Michael Mwngi

 COUNTRY AND INDUSTRY SECTOR ANALYSIS Student’s Name Name of the Class Professor’s Name University Affiliation City State The Date Country industry and sector analysis BAT (British American Tobacco) is a multinational corporation dealing with worldwide manufacturing of tobacco products. The company is headquartered in London, UK, and it is among the top five largest tobacco companies in the world (British American Tobacco, n.d).BAT serves the global market by establishing franchises in different countries. The company has been listed on London Stock Exchange. In 2004, BAT signed a deal to establish a manufacturing firm in China, which is a home for numerous smokers (Watts, 2004). Estimated capital £800 million The targeted market share growth for common brands 5% China’s population of smokers 1.2 billion Targeted sales (units) 1.8 trillion cigarettes per year Targeted profit Over £ 15 billion Source: British American Tobacco China is one of the fastest growing economies with a buoyant environment for foreign investors. In 2014, the total asset stock for UK companies that have invested in China totalled to £ 6.7 billion (Callander, 2015). China’s population is high to create a strong customer base for various multinationals. BAT targeted over 1.2 billion cigarettes consumers in the Chinese market only (BBC News, 2012). China’s GDP growth rates Source: Wright, 2016. • China’s GDP growth has fluctuated over time, with annual growth rate reaching over 10% (International Monetary Fund, 2016) • These GDP fluctuations indicate that China is a maturing economy with a significant potential market for international companies. • GDP measures the economic productivity of an economy. Therefore, high GDP in China reflects a high propensity to consume which is a vital consideration for FDIs Law of one price The law of one price entails an economic theory involving price alignment for commodities or securities in the foreign markets. This price alignment is done with the consideration of the exchange rates. The British pound is stronger than Yuan. Thus, if a commodity is sold at the same price in the UK and China, the commodity will be relatively expensive in the Chinese market and the competitive power of the company will reduce. Historical inflation rate in China Source: http://www.inflation.eu/inflation-rates/china/historic-inflation/cpi-inflation-china.aspx • Inflation is one of the economic factors that affect FDIs in China. Inflation influences an investment in various ways. It reduces consumers’ disposable income, resulting in reduced consumption. • China has tried to maintain low inflation levels (Keidel, 2007). As such, the prices of services and products are relatively low. • Low inflation rates create a favourable business environment that attracts FDIs in China BOP (balance of payment) entails a statistical statement that provides a summary of financial transactions between non-residents and residents of a country as a result of international investment. Value of goods exported 2011 bn $ 199.23 2012 bn $ 213.72 2013 b $ 344.08 2014 bn $ 338.7 2015bn $ 418.64 Value of goods imported ($167.61) (202.08) (299.41) (246.5) (327.1) Value of services exported 191.4 219.4 310.59 342.11 383.29 Value of services imported (83.44) (106.11) (177) (214.48) (228.91) Net income from abroad 86.58 131.72 92.06 144 153.61 Net current transfers (31) (46.25) (66) (72.48) (94) Balance of payment 195.16 210.4 204.32 291.35 305.53 Source: International Monetary Fund, 2017 The current account figures indicate that China has had favourable and improving trade terms with other countries. The standard corporate income tax charged in China ranges between 15 to 25% depending on the agreement with the China government. The standard VAT in China is approximately 17%, although it fluctuates depending on the type of products or services (Callander, 2015). BAT estimated that a tariff of 65% charged during product exportation to China would reduce its profits compared to corporate taxes charged if it operates through the establishment of a manufacturing firm in China (Watts, 2004). Micro The establishment of a manufacturing industry in China can be profitably given the conduciveness of the current business environment. According to the recent reports, China is likely to become the most buoyant international market for FDIs (Ferris, 2015) The existence of strong financial sector and low labour costs are significant boosters to the buoyancy of Chinese business environment. Doing business in China requires patient and persistent dialogue with various stakeholders (BBC News, 2002). Every city has its unique methods of conducting business with various requirements for market entry. China’s business environment is characterised by comprehensive business regulations that govern industrial activities within the country. A high rate of technological advancement in the country coupled with effective government policies has significantly promoted the growth in individuals’ disposable income (Ferris, 2015). Risks FDI involves various forms of risks. The establishment of a manufacturing firm in China involves both commercial and currency risk. Currency risk occurs due to currency exchange between Yuan and pound. Commercial risk occurs due to other economic factors such as competitions, unfavourable variations in production costs, and compliance costs. Country risks relate to financial losses that may occur as a result of factors related to economic, social, political, and cultural issues in the country (Busse and Hefeker, 2007 p 402). Establishment of a manufacturing firm in China involves some unfavourable variations in revenue due to various economic factors. Change in interest rates tend to lower the capacity of companies to obtain business capital Inflation rate and political instabilities contribute to reduced profitability of organisations through reduced sales (Hayakawa, Kimura, and Lee, 2013 p 71). FDI involves operating in an environment dominated by a new culture. Cross-cultural risk Company’s profits Cross- cultural risk may be encountered through issues such as inefficient labour management as well as the lack of culture-focused business strategies. China has various incentives that make it attractive to FDI. Some of these incentives include low labour cost, large population of consumers, and low inflation rates (United Nations, n.d). Conclusion The establishment of a manufacturing firm in a new country requires strategic planning. Various factors such as the level of currency, country, and commercial risk involved need to be considered. China forms a highly buoyant market for FDIs due to favourable business climate The major incentives to establishing new firms in China include factors like low inflation, political stability, high population, and low labour cost. Recommendations Investors must assess the viability of an investment and its potential for success in a country like China where competition from domestic industries is high China has a good economic climate which is contributed by various factors such as low political risk and stable financial markets. A company seeking to achieve a high profitability growth would consider China due to its greater population of consumers. However, it is important to consider various drawbacks associated with FDI in China such as government regulations and stiff competition before making a decision regarding FDI in the country. References BBC News. 2002. UK manufacturers Lured Overseas. [Online]. 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