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Foreign Direct Investment: Case of Adfresh Farm in Singapore

Introduction

Political and legal risks, as well as financial and economic risks are very vital aspects to consider while establishing a business in a particular country. Lack of identifying these risks in time and planning on how to adjust accordingly could possibly affect the overall productivity and functioning of the business. The aim of this paper is to explore financial and economic risk, political and legal risks that Adfresh Farm might face in Singapore, and how these risks could be solved for better performance of this industry.

Political and Legal System in National Environment

Country Risk

Country risk is the introduction to possible loss or unfavorable impacts on a business operations and productivity caused by developments in a nation’s legal and/or political structures. This type of risks can be referred to as political risks. Every nation has distinctive political and legal structures that frequently constitute defies for business proper functioning (Ho, 2011). Different factors in a nation give rise to country risk these include unintentional outcomes. This occurs when policy makers may enact laws that are unpredictably strict, lawmaking or political activities may affect the business negatively unintended. Interests in overseas nations that the company has direct operations. Additionally country risk may arise due to inadequate enforcement of particular laws and regulations in a country. For instance, regulations that defend intellectual property exist as policies but are not sufficiently implemented (Lam, 200).

Political and Legal Systems

Singapore is a country that enjoys a continuous political stability. The report of the Political and Economic Risk Consultancy appreciates that Singapore enjoys the lowest political risks in the Asian continent (Reuters, 2008). The electoral process in Singapore and the elections is very democratic and is never characterized by chaos. Furthermore, the leaders in Singapore operate democratically and uphold the rule of law in their transactions. Since independence, the country has enjoyed advanced political stability that has allowed businesses to flourish. The country is democratic and citizens elect their leaders who are supposed to represent them. This political stability has led to peace in the country and higher living standards which has facilitated great business opportunities in the country. Given the low political risks in Singapore, it offers an attractive destination for FDI(Tan, 2003).

Types of Legal System

The courts in Singapore exercises extreme independence in determining the course of justice. In Singapore, the judges have the power to give meaning to laws based on the conditions of a person’s case. Civil law is a form of legal law where the frameworks of laws are clearly scripted by legislative bodies. Religious laws are powerfully influenced by religious beliefs, moral values, and ethical policies. Most religious law structures are founded on Hindu, Islamic, and Jewish law. The Islamic law sets traditions of conduct to be adhered to in politics, marriage, economics, and other social and financial matters (Sen, 2003).

Participants in Political and Legal Systems

Different institutions and groups participate in political and legal structures. These include the government or the public sector that operates at the national and local levels. Global associations including World Trade Organization, United Nations, and World Bank take part in legal and political systems (Tracy, Sikorski, &Huu, 2003). Another participants in these systems is the regional economic blocs these includes NAFTA, European Union, and other blocs. Unique interest groups, including environmental advocates and labor unions also participate in these systems. In addition, local competing business, which go up against overseas business are participants in the political and legal systems.

Types of Country Risk Produced by Political and Legal System

Political and legal systems promote a variety of country risks (Pavoni, 2012). Expropriation may also arise this is where assets are taken by force without compensation. Additionally nationalization crops up where an industry is taken over with or without any compensation. The political system may also lead to creeping expropriation; this is where the government alters laws, and regulations following huge local investments in properties by oversea MNEs. Political structures may also lead to sanctions and embargoes to Singapore (Nathan, 2002). This causes governments to react to unpleasant activities of other nations by establishing sanctions and embargoes. It may also lead to a boycott against companies and nations. Political structure may also lead to insurrection, war, and terrorism. Legal systems may bring rise to different types of country risks include overseas investment rules, monitoring on operating forms and practices, distribution and marketing rules, income repatriation law, insufficient legal structures, internet and e-commerce monitoring, environmental law, and contracts rules.

Singapore is a politically stable country. It is a parliamentary republic with People’s Action Party (PAP) ruling the government since the year 1959. The country has been strike free and peaceful for many years. Its tripartite mode has largely contributed to its peaceful industrial associations. This is an advantage for Adfresh farm, as it will enjoy the political stability in the country. However, compared to Australia the Singapore market is relatively small domestic market as compared to Australia (Alon, Mathew, & Rajesh, 2006). This would give a challenge to Adressh farm unless the company targets both the Singapore and Australia market. Importing to Australia the company’s products will pose another challenge. The Australian dollar is cheaper compared to the Singapore dollar this will make the importation process expensive. Therefore, the goods will have to be sold at higher price compared to companies that are producing goods in Australia. Since the company will be selling to the Australia market but will incur high importation costs the company will not make profits as compared to when it is based in Australia.

Adfresh farm are likely to encounter these types of risks as they establish their industry in Singapore. Therefore, a risk management strategy is essential for better performance of the industry. Some of the ways to manage country risks include proactive environmental scanning of the possible risks in Singapore. Adfresh farm should adhere to ethical standards in Singapore. Working with qualified local partner in Singapore will help find a way through complicated political and legal system. The industry can protect itself through legal contracts.

International Monetary Financial Environment

Currencies and Exchange Rates in International Business

There are about 175 currencies in globe. The currency system is becoming simpler; this is because many countries are adopting a similar currency. For instance, many countries in Europe have adopted the euro while a few nations such as panama are using the U.S dollar. Exchange rates are the value of a currency expressed in terms of a different currency. Fluctuations in exchange rate brings about risks such as currency risk. This risk is because of alterations in the price of one currency in relation to another. This type of risk makes cross border transaction complex between Singapore and other countries (Kotrajas, Tubimtong, &Wiboonchutikula, 2011).

How Exchange Rates are Determined

The rate of change in a free market is determined by the supply and demand in a free market. When the supply of a currency is high its price is low, if the supply is low the currency price increases. The higher the demand for a currency the higher the price of that currency, if the demand is low the price is low. The Euro or dollar fluctuation exchange rates also determine the exchange rates. If the demand for euro is increased or its supply is low then the price of euro or dollar increases this affects the exchange rate market. When the price of the euro or dollar decreases due to low demand and high supply, then these currencies become cheap and the exchange rates are affected (Ho, 2011).

 

Development of the Modern Exchange Rate System

The Years before the world war 11 experienced disorder in economics regardless of risings levels of international trade. Due to factors such as war, the international trading system collapsed. Due to the collapsing of the system, many nations established a structure for the stability of international monetary and financial structures. In the year 1944, approximately 44 nations discussed and signed the Bretton woods agreement. This agreement established a fixed exchange rate framework; it fixed the price of the U.S dollar at a founded price of gold ($35 per ounce). The other signatories approved to initiate a currency in terms of the U.S dollar and sustain the fixed exchange rate through central bank involvement. In the year 1971 president, Nixon deferred the association between the U.S dollar and gold and removed the U.S agreement to trade gold for U.S dollar. This resulted to the collapsing of the Bretton wood structure. The end of the Bretton Woods system many currencies was freely exchanged, with their price fluctuating depending on supply and demand. The fixed and floating trade rates were given equal status. Nations were not required to sustain a pegged price for their currency. The fixed and floating structures are the current trade structures (Henderson, 2012).

The International Monetary and Financial Systems

International monetary system can be defined as institutional structure, laws, and processes by which a country’s currencies are traded to another. The international monetary framework manages trading rates that have an impact on the economic activities of business and governments. The flow of capital and investment funds is assisted and controlled by a group of financial institutions under the global financial systems. This structure integrates global and national banking frameworks, countries stock exchange markets, the market of bank deposits, and global bond market.

Key Players in the Monetary and Financial Systems

The key players in the financial and momentary structures include national stock exchanges, central banks, global monetary fund, central banks, finance ministries, commercial banks, and World Bank. Some of the solution to this risk includes developing and refining analytic models for risk management. Additionally it is essential to access the actual trading data for the country (Bhattacharya, 2009).

In Singapore, economy is enticing and advancing at a very high rate, which categorizes it in the midst of the most competitive countries (Bhattacharya, 2009). The strategic geographical location of the country has made the government active in investing. Industries such as vacation industry, pharmacological, and various additional commerce industries have succeeded. Neighbouring countries offers cheap labour, which helps the country in saving on costs of production (Nathan, 2002). The deep-water harbours in the Singapore are the main essential resources. In 1960, the government took a step to change the existing economic pattern by focussing on a determined program of promoting industrial investment from its market locally and internationally (Pavoni, 2012). After 1980s, the country began to broaden horizons on its economy to gain capabilities in offering facilities such as financial, manufacturing, and communications for global businesses. The government owns significant useful properties such as land and capital, making it the main and vigorous participant in the economy. The government guides and aims the economy over and done with regulations, code of practice and inducements, and takes part in commercial undertakings through Singapore’s exceptional hybrid, the government-linked Company (GLC).

 

Risk Management Considerations

One of the risks facing Adfresh in their new market is the political risks. Since they are operating in a foreign country, the political decisions made by the ruling class are likely to affect the operations of Adfresh. However, the chances of this risk occurring is very limited considering the fact that Singapore is a very peaceful country with advanced democracy (Pavoni, 2012). In addition, the company decision to do business with a local retailer will shield them from some potential political risks.

The other risk that may affect Adfresh as they do business in Singapore is the financial and economic risk. The economic success of Singapore is also dependent on the global market conditions (Tan, 2003). The economy is Singapore is characterized by shortage of skilled professionals and is highly dependent on exports. Adfresh can manage the economic risks by hedging anticipated offshore revenues in the foreign exchange market. Adfresh can also manage the economic risks by operating a flexible sourcing policy and diversifying their product portfolio.

Afresh is also likely to suffer from the legal risks. The laws governing business operations in Singapore may be slightly different from the laws governing Adfresh business in the home country. However, the company can manage the legal risks by identifying all the legal requirements of their business and creating a culture of compliance within the organization.

The literacy level in Singapore is higher compared to most third world countries. Singapore has one of the most stable economies around the globe. These two factors contribute to high wages for the labor in the country (Allan, 2011). This would pose financial risks to the company as compared to when it was based in other third world countries. The financial risks posed by imporataion to Australia would be solved by basing the company in Australia. This would be cheaper and would provide jobs for the locals.

Conclusion

In conclusion, it is important for Adfresh Farm to identify and consider these types of risk in Singapore. Singapore offers a lucrative business environment for foreign direct investment. Considering the risks inherent in the Singapore market, Adfresh can still gain from many opportunities in the market. The risks can be managed to help the company take advantage of the opportunities in the market. The best market entry strategy for Adfresh is to partner with local distributor to reduce the market entry risks and get a platform for maximizing their sales. The fast growing market in Singapore supported by increased trend in supermarket buying will enable the company make profits in their new market.

 

Bibliography

Reuters. 2008.  Research and Markets: Communications Markets in Singapore Presents The Offers Detailed Analysis On Singapore’s Business, Political, And Economic Environments New York

Bhattacharya, J. 2009, “Economic Cooperation between Singapore and India: An Alliance in the Making? ASEAN Economic Bulletin, vol. 26, no. 3, pp. 323-324

Henderson, J.C. 2012, “PLANNING FOR SUCCESS: SINGAPORE, THE MODEL CITY-STATE?”,Journal of International Affairs, vol. 65, no. 2, pp. 69-XIII

Ho, K.C. 2011, “Arrested Agglomeration: The Spilling Out of Singapore’s Economic Activities into the Surrounding Sub-Region”, Seoul Journal of Economics, vol. 24, no. 2, pp. 151-170

Kotrajaras, P., Tubtimtong, B. &Wiboonchutikula, P. 2011, “Does FDI Enhance Economic Growth?: New Evidence from East Asia”, ASEAN Economic Bulletin, vol. 28, no. 2, pp. 183-202.

Lam, N.M.K. 2000, “Government intervention in the economy: a comparative analysis of Singapore and Hong Kong”, Public Administration & Development, vol. 20, no. 5, pp. 397.

Nathan, K.S. 2002, “Malaysia-Singapore relations: Retrospect and prospect”, Contemporary Southeast Asia, vol. 24, no. 2, pp. 385-410

Pavoni, S. 2012, “International finance centres: Singapore top centre for inward financial FDI – FDI inflows”, The Banker,

Sen, R. 2003, “The India-Singapore Comprehensive Economic Co-operation Agreement (CECA): A good beginning towards an enduring economic relationship”, ASEAN Economic Bulletin, vol. 20, no. 2, pp. 179-183

Tan, E.K.B. 2003, “Re-engaging Chineseness: Political, economic and cultural imperatives of nation-building in Singapore”, The China Quarterly, no. 175, pp. 751-774

Tracy Chan, S.Y., Sikorski, D. &Huu, L.T. 2003, “How Singapore Companies in Asean Manage Political Risk”, Seoul Journal of Economics, vol. 16, no. 1, pp. 23-58

 

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