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Question 2 (a)
Question 2(b)







Assume that you have been approached by a competitor in China to engage in a joint venture. The competitor
would provide the classroom facilities (so you would not need to rent classroom space) while your employees
would teach the classes. You and the competitor would split the profits. Discuss how your potential return and
your risk would change if you pursue the joint venture.

Multinational corporations (MNCs) are defined as firms that engage in some form of international business
(Madura). The managers will try their best to increase the value of MNC by involving such as international
investing. Therefore, International Financial Management is important for any companies that have desired to
enter international business. Because, these companies must know how the movement in exchange rates,
inflation, competitors and others.

The decision of how to enter a foreign market can have a significant impact on the result. Expansion into
foreign markets can be achieved via the following four mechanisms, exporting, licensing, joint venture and
direct investment (QuickMBA). For this company, we used joint venture as our mechanism to enter foreign
market. The joint venture is a venture that is jointly owned and operated by two or more firms (Madura). The
firm that has intended to enter foreign market will proceed with engaging a joint venture. They will do joint
venture with local company. Our company and competitor will apply respective comparative advantage for this

From this issue, our company will provide a service to teach for those who are not used English as their
medium to communicate with other people. It is difficult to do any trading without used English as main
language. If, all of us use same language, it will minimize the barriers that occur during international trade.
The return is, we will not spend too much money, because the competitor will provide facilities. So, we are in
win-win situation.

We can expand our business and participate in capital markets by negotiating and acquiring shares, bonds and
other securities listed by the Foreign Investment Statute. These activities must be conducted via a foreign
investment capital fund and be administered by a local trust company or stockbroker that has been authorized.
Thus, we can use the company that willingness to do joint venture with us and act as deputy in China.

The potential return from this joint venture are, our company will viewed as insider and it will make less
investment required. For example, we do not have to pay any renting for a class or any facilities as they already
provided to us. We also can take it as our potential for learning in order to maximize our value and enter
foreign market in large scale. The joint ventures are from combining resources between two companies with
different market or country. It will overcome ownership restrictions and cultural distance.

For the risk, we will have knowledge spillovers as we know that the partner may become a competitor. It ill
difficult to manage and dilution control. So, we need to sign agreement that will be a guideline during our joint
venture. So, we can avoid misunderstanding or problems that arise in future. Other than that, the joint
ventures have a greater risk than exporting and licensing. Because, it involve two companies in generate a
profit. It must have decision from both if they want to do something.


If you pursue this idea, explain how the factor that affects international trade flow could affect the
Chinas demand. Which of these factors would likely have the largest impact on the China demand for
your CDs?
Firstly, it will affect to the inflation. If a country's inflation rate compared with countries with which it trades,
the current account was expected to decrease, other things are equal. Consumers and companies in the country
will most likely purchase more goods abroad (due to local high inflations), where it affects in increasing the
Chinas demand, while exports to other countries will decline.
Secondly, affect to national income. If a countrys income level or national income increases by a higher
percentage than those of other countries, its current account is expected be decrease, while other things being
equal. As the real income level (which adjusted for inflation) rises, so does the consumption of goods. The
percentage of that increasing in consumption will most likely reflect an increases demand for foreign goods.
The third point is, the government policies. Chinas government can have a major effect on its balance of trade
due to its policies on restrictions on imports, subsidizing exporters, or the lack of enforcement on piracy. Next,
the exchange rates where countrys currency is valued in terms of other currencies through the use of exchange
rates, so that currencies can be exchanged to facilitate international transactions.
The largest impact is lack of restrictions on piracy. In some cases, a government can affect international trade
flows by its lack of restrictions on piracy. In China, piracy is very common. These individuals, who called
pirates, manufacture CDs and DVDs that look almost exactly like the original product produced in the Malaysia
and other countries. They will sell it on the street at a price that is lowered than the original product price.
They also sell to retail stores. It will be estimated that producers lose billion in sales per year due to piracy in
China. Therefore, Chinas demand for imports is lower. The other countries have a large balance-of-trade
deficit with China because of piracy. However, even if piracy were eliminated, the trade deficit with China
would still be large.
Suppose that you believe the China government will impose a tariff on the CDs exported to China. How could
you still execute this business idea at a relatively low cost while avoiding the tariff? Describe any disadvantages
of this idea to avoid the tariff.
The ideas will be good and it will help the customers to learn well without teaching energy and it will be easy to
people to learn basic of the English language. The china government will impose a tariff on the CDs exported
from Malaysia to china but there is the way to avoiding the tariff even we sale the CDs in low cost relatively.

It will show did global companies can realize the benefits of importing goods without carrying the financial
burden associated with foreign trade by bringing goods into the country without bringing them into the
country. It the way even the CDs was imported to China from Malaysia but we still can avoid the tariff or tax

Technically the name of the system is known as Foreign trade zone (FTZ), and it will be using to avoid from
paying duties and fees is exactly what was intended when FTZ was created. The council have approve the
establishment of SFTZ on August 22, 2013 but it officially launched on 29 September 2013 and have supported
by Chinese Premier Mr. Li Keqiang, it become the 1st free trade zone in mainland China. The zone is covers are
of29 square kilometres and it concludes 4 existing bonded zones in Pudong district.
When the import items or goods, it make their 1st pit stop in the designated foreign trade zone. They not yet
enter the country or import country as far as china law that concerned even if it travels by truck prom port to
the main city.

Goods that imports into country by SFTZ, it can be in manufacturing, and can be assembled, tested,
repackaged, warehoused, processed, relabeled, and it can be manipulated in a variety of ways. They can even
change it as long as they stay inside SFTZ and them not subject to any import duties.
The disadvantage because of avoiding tariff is the item does not give the country to get the benefit more from
the import item because they not pay the taxes. It will make you get benefit but it not gives benefit to the
Assume that the business in China grows. Explain how financial could help to finance the growth of the
Firstly, raising money through bonds. By issuing bonds, the corporation pays the bond holders a specific
amount of money at a specific date. These investors receive interest from the business firm. Large business
firm prefers bonds, as the interest they need to give such investors is less than any other way to raise capital.
The business firms need to pay interest to bond holders even if they are at a loss.
Next, raising money through leasing finance or hire purchase finance. The lessor enjoys tax benefits and may
gain from capital appreciation on the property, as well as making a profit from the lease. The lessee benefits by

making smaller payments, retains the ability to walk away from the equipment at the end of the lease term, and
may be able to negotiate build-in maintenance provided by the lessor.
Thirdly, raising money through debt financing. Debt financing is generally considered to be an inexpensive
source of capital for business, as the cost of debt is tax deductible, especially when compared to equity, which is
involves giving up part of the ownership of the company. Debt financing can be the shortterm or longterm in
nature. In Long Term Debt Financing is opted for acquiring assets like equipment, buildings or the land. To
ensure the stability of a commercial borrower a substantial portion of the debt is in the form of longterm debt.

Given the factors that affect the value of a foreign currency, describe the type of economic or other conditions
in China that could cause the Chinese yuan to weaken and thereby adversely affect your business.

There is a factor that affects the value of foreign currency and it can be happen to all country currency if not
taking serious to overcome it. One of the factors is differentials in inflation. General rule for every country is
inflation rate is consistently low exhibit the rising of currency value and the purchasing power will increase
relative to other currency. Those countries with the higher inflation will see the depreciation in their currency
that relation to the currencies of their own trading partners. This is also usually accompanied by higher
interest rates.
Second is differentials in interest rates, the interest rates, inflation and exchange rates are highly correlated.
The changing of currency values and interest rate impact, and central bank will influence over both inflation
and exchange rate by manipulating the interest rates. Higher interest rates will offer the lenders in an economy

a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the
exchange rate to rise. The impact of higher interest rates reduced, however, if inflation is high and additional
factors other to bring currency rates decline. By this contradictory relationship exists will reduce the interest
rate that low interest rates and the exchange rate tends to reduce

Next is the terms of trade, terms of trade is the ratio that compares the export price to import prices, the terms
of the related current account and balance of payment. if low import growth, while export growth is bigger
than show improved terms of trade. Increased in exports showed an increase in market demand for domestic
goods, then it will increase the demand for the national currency. Whereas, if the opposite applies is greater
import than exports, the currency will decline in relation to trading partners

Lastly, the factors than can affect the value of foreign currency are political and economic performance.
National currency easily influenced by political factors in the country. Foreign investors are actively seeking
sites for investing not only see the development of the national economy and even political factors are also
important in assessing where the direction of investment. if the country's political turmoil that investors will
run away and this makes the national currency will be affected. Political unrest will disrupt the economic cycle
in the country and resulted in unstable countries experienced problems in the movement of capital to national

As the conclusion, the exchange rate of the currency is easily changed because of the factor that happens. In
China we can see it will affect if the factor above happen badly. So that China must stable their politic and keep
all citizens to take care and keep spending for money circulation. So that china can keep their investor to come
and invest inside china.

Explain how your business will likely be affected (at least in the short run) if the Peoples Bank of China
(central bank of China) intervenes in the foreign exchange market by exchanging Chinese yuan for Malaysian

A fixed rate system that can be adjusted is a system of fixed exchange rates, but included a provision for decline
in value of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (RMB) fixed to the US
dollar at 8.2768 RMB to 1 USD. China is not the only country to do so; since the end of World War II to 1966,
all Western European countries maintain a fixed exchange rate with the US dollar under the Bretton Woods

In practice, there are a lot of foreign currency and the extent of the price to be taken into account. At the same
time, the calculation is more complicated model. Moreover, the model is based on purchasing power parity,

which indicates a constant RER. Empirical determination of the RER constant can not be achieved despite any
way, due to limitations when collecting data. Purchasing power parity may indicate that the RER is the rate at
which an organization can trade goods and services an economy (eg. Country) for goods and services an
economy other. For example, if the price of goods increased by 10% in the China, and at the same time the
Japanese currency rose 10% against the China currency, the price of the goods is to remain for a person in
Japan. Regardless, China residents still had to deal with a 10% increase in local prices. Also noted that the
rates charged by the government could affect the real exchange rate, which helps reduce price pressures.
Purchasing power parity seems appropriate only in the long term (3-5 years) when prices eventually correct
towards parity.
The latest approach in modeling the RER A set of economic variables, such as relative productivity and the real
interest rate differential.

Market-based exchange rate will change when the value of one of the two components of currency changes.
One currency will tend to be more value when demand for them exceeds the supply available. The currency will
become less valuable when demand is less than supply (this does not mean that people no longer want the
money, but only means that they would rather hold their wealth in another form, perhaps other currency).
Increased demand for the currency is due to either an increase in transactions demand for money, or increased
speculative demand for money. Demand for money transactions highly correlated with the level of the
country's business activity, gross domestic product (GDP) and employment. More and more unemployed,
more and less spending on goods and services by the public as a whole. The central bank usually less face
difficulties in adapting existing money supply to accommodate changes in the demand for money as a result of
the transaction.

Speculative demand for money is more difficult for the central bank accommodated, but the central bank is
trying to adjust interest rates. An investor can choose to buy one currency if the return (ie interest rates) is
quite high. The higher a country's interest rates, then the greater the demand for its currency. Had argued that
currency speculation can undermine real economic growth, particularly due to large currency speculators may
deliberately impose downward pressure on the currency forced the central bank to sell its currency to stabilize
(when this happens, speculators can buy the currency back from bank at lower prices, strengthening their
position, and with this making money).

Demand Ringgit Malaysia as Foreign Exchange depends on foreign demand for goods and services and the
desire of foreigners to keep their Ringgit Malaysia as cash or deposit to buy real estate, stocks, bonds and other
assets in Malaysia. Ringgit Malaysia deals depends on the wishes of consumers, firms and the government of
Malaysia Ringgit Malaysia convert them into foreign currency. This situation depends on the demand for
foreign goods and Malaysia to the wishes of the people of Malaysia Ringgit Malaysia to convert foreign
currency to purchase real estate, stocks, bonds and other assets in other countries. When the lower the
Malaysian Ringgit in Chinese Yuan terms, the lower the cost of purchased goods by the holder of Malaysia
Chinese Yuan. Which means lower prices Ringgit Malaysia in terms of foreign currencies, the lower prices of
goods, services, and Malaysia in terms of assets in foreign currencies. What should happen next is too much
demand for Malaysian goods by countries with appreciating currency. Malaysian Ringgit demand curve slopes
downward for foreign currency from left to right.

If the importer from the China to increase imports of electronic goods from Malaysia without reducing demand
for other goods Malaysia, the China demand will rise against the Malaysian Ringgit. The increasing demand for
Malaysian Ringgit will cause the demand curve shifts to the right the Malaysian Ringgit. This situation will lead
the Malaysian Ringgit exchange rates against the China will rise.

The increase in external demand for Malaysia's exports can be attributed to higher real income importing
countries for Malaysian goods. This situation will lead to the country's import demand will increase. The
reverse is true if the income of many countries trade with Malaysia is experiencing economic decline, this
situation will cause import demand of these countries will be reduced.

The increase in demand for imports will cause supply Ringgit Malaysia at the foreign exchange market
increased. For example, if the request Malaysia to computer software imported from the China increased, this
situation will lead to an increase in supply of ringgit in foreign exchange markets. This will lead to the collapse
of the Malaysian ringgit against the Chinese Yuan.

If the expected value of Ringgit Malaysia will increase, supply will fall Ringgit Malaysia. Importers Malaysia
will postpone the purchase of goods from foreign countries until the Malaysian Ringgit exchange rates actually
increased in value. This is because the increase in the value of Ringgit Malaysia in terms of foreign currencies


will result in the foreign currency is cheaper in terms of Ringgit Malaysia. This in turn causes the condition of
foreign goods become cheaper in terms of Ringgit Malaysia.

Those involved in speculative activities will try to take advantage of the volatility of the value of a currency. For
example, in Malaysia, in September of 2013 happened depreciation of the Malaysian Ringgit in US Dollar
terms. The Ringgit Malaysia has declined from the RM1 = US $ 0304 (or US $ 1 = RM3.30).

The confidence of investors and those engaged in speculative activities is important because if they are less
confident in the strength of a currency, they will release more base currency and buy a stronger currency value.
There are several factors that can affect their predictions involved in currency speculation. Among these is the
assumption that a country's currency is overvalued, causing them to release the holdings of currency is
overvalued, thus devaluing the currency. Other factors influencing the decision was the currency speculators
investor confidence in a country's banking system, transparency and efficiency of the financial system, the
government's economic policies, and assumptions about errors or weaknesses in the management of
government economic policy


1. Madura, J. (2012). International Financial Management. Singapore: Cengage Technology Edition.

2. QuickMBA. (2010). Foreign Market Entry Modes. Retrieved April 2, 2015, from QuickMBA Strategic
3. Riley, G. (2014, November 1). Exchange Rates - An Introduction.


4. foreign Exchange Market-Economic-Political and psychological Factors. (2015, January 1). Retrieved