Raytheon Corporations New International Market in South Africa - Research Paper Example

MULTINATIONAL CORPORATION EXPANSION and number Raytheon Corporation A multinational corporation (MNC) is a business firm incorporated in one country that has production facilities and sales operations in several other countries. Raytheon Corporation is an innovation and technology leader specializing in civil markets, defense and security throughout the globe. With a record of innovation spanning over ninety years, Raytheon Corporation provides mission systems integration, state of the art electronics, and other capacities in the areas of sensing, control, effects, command, intelligence, and communication systems; as well as, a variety of mission support services (Raytheon Corporation, 2014). When it comes to devising the most effectual security solutions, Raytheon Corporation employs all its proficiency at its disposal. Raytheon Corporation exploits all its advanced technological expertise and partnering with its experienced teammates and clients in the security field. As an integrator, Raytheon Corporation employs software solutions and equipment that are best-suited to meet particular security requirements by clients. The key aspect of Raytheon Corporation’s growth can be attributed to its strong dedication to the international marketplace (Raytheon Corporation, 2014). Raytheon Corporation’s new international market in South Africa With the present global economy, the risk of expanding into other nations can be high; however, South Africa may be a strategic spot in Africa owing to its transportation location and its stabilizing economy. With the South African government being the main target of this expansion, this move may also be the most favorable for Raytheon Corporation. The South African government has the full capacity to expend whatever may be required to aid in maintaining the safety of its assets. South Africa possesses a huge potential to do business with since is has a relatively stable political and economic system. Moreover, South Africa has an excellent position in the African continent; for this reason, it makes transportation by sea more cost efficient and easier. Major dimensions of international finance 1. Political risks and foreign exchange The South Africa’s current exchange rate stands at one U.S. dollar against 10.5432 South African Rand (Oanda, 2014). The political risk in South Africa would be minor since there have been close political ties between the U. S. and South Africa since 1994. With these well-built political ties among the two countries and the multiple ambassadorial trips that are taken by both parties since 1994, the risk of immediate losses owing to politics would be little. Moreover, there is also local U.S. embassy established in South Africa, to address various diplomatic issues (International Relations & Cooperation, 2013). Ten top political risk factors that are general, in South Africa, include terrorism, nationalization, violent and non-violent civil unrest, confiscation, war, creeping exploration, breach of contract, currency inconvertibility and non-honoring of South Africa’s guarantees. The other major risk that may affect Raytheon Corporation’s venture in South Africa would be dealing with the private companies. There may be many issues that could arise in the case of Raytheon Corporation deals with private companies. Private companies could put loopholes in specific stipulations or contracts so that they can be nullified at any time, leaving Raytheon Corporation to pick-up its pieces. On the other hand, dealing with governmental companies tends to work-out better and is more long-term since the state is obligated to honor its contracts. Given that the contracts fail because of faults by the South African government, this could ruin their reputation to other Multinational Corporations. 2. Market imperfections In 2012, the U.S. and South Africa signed an Agreement on Trade and Investment Framework (TIFA) that amends agreement framework that was originally signed in the year 1999. In addition, in the year 2008, the U.S. and SACU (Southern Africa Customs Union) signed a Cooperative Agreement on Trade, Investment and Development (TIDCA). These agreements establish a forum for cooperative work, consultative discussions and potential agreements on a broad range of trade issues. Moreover, they have a special focus on technical barriers to trade, trade facilitation, trade investment promotion, sanitary and phytosanitary measures, and reduction of market imperfections (South Africa U.S. Trade Representative’s Office). 3. Expanded opportunity set The equity markets in Africa are hot attracting investors caused by the growth rate in terms of GDP in the Sub-Saharan region that is more than five percent over the past three years. In the past decade, Africa abounded six of the ten economies with the greatest growth in the world. According to McKinsey, by the year 2020, more than 50% of African households may have adequate income to splurge on non-essentials. Besides, more than 50 % of the people in Africa are aged less than twenty years (Investing in Africa, 2013). In the next three decades, Africa will have a bigger working-age population than that of China. However, Africa is short of capital and savings, and requires investment from Multinational Corporations. This shortfall creates an opportunity for Raytheon Corporation and other rich-world investors in search of a better return on investment higher than what may be available in their current countries. North Africa is tied to the Mediterranean trade and can be termed as fairly well-developed. Moreover, some see it as a detached investment proposition. South Africa has comparable potential to North Africa since it is Africa’s biggest economy, which has a slower growth-rate compared to most of its neighbors. Globalization and economic trends The economic impact of globalization on South Africa is multifaceted. South Africa returned to the international economy from isolation when the globalization forces particularly for developing countries seemed to gain thrust. Although the pattern of economic growth may be lower than tolerable norms in other up-coming economies, the globalization forces seem stronger than expected. Approximately ninety-eight percent of the existing growth performance in South Africa can be explained by globalization forces. Regression results also designate South Africa’s economy as benefiting from the gradual exchange controls, relaxation. Conversely, South Africa’s economic trends indicate that MNCs (Multi-National Corporations) through their international business structures may be active in activities of the national economy and have power to control national economies. The IMF (International Monetary Fund) and other organizations such as the World Bank and WTO (World Trade Organization) have a huge influence over policies in South Africa, especially trade and economic policies. The recent award of a contract to South Africas leading privately owned aerospace, and Defense Company, the Paramount Group to supply defense automobiles to Brazil for the Fifa World Cup and the Olympic Games may potentially disrupt or affect Raytheon Corporation’s operations. The contract was awarded after exhaustive field testing, technical evaluations and an open procurement process to international and local firms. This contract award demonstrates that South Africa has a conceited heritage in the security and defense sector, and the Paramount Group continues to invest in the development and research so as to ensure its products are at the top edge technologically (Global ventures, 2013). Despite the fact that there may be a privately-owned aerospace and defense firm established in South Africa, Raytheon Corporation is a larger firm with better assets; therefore, it can move in and muscle its way in as a single investor or either partner with Paramount Group. South Africa’s foreign exchange system and the monetary system The foreign exchange system in South Africa is flexible. The country has tried to employ a fixed exchange rate; however, it has had a hard time in implementing this system. Investigations show that the dual-rate system was very effective in segmenting Forex (FX) markets for the commercial vs. financial rands, thus providing “controlled lab” scenery to investigate key exchange rate queries (Eun, Kilic, and Lai, 2012). Investigations show striking disparities in empirical characteristics of the financial rates and commercial rates. The financial rate is predictable, while the commercial rate is not predictable. The commercial rand rate exhibits a relatively low volatility while the financial rate exhibits a relatively high time-varying volatility. Overall investigations in South Africa suggest that the growing dominance of investment by foreign corporations over trade is liable for the eminent behavior of the current flexible exchange rates in South Africa (Eun, Kilic, and Lai, 2012). On the other hand, the key goal of South Africa’s monetary policy is to maintain and achieve price stability in the interest of balanced and sustainable economic growth and development (Monetary Policy). Price stability decreases uncertainty in the economy; therefore, South Africa provides a favourable location for the growth of Raytheon Corporation and also employment creation. The combination of an independent monetary policy and flexible exchange rate has led to high interest rates and a high exchange rate compared to the rest of the countries around the word. Consequently, this may adversely affect the operations of Raytheon Corporation when it ventures into the South African market. Moreover, South Africa has permitted the Reserve Bank to place a monetary policy that is suited to domestic conditions rather than requiring it to meet a definite target exchange rate level. The balance of payments and effects of deficits and surpluses Given that the BOP (balance of payment) reflects all liabilities and payments to foreign investments and all obligations and payments received from foreign investments. The BOP is one of the key indicators of South Africas status in international trade. The balance of payment in South Africa influences the free-floating currencies prices since free-floating currencies are influenced not only by government policies or political events but also by the economic events characterized by the balance of payment. The BOP statement in South Africa contains useful information for Multinational Corporation’s business decision-making. Deficits or surpluses in the BOP may have a direct impact on the exchange rate; therefore, Raytheon Corporation’s operations may be affected either positively or negatively depending on the BOP. Balance of payment in South Africa records all transactions that generate supply and demand for a currency and the potential impact on the exchange rate. In addition, these transactions may indicate a policy shift on monetary authorities in South Africa, in concert or unilaterally with its trading partners. The current rand-weakness may not be attributed to South Africa’s local issues; therefore, South Africa’s volatility exposes an opportunity for Raytheon Corporation to venture in South Africa’s market. Increases in interest rates caused by the current budget deficit in South Africa, suppress demand for imports through weakening consumers; as a result, they may be attracting more foreign investors. The South Africa Reserve Bank has complete operational independence. The MPC (Monetary Policy Committee) sets the monetary policy. The MPC accomplishes a monetary policy within a targeting framework of flexible inflation. The inflation target range goes out the target range due to first-round supply shock results and lets the South Africa Reserve Bank settle on an appropriate time-horizon for restoring inflation to within the target range. The bank does not alleviate its responsibility due to this flexibility but facilitates interest rate smoothing, which may moderate any output unpredictability from the monetary policy reaction to the shock (Monetary Policy). As a result, the area’s value increase would cause an increase in the expansion of Raytheon Corporation and its operations. BOP can be a vital document in international trade since it covers each and every economic activity a country has with other countries in the world. In a nutshell, the balance of payments may support the management of Raytheon Corporation to make informed decisions on whether its venture into South Africa will be successful or not. The foreign exchange market and Key foreign market participants South Africa may be a key player in global trade and may be performing an increasingly significant role in the rapid-changing governance landscape. Some of the key international market participants in South Africa include the World Bank, IMF (International Monetary Fund), the IAEA (International Atomic Energy Agency), the United Nations System and the WTO. South Africa plays a fundamental role in reshaping global trade, governance and business architecture through its foreign exchange market. South Africa’s foreign exchange market may also be reflected through its membership of the G20 group of emerging and advanced economies, lined up with the changing balance of economic power globally. These institutions provide possible key financing opportunities for Raytheon Corporation. Germany may be developing its economic investment in South Africa and also in other African nations. Germany is the second largest investor and the third largest trading partner in South Africa. Germany has extensively supported development priorities in South Africa and has allocated over R3.4 million during the 2012/2013 period (Sapa, 2013). In addition, Britain is also a top investor in South Africa supporting to up 29.5 million dollars yearly (Cropley, 2013). To achieve its business expansion and increase their operating revenues, Raytheon Corporation ought to adapt, modify or develop new technologies for its prospective markets and current core defense markets, including emerging markets such as South Africa and also adjacent markets. References Cropley, E. (2013). “South Africa slams UK decision to phase out aid.” reuters.com. Retrieved May 1, 2014; from, http://uk.reuters.com/article/2013/04/30/uk-safrica-britain-idUKBRE93T0QK20130430 Eun, C., Kilic, R. and Lai, S. (2012). A Tale of Two Exchange Rates: South Africa’s Dual- Rate Experiment. Seminar Paper. Retrieved May 1, 2014; from, http://www.frbatlanta.org/documents/research/seminars/seminar_kilic_060112.pdf Global ventures. (2013). “SA to supply security vehicles to Brazil.” southafrica.info. Retrieved May 1, 2014; from, http://www.southafrica.info/business/trends/global/paramount-220413.htm#.U19VDlKddbU International Relations & Cooperation. (2013). “United States of America (USA).” Republic of South Africa. Retrieved May 1, 2014; from, http://www.dirco.gov.za/foreign/bilateral/usa.html Investing in Africa. (2013). “The hottest frontier: Strategies for putting money to work in a fast-growing continent.” economist.com. Retrieved May 1, 2014; from, http://www.economist.com/news/finance-and-economics/21575769-strategies-putting-money-work-fast-growing-continent-hottest Monetary Policy. (n.d). South African Reserve Bank. www.resbank.co.za. Retrieved May 1, 2014; from,https://www.resbank.co.za/MonetaryPolicy/Pages/MonetaryPolicy-Home.aspx Oanda. (2014). “Oanda Currency Converter.” Oanda.com. Retrieved May 1, 2014; from, http://www.oanda.com/currency/converter/ Raytheon Corporation. (2014). “Raytheon.” Retrieved May 1, 2014; from, http://www.raytheon.com/ourcompany/global/ Reuters. (2013). “SA March credit growth slows to 7.79%.” Business Report. Retrieved May 1, 2014; from, http://www.iol.co.za/business/news/sa-march-credit-growth-slows-to-7-79- 1.1508560#.U19OPlKddbU Sapa. (2013). “Germany to invest more in Africa.” Moneyweb. Retrieved May 1, 2014; from, http://www.moneyweb.co.za/moneyweb-south-africa/germany-to-invest-more-in-africa South Africa U.S. Trade Representative’s Office. (n.d). Executive office of the President. Retrieved May 1, 2014; from,http://www.ustr.gov/countries-regions/africa/southern-africa/south-africa Read More