Language Connections Centre is a U.S business with operations in Mexico that teaches individuals to speak English. The proprietor resides in the United States but, has invested $60,000 in Mexico by setting up a subsidiary in Mexico that contains an office and leased classroom. The school offers two kinds of English courses: one-month structured and one-week intensive refresher courses for persons who want to improve their skills prior to visiting the U.S.A. The teaching services are advertised in the local Mexican newspapers and the owner hires locals who can speak English and teach the language to others.
The revenues and expenses linked to the language center are denominated in Mexican pesos. The business expenses are stable, but the revenues vary based on the number of clients who sign up for the courses. At the close of each month, the subsidiary sends most of the profits to the U.S. Although the Language Connections Centre has a basic model, it still needs the same decisions that are faced by the bigger MNCs.
This paper examines the firm’s opportunities and exposures as well as the potential strategies that can be pursued by the business.
Discussion and AnalysisTheory of Competitive AdvantageCompetitive advantage can be defined as a strategic advantage that a business has over its competing firm in a competitive industry. In 1985, Michael Porter recommended the competitive advantage theory that proposes that countries and businesses ought to pursue policies that generate high-quality goods for selling at higher prices in its markets (Stonehouse & Snowdon, 2007).
This can be exemplified by expanding the business by setting up a subsidiary in foreign markets like Mexico. But, while the owner will experience benefits by going global, there will also be some pitfalls. The competitive advantage arises when the entity develops or acquires one or a combination of attributes that allow the business to outperform the rivals (C?ater, 2005).
Based on the information provided in the case, the theory of competitive advantage justifies the existence of the Language Connections Centre in Mexico. The attributes that offer the business competitive advantage is the access to cheap labor and high demand in Mexico. There is a high demand for locals who want to learn to speak English and firm uses locals who are in proficient in English to teach others. Mexico is an emerging market with increasing access to capital can be used by businesses to aid in boosting potential and availability of products.
The global capital markets permit firms to raise long-term finances through the provision of market for securities, for debt and equity funding (Valdez & Molyneux, 2016). As well, the markets also provide a whole range of sophisticated financial products which permit businesses not just to get capital but to ‘hedge’ against risks too. Once the Language Connection Mexican center thrives and there is a need to expand to other cities in Mexico and neighboring countries to compete effectively, the owner will need to spend more money. The owner will seek additional funding either through credit or investments. The owner can consider several sources of funding from the global financial markets to get the needed financial boost for growing the business.
First, one of the fastest means of gaining capital is through incorporating whereby the owner will offer shares to the general public or to a designated set of investors. Since the Language Centre is already a global business, this will enhance the prospects of the investment to foreign investors. Secondly, the owner can issue debentures where there is no loss of control but one is required to pay interest. Furthermore, venture capitalists offer loans for funding new and expanding businesses, especially established entities that have crossed global boundaries in exchange for a fraction of ownership and interest.
The owner could also seek loans from local banks and other financial institutions at a lesser interest rate but, security will be needed. Finally, the owner can also seek grants to fund the expansion of the business. For instance, IFC aids in increasing access to financial services by provision of funding for loans, equity along with mezzanine financing. The World Bank’s High Impact Entrepreneurship Program, managed by the National Institute of Entrepreneur in Mexico offers a matching grants scheme (World Bank, 2012). Lastly, there is the criteria that need to be reviewed to make correct financing decision that will support the growth efficiently and generate the highest value for the owners. The criteria include the amount of financing needed, loss or dilution of control, profit sharing basis, risks, interest rate, collateral needed, and terms of repayment.
Mexico is positioned in the southern parts of North America and spans an era of more than 2 millenary. The population is approximately 112,468,855.00 and linguistic communication is Spanish. The population around the capital, Mexico City is approximately 22 million. The country is renowned for its manner, socialization, as well as athletics and diversion. The business culture is relationship-heavy, hence, it is important to nurture professional friendships by behaving, communicating and interacting with the corporate world. It takes time to build ding a rapport owing to language and other cultural barriers.
The country is federation with the presidential government system with federal, state and municipal government levels. The politics sphere has never revolved around one personality, like in other countries. The Institutional Revolutionary Party that was created in 1929 has been the dominant player. Security and corruption are a huge challenge since domestic trends are not reassuring.
The economy is relatively stable, with massive potential benefits of doing business on condition that one has an accurate knowledge base. The most expedient feature of the economy for a foreign investor is the Mexican trade policies that has the freest trade agreements which offers market access of more than 50% of global GDP. Additionally, the legal system plus tax regulations guarantee there is no discrimination between the Mexican and foreign businesses. There are no minimum requirements of capital for launching businesses, however, completing compulsory license requirements is expensive. In spite of this macroeconomic stability, there is a wealth gap throughout Mexico, denoted by a combination of poverty and affluence. In the recent past, the disparity has slowly improves. The other risks include the strict legal requirements and competitive markets.
there are factors that influence the fluctuations and variations in the peso which explain currency’s weakening and adverse impact on the business operations. They include changes in inflation rates, interest rates, Mexico’s balance of payments, government debt, terms of trade, political stability and economic performance, economic recession, in addition to speculation (Wu & IMF, 2013). Since the profits are relayed to the U.S monthly, the owner should stay up-to-date on the above-mentioned factors to aid in evaluating the optimal timing for international transfers. Finally, a deteriorating exchange rate erodes the purchasing power of gains and income derived from the returns (Lo?pez-Marmolejo & Ventosa-Santaularia, 2018). Hence, the owner should monitor Mexican economic reports that have an instant impact on exchange rates like GDP measurements, unemployment, inflation rate, as well as wages and productivity reports.
The current account replicates the balance of trade and the earnings derived from foreign investments that constitute transactions including exports and imports. In January 2019, Mexico’s trade deficit broadened to $ 4810.00 million from $ 4420.00 million in January 2018. This is the record trade gap in history, since imports increased by 6.1% and exports increased by 5.7% (IMF, 2018). The deficit is an indication that Mexico spends more on international trade than the gains. Mexico is also borrowing capital from external sources to lower the deficit since foreign currency is required which in turn, lowers the pes rate. Since Mexico’s current account deficit has continued for an extended time, the impact has been slow economic growth, higher inflation rates, and interest which have an adverse impact on domestic businesses (Blecker & Ibarra, 2013). The Language center’s activities fluctuate based on the amount of clients who sign up for the courses, which is linked to consumer spending and income levels. Hence, the business activities can be linked to the BOP deficit between USA and Mexico.
The Language Connections Centre is involved in global trade, hence it is exposed to substantial foreign exchange risks due to the current account deficit and other adverse factors affecting the Mexican peso. This leads to challenges in raising working capital, accessing funding, and lower profitability. Accordingly, there is a need to identify measures for reducing foreign exchange exposure. One of the recommendations is that the management can use appropriate hedging financial tools to minimalize the negative effects of the peso depreciation. Financial institutions have developed various services that permit businesses to hedge against the foreign currency risks using hedging tools like forwarding contracts, forex swaps, money market hedges, stop loss & limit orders, and currency swaps.
ConclusionThe Language Connections Centre has a basic model, where the parent firm is based in the U.S and subsidiary is based in Mexico. This paper examined the opportunities and exposures as well as the strategies that can be pursued to enhance growth and success. One of the largest growth aspects for U.S. firms doing business in Mexico is access to the low labor costs and growing middle class that presents the massive market potential for clients. Just like other emerging markets like Mexico, there is increasing access to capital which can be used by businesses and aid in boosting potential and availability of the products. Nonetheless, there is a need to review the economic, political, cultural, demographic and legal issues that have an impact on the operations. Also, the weakening of the peso is attributed to changes in inflation rates, interest rates, BOP, Mexican government debt, terms of trade, political stability and economic performance, recession, in addition to speculation. One of the factors, the prolonged current account deficit has slowed economic growth, augmented inflation rates, and interest rates which have an adverse impact on the center’s revenues and profitability. Finally, exchange rate risks cannot be evaded completely when conducting business abroad, however it can be alleviated considerably using various hedging methods.
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