A firm’s decision to invest in a foreign country is normally motivated by the need to increase profits by exploiting specific advantages available in another country. The firm must consider the micro-economic factors such as the technology available, its marketing skills and its ownership advantages prior to investing in an alien environment. Of most significance, however, is the nature of the business environment in the foreign country.
Underlying a firm’s choice for a particular foreign investment location is the comparative rates of return expected between two foreign markets. Factors such as availability of capital, labor, as well as favorable business environment, give a country a comparative advantage over other countries. A firm’s investment decisions in foreign markets are influenced by the comparative advantages amongst countries. The US should invest in Australia.
Comparison between Australia and Mexico
In making investment choices, market-oriented factors including market size, relative costs, taxation, and the level of infrastructural development are important. For a small computer software firm, Australia would be a more suitable investment location than Mexico. In Australia, government policies give international investors a cost-effective, innovative, as well as a low-risk business environment.
Australia is ranked fairly at number ten globally for ease of doing business for foreign investors compared to Mexico’s number 35. The cost of registering and operating a subsidiary business in Australia is low at 5% of the total investment. Additionally, Australia’s foreign investor protection index stands at 5.7 compared to Mexico’s 6.0.
The Australian population of 22.8 million people provides a large market share for technology products. In Australia, the total tax rate is 47.9% of the total profit while Mexico’s tax rates for investment stands at 52.4%. Thus, Australia’s business environment presents high opportunity and low costs relative to Mexico for new investments.
In setting up a new investment in Australia, a collaborative approach would be the best strategy. In Australia, government incentives are awarded to local companies to promote their growth.
Furthermore, government practices often favor local companies, as opposed to foreign control. Thus, a joint venture with an established technology company would be appropriate. In joint ventures, the risks and operating costs are minimal; therefore, a company has an advantage of improved access to extra financial resources, new technology, and improved managerial practices.
Joint ventures focus on exploiting new markets as well as facilitating the transfer of skills and technologies. Through joint ventures, partners combine existing technologies to diversify their product offerings. In addition, the local partner with sufficient knowledge of local market would contribute to improved business performance. The equity share for an international company operating a joint venture in Australia stands at 35%. Therefore, a joint venture in Australia would enjoy the benefits of incentives and favorable business environment.
In selecting the location for foreign investment, the focus should be on exploiting the local market and expanding globally. This can be enhanced through well-developed local infrastructure, advanced information technology, and access to cheap, skilled labor force. With regard to information technology, Australia provides one of the largest ICT markets for imported ICT products ranked at position 14th globally.
In Australia, telecommunication industry takes 40% of the total market share followed by computer systems trade. This indicates the importance of Australian market for emerging technologies globally. Moreover, the ICT industry is projected to grow at an average of 6% annually between 2010 and 2014 due to increased government spending in the ICT sector.
During the year 2008/2009, government spending in ICT sector stood at US$4billion to stimulate growth of the industry. The good business environment and the fact that Australia is a large consumer of technology products and services mean that Australia is a suitable investment location.
Australia’s comparative advantage over Mexico
|Ease of doing business globally||35||10|
|Direct costs (1-10)||3||1|
|Market Share (1-10)||3||2|
|Costs and Risks||Australia||Mexico|
Australia has advanced physical infrastructural facilities consisting of an integrated road network system and efficient freeways. The major infrastructures provide access to all airports in major cities such as Melbourne and Sidney. There is also rail transport linked to major ports for freight transport.
Tullamarine Airport in Melbourne is the major airport in Australia that handles over 35% of total airfreight market. The availability and quality of the key raw material and labor required during the production process is another factor that influences the location of foreign investment. In Australia, skilled labor is available at affordable rates. Additionally, the market for technology products and services is also high.
In order to minimize costs, my investment in Australia would involve local Australian citizens and expatriate employees. This would allow transfer of technologies to diversify and expand the existing product portfolio. Additionally, hiring local managers who understand the Australian market would increase profitability. This approach would reduce costs and risks in many aspects; it safeguards and increases access to local financial resources, new technologies, better managerial practices, and enhances the economies of scale.
In making a decision to invest in a foreign location, market oriented factors that minimize risks and costs must be considered. The macroeconomic environment in a foreign country, as well as the potential market share, offers a country a comparative advantage over another. Australia’s business environment is better compared to that of Mexico. In this regard, a new investment in Australia could be more profitable than in Mexico; therefore, the US should invest in Australia.