Recommendation

Considering the opportunities, threats, risks, and strengths of doing business in either China or India, it is highly recommended that Rainbow should establish an operating firm in China. Today in the world there has a large focus on trading with China.

China is slowly portraying itself as the world economic driver; this means that each and every country, individuals and the companies are considering China as the trade partner, a thing that has boost in the economy of the country; companies in the economy not only depend with the local market for their business but has high access to international customers.

The fact that each country is willing to trade with it has set the country in the pace, now heading to be a political neutral country. As nations get more confident in the country, the more they will be willing to trade with China and thus the market stands to gain. This stands to have a positive effect on the business since we will not be depending on local market alone but the entire world (Easson, 2004)

China has come up as a bargaining market where traders interact as an open market. As the world come to fetch for varieties, we will be one of those variety providers. An example is the African countries that have diverted there trading to China and killing the predominant markets of the west. This has been as a partnership kind of trading where you will find contractors in Africa from china. The way the contracts are made is in such a way that there is a long relationship created.

The growth rate of the economy of China has always, for the last three decades, remained on a positive note. There have even been some rates recorded as high as 12%. This is an element to show the strength of the economy as well as it gives us the hope of continuity in the market.

This growth has enabled China to be seen as the emerging world economy. The rate of growth is another indicator of a stable political environment that encourages local and international investors to invest. With such a rate of economic growth it leads to the easy options of diversity of the business.

When an economy is growing one major demand that will be there is demand for energy; this Rainbow will have ready market for its products. When comparing the ease of doing business between China and India, China is rated far better than India thus Rainbow can establish the business in the country easier (Reuvid and Li, 2005).

Conclusion

When multinationals are considering the country to develop a manufacturing plant they consider the business atmosphere in the country. When comparing China and India, it is advisable for Rainbow Power Company to venture in the Chinese market as the business environment is more favorable than in India.

Other than normal business environment, Chinese government has projects to promote the use of renewable energy thus companies in the industry are benefiting government incentives and support. The fast economic growth rate of China is another opportunity that Rainbow can tap from the Chinese market; China fast industrializing thus demand for energy keeps increasing. Growth in international trade also favors China than India, with the growth in international trade, Rainbow will benefit from local and international markets.

References

Barney, J. B. ,2007. Gaining and sustaining competitive advantage. Upper Saddle River: Pearson Prentice Hall.

Charles, W.L., 2011. International Business: Competing in the Global Marketplace. New York: McGraw-Hill.

Easson, A.J. (2004) Tax incentives for foreign direct investment. Boston, Kluwer Law International.

Gevorg, S.,2011. Unleashing the Potential of Renewable Energy in India. Geneva: World Bank Publications.

Ranjini, M., 2007. Doing Business in India For Dummies. New York: For Dummies.

Reuvid, J. and Li, Y., 2005. Doing business with China. London: GMB Publishing Ltd.

Zachary, A. and Katrina D. , 2008. Renewable and alternative energy resources: a reference handbook. New Jersey: ABC-CLIO.

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IvyPanda. 2019. "International Financial Management - Rainbow Company." March 25, 2019. https://ivypanda.com/essays/international-financial-management-rainbow-company/.

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IvyPanda. (2019) 'International Financial Management - Rainbow Company'. 25 March.

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