The World Health Organization, ABC Corp British Manufacturer Case Study & Economic Risk & Market Leadership - Economics Assignment Help

Assignment Task

Question 1

The World Health Organization declared the COVID-19 virus a pandemic due to its unprecedented global spread (UNCTAD, 2020). Even though COVID-19 initially affected people and public health but it has also disrupted global trade. It is estimated that world trade in goods and services could fall by approximately 10%-15% in 2020 (Oxford Economics, 2020). Trading activities across border is also facing challenge of inadequate customs clearance and compliance controls. Though, many businesses are experiencing shortfall of cash flows, ABC Corp. is getting many orders from the customers due to high demand for its medical supplies. Demand for their product is increasing. However, the order from different countries started to pile up. The firm had to delay some of its existing delivery and request extra time for new delivery than their original quoted time. This is due to delay in supply of raw materials and human resource.

ABC Corp. is proud to be 100% British manufacturer as everything is made in Britain. Furthermore, raw materials required to manufacture the medical equipment are also sourced from one British suppliers. ABC Corp. is market leader for the quality of its product. However, one of the crucial reason why ABC Corp. product delivery is being delayed is its supplier inability to deliver the raw materials on time. In addition, government rule of two meter distancing is causing disruption in the production plant. For example, ten employees used to work in each production shift. Now, only five employees are allowed due to 2 meter distancing.

Over the years, many companies from India and China mailed free samples of their supplies along with some pricing information. Your production manager suggests that some of the suppliers sample from India are good quality and cheap. Now, importing the raw materials from other countries could also be delayed due to slow customs clearance.

Given the fact that, ABC Corp. (UK) export to Asian countries doubled recently many companies contacted for License to produce the product and sell in Asian countries. Current total sales of ABC Corp is £3 billion and sales in Asian countries contribute to 65% of the firm yearly revenue. This means that the demand of ABC Corp. product is not high in Asia due to this pandemic rather demand is consistent. Therefore, you were also thinking to go for foreign direct investment (FDI) or Licensing. Now there are two Asian countries you are particularly thinking of investing in. Your Business development manager made some analysis for the countries the company interested. The Business development manager suggested that Chinese yuan is weak now compared to the pound, but is expected to depreciate against pound. Moreover, the Chinese labour market is tight and it is expected that wages need to be competitive. On the other hand, in India cost of labour is low compared to China and the UK. The Indian rupee is weak against the pound now and it is expected to be strengthen against

pound. India is member of the South Asian Association for Regional Cooperation (SAARC) that allows preferential tariff for exporting to SAARC countries (e.g., Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka).

Considering the fact that the demand for ABC Corp’s products are high in Asian countries (e.g., Bangladesh, Bhutan, India, Pakistan, Sri Lanka) and disruption of production and sourcing raw materials during this pandemic they are thinking of either going for Licensing or FDI. Licensing will allow ABC Corp. to charge loyalty fees to the foreign company to manufacture and distribute their product in the Asian region. On the other hand, FDI will allow the company to set up its manufacturing facility in China or India and you will control the business.

Q-Should ABC Corp. go for licensing or FDI? Provide rationales based on the case study information, advantages, and disadvantages for each method.
Q-How your decision in (i) can affect ABC Corp. future transaction and economic risk exposure?
Q-Explain how ABC Corp. can reduce the transaction and economic exposure you have discussed in part (ii)?

Question 2

Q-A UK multinational company has subsidiaries in the US, China and South Africa.
Q-Describe the types of foreign exchange exposures the company may be facing.

Q-Discuss the arguments for and against corporate hedging of foreign exchange exposures and advise the company whether it should hedge the foreign exchange exposures that you have identified in (a) above?

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