Country Risk for Zeus Plc - Assignment Example

Country Risk: Zeus PLC Case Study Executive Summary Operating a business in a foreign country could be open up better business opportunities but there are many challenges the business operators should overcome in order to turn the available opportunities into business revenue. The report provides an analysis of investment opportunity for Zeus PLC, a UK based company planning to engage in mining business in Malaysia. The cost of operation is estimated at US$1.5. The objectives of the report are to analyse various risks the business managers are likely to face as they engage in the investment plan. The various risks examined include the political risks such as tax legislation, risk due to foreign exchange rate variations, inflation rate, interest’s rates, etc. When business extends its operations to foreign countries it has to comply with regulations of the host country as well as those of the mother country. The report examines general business environment in UK and Malaysia in order to decide the best source of business funding and understand the prevailing challenges that Zeus PLC is likely to face during its operations. The company will contribute to growth of UK and Malaysia economies through creation of employment opportunities, generating revenue, etc. Its operations will be influenced by the labour laws of the two countries. In order to minimize the cost of operations the company should set its operation as branch in foreign country and use the local currency to pay its workers in order to reduce effects of currency exchange on cost of labour. Table of Contents Table of Contents 3 Introduction Malaysia is a mixed economy in which both private and public sectors are actively involved in business, and the country provides an enabling business environment for both domestic and foreign companies. “The services industry including business services (wholesale and retail), financial transport, communication and real estate subsectors contributes 58.6% of the economic Gross Domestic Products (GDP) as of 2011” (Ibp Inc. 2014. P. 124). Manufacturing sector is the second (contributing 27.5%) while agriculture and mining industry takes third and fourth positions with 7.3% and 6.3% respectively (Export.gov. 2014). However, existence of "tight fiscal policies, nonaggressive consumers, and restrained global growth" services is likely to limit the economic growth in UK (PwC. 2014). The government aims to "promote foreign investments through by deregulating Foreign Investment Committee’s investment procedures” (Dana, Mahdi, Zin, Ramli, Nor, & Mohd, 2013. P. 11). The report examines general business environment in UK and Malaysia in order to decide the best source of business funding and understand the prevailing challenges that Zeus PLC is likely to face during its operations. The Malaysian economy is business focused and favourable to start and operate a business. Zeus PLC is a UK based company and intends to open its office in Malaysia in order to be able to exploit it mine in the Malaysia. Country Risk Economic Risk Europe in general and UK in particular have developed an economy across world with low very low risks facing businesses operating within their territories (Ibpus.com, 2014). This implies that operating the business environment in UK is quite stable compared to other parts of the world. Being a member of European market UK enjoys free movement of capital, services, goods and people and the use of a common currency across Euro-zone. The inflation rate is fairly under control in UK thus enabling the financial service providers to charge low-interest rates (World Bank Group, 2014). For more details about the economic risk in UK see appendix 1. By taking its operations to Malaysia, the Zeus PLC will be in a position to enjoy friendly business environment better that that of home country. For example, in 2014 UK was ranked position ten while Malaysia was ranked position six globally "in terms of ease of operating a business" (Vincent, Chang & Thorson, 2010. P. 314). The Malaysian economy is characterized by stable labour sector, low-interest rates, strong employment policies and government incentive processes to encourage local consumption. The Malaysian government focus to promote economic development through Economic Transformation Programs (ETP) with the primary targets on 12 vital areas known as the National Key Economic Area (NKEA) (Ibpus.com, 2014). The Malaysian government has adopted holistic approach to nurturing competition in all economic sectors through adoption of conventions and market-friendly policies in order to generate new sources of growth and support value addition in all sectors (Oxford Business Group Malaysia, 2008). Malaysian government provides investment incentives to foreign investors by eliminating restitutions of capital and earnings. The Malaysian government encourages Foreign Direct Investment in Malaysia in order to create employment opportunities for the local citizens (Export.gov. 2014). Therefore, operating opening a branch of a foreign company in Malaysia will receive a cordial welcome from the government and citizens since the country has a culture that values business operations. Political Risks The Malaysian economy is well-endowed with natural resources such as forestry and agricultures Kamarul & Kayathry, 2012). It exports mainly agriculture and mineral resources such as petroleum. In order to oversee the financial stability, the new banking regulations give the banking industry powers to stabilize the financial position of the country’s economy (Ross, 2012). The regulations have brought changes in taxation, executive bonuses and barring risky behaviour. The legal tender for Malaysia is Malaysian Ringgit (Lin, Teh, Chong, Yee-Loong, 2012). The Malaysian economy has a score of 69.6 in terms of economic freedom and is 37th freest economy globally (World Bank Group, 2009). The economy enjoys significant freedom in the areas of finances, labour, investments and business freedom. Malaysia was ranked position six in the world in simplicity of doing business and is the best in the world in terms of acquiring credit (PKF, 2014). The Malaysian government provides tax incentives to the foreign investors to promote foreign investments and especially the companies willing to incorporate local affiliates (Nor, Aziz, Nazri, & Azrin, 2011). The foreign companies are incorporating local firms and working as approved businesses enjoy up to 70% tax exemption of the company’s statutory income (Ross, 2012). The sterling pound (UK local currency is a bit stable than Malaysian Ringgit which implies in case of inflation the sterling pound is less affected than Malaysian ringgit (Crown copyright, 2013). Therefore, foreign companies such as Zeus PLC operating in Malaysia can enjoy greater returns due to tax exemptions. Investor protection The government of Malaysia is putting effort to create a simpler business environment. The key changes the government aims to introduce include easing restrictions and necessities to appoint expatriates, increase the limit of sugar storage and reduce the time required for transferring the land (Crown copyright,2 013). The aim of the government in easing the requirements of doing business is so that they can attract more foreign investors. Since the introduction of PEMUDAH in Malaysia there have been changes in the acquisition of credit, taxation, contract enforcement and handling of construction permits (Bryan Cave LLP, 2012). In order to reduce the country risk, the company’s management should use local currency (Malaysian Ringgit) to set pay for the cost. Therefore, the cost of operating the business might remain unaffected by the changes in exchange rate and inflation. Also, it has good investor protection and cross-border activities Financing Companies The Zeus PLC, which has its operations in UK only and intends to extend to Malaysian, requires US$1.5 billion to finance its operations. The company has various options to raise the required funds from it mother country (UK). Being a public Limited corporation, the main source of financing could be through sale of additional shares to the shareholder in the form of right issue (Crown copyright, 2013). The advantage of using this method to acquire funds is that the finances are permanent in the business, and the company is not obliged to pay a dividend in case there is no profit realized from its activities. In addition, the company can raise additional funds through the sale of some its assets (Ibpus.com, 2012). Furthermore, as an established company Zeus PLC can get loans from financial institutions in UK and use the money to fund its mining activities in Malaysia (Oxford Business Group Malaysia, 2008). Other alternatives include the use of retained earnings instead of issuing dividends to the shareholders and sale of some of its unused assets (Singh, Yahya, Amran, Nabiha & Siti, 2009). It is appropriate for Zeus PLC to acquire finances from UK to funds its mining activities in Malaysia because it is already established in UK where thus opening up more opportunities for raising finances than in Malaysia where the company has no credit rating. Furthermore, by using the home currency is beneficial to the company because of lower interest rates in UK compared to Malaysia (Faul, 2008, p. 178). The UK tax regime protects domestic investors operating international subsidiaries in other countries against double taxation (Bryan Cave LLP, 2012). Therefore, Zeus PLC will be subject to Malaysian taxation policies and might be exempted from paying corporate tax to the UK government. However, the company will pay higher tax in Malaysia that what they would pay in their home country (Faul, 2008, p. 228). For example, in UK the corporate tax is 24% while in Malaysia it stands at 25%. However, by using the home currency the company might gain in terms of exchange rate differentials (Ibp Usa, 2007). For example, since sterling pound is a stronger currency compared to Malaysian Ringgit the company stands to gain financially during the exchange of sterling pound to Malaysian ringgit because the sterling pound does not easily fluctuate in value. Utility Theory The difference in tax rate between Malaysia and UK is almost equal while the exchange rate is stable (Batra, & Singh 2013). Therefore, according to International Fisher Effect the inflation rate of Malaysia in comparison to UK is almost negligible. Therefore, Zeus might not be exposed to significant inflation risk by setting up their operations in Malaysia. Furthermore, the Malaysian central bank has put measures to stabilize the country’s currency in order to control inflation (Asefeso, 2012). Therefore, the Zeus PLC cost of operating business in Malaysia might remain quite steady due to low risk of inflation. The expansion of Zeus PLC operation to Malaysia is of significance to the UK and Malaysian economic developments. The company will spur the growth of the Malaysian economy through creation of employment opportunities for the local community and contribute to growth of Malaysian GDP through tax levies on the earnings of the company as well as income tax from the workers (Dana et al., 2011). On the other hand, the company will create employment opportunities for the UK people who will be hired to manage the subsidiary firm in Malaysia. In addition, the company will generate foreign income for the home country (UK) thus increases in growth of the economy (Batra, & Singh 2013). Therefore, the exploration of the Zeus mine in Malaysia will create a utility to Malaysian and UK government, community and the investors in Zeus PLC. Zeus should operate as a Branch of a foreign Company in Malaysia in order to reduce the cost of starting the operation. The Malaysian government recognizes the establishment of an office of a foreign company in Malaysia. "There is no need to register the company as required by the companies Act” (Asefeso, 2012, p. 86). However, Zeus PLC has to seek the approval of Malaysian government in order to get recognition as a foreign branch company (Ibp Usa, 2007). The activities of the Zeus branch will acquire its full funding from the UK based head office. The financial sector favours lending to small businesses through the new loaning system introduced by the banks. Therefore, being a foreign company and well established in UK Zeus can be able to acquire funding in Malaysia hence they have to get funds from UK. The exchange rate of USD to MYR is 3.04 thus the investment requires about MYR 4.5 billion. The sterling pound remains the currency of trade in UK while Malaysia uses Ringgit. Availability infrastructures of support services and facilities of cheap labour ready to work and undergo training to achieve greater productivities in Malaysia presents a favourable business environment for labour intensive mining operations of the Zeus PLC (Ibpus.com, 2012). Conclusion and Recommendations The UK and Malaysian government offer fairly stable business environment with minimal requirements and strong business culture. The company should source its finances from the domestic country where it is already established. Since the domestic and foreign business environments in UK and Malaysian respectively are relatively steady and supportive of business Zeus might enjoy fewer risks in its operations and might have little challenges in the foreign country due to similarity of business environment. The company should open a branch of a foreign company in Malaysia and hire local workers and should pay them using local currencies in order to reduce negative effects of currency exchange in cost of operating a business. The company should hire local workers in Malaysia to operate it since the labour market is fairly stable. Also, by getting the support of the local people the company can reduce conflicts with local people thus enabling them to continue with their activities. List of References Asefeso, A. (2012). CEO Guide to Doing Business in Asia: (Singapore, Malaysia and Indonesia). AA Global Sourcing Ltd. Pp. 1-206. Batra, & Singh, G. (2013). 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Global Business and Management Research: An International Journal, Vol. 1(3-4). Vincent, Y. A., Chang, Y. & Thorson, A. (2010). A Legal Guide to Doing Business in the Asia- Pacific. American Bar Association. Pp. 1-500. World Bank Group, (2014). Ease of Doing Business in United Kingdom. UK Available at World Bank Group. (2009). Doing Business 2010. USA; World Bank Publications. Pp. 1-215. Appendix Appendix 1 Source (PwC, 2014). Read More