The proposed research study is intended to discern sources of finance for international trade and investment organisations which is an area considered to be the cornerstone of modern day business. Many organisations have widened their business horizons in search of profit maximisation and reduced costs due to lower costs abroad. However, some organisations more than others have encountered a dilemma in trying to raise finance. In today’s increasingly internationally, interdependent world, sustaining an open trade environment for foreign investment is purported to be in the best interest of the UK, as well as other countries. This could be considered good news that doesn’t get past the door. International Economics is currently considered by some experts to be in the realm of frontiers of research especially in period of looking recession where many financial industries are reluctant to lend finance fearing little or no return on their investment. Asian investments in the UK are currently deemed to be approximately £70 billion per year, while UK trade with Asia is reported to exceed that same amount. When the UK or any other country tightens restrictions on foreign investment in the name of national security, however, this places the countries’ “manufacturing, employment, competitiveness, and innovation at risk” (“Pimer, 2001). In addition, the county employing this type limiting practice risks potentially isolates itself and alienates allies, who could prove to be assets for investments and international trade and thus restricting potential sources of finance. Changes in our world’s sphere have fostered domestic markets into encompassing an international scope. More and more, manufacturers, as well as firms that provide services, and business who had not previously considered soliciting customers outside the UK regularly pose themselves into global postures. Considering the proliferation in recent years of many organisations looking to trade globally, they have simultaneously had to seek innovative ways of raising finance to accommodate their plans.
This research proposal will seek to offer answers to the following research question –
The research question is: Are there vastly different practises employed between British organisations in soliciting finance from institutions to accommodate their global trade and investment plans?
Aims and Objectives:
The aims and objectives of the proposed study are as follow –
- Elicit data which specifically identifies various sources of finance for organisations ranging from Internal to External.
- To examine primary data pertaining to British organisations (ie Rover) who in recent years have proliferated their trade into the international market and examine their financial backing which has ranged from depreciation to the sale of assets.
- To examine the recent decline of traditional bank lending in light recent economic meltdown and examine the implications for foreign direct investment.
- To examine the role of large financial institutions and criteria as set out to qualify for finance ie FDCF.
- An exhaustive literature review consisting of data derived from books/journals will form the literature review. This literature review will only consist of data which has been published after 2002 to ensure that all data is contemporary.
A truncated review of literature
International outsourcing, regularly employed by the UK and other countries is factor in international trade and embodies shuffling resources for comparative benefits. According to O Brian et al (2005) this “win-win” practice involves one country importing products which cost more to do domestically. In turn, the reciprocating country produces and markets goods to other countries that prove more costly for them to manufacture themselves. International trade increases purchasing power as less expensive imports help stretch incomes to be able to purchase more services and products. This helps increase production and compliments investments as this enables countries to produce the products that return better profits. Brian et al (2005) contends that in outsourcing more labour-intensive processes to countries that pay lower-wages organisations seek to make profit but initial require considerable financial outlay to accommodate their plans. The author enlists a considerable amount of short term and long term sources of finances which internationally bound organisations can resort to in order to continually trade or reform their financial clout in to rise additional funding to expand or invest. These include internal and external. Brian et al (2005:25) is eager to highlight that internal methods are a lot more secure than external methods. The directors of a Public Limited Company can retain profits for a financial year as opposed to distributing it amongst the owners. Brian et al (2005) cites a case study namely Rover who had used this method of raising finance to fund their international trade strategy. These funds were subsequently invested to earn additional interest which over a certain period grew considerably and were sufficient to penetrate the Chinese market. Indeed, this method of finance is dependent on the willingness of stakeholders to defer profit allocation and so it is not appropriate for all situations. However, as Brian et al (2005) cites it is a tried and tested method will no need to secure or remortgage the business meaning the long term survival on the business in not jeopardised.
Primer (2001) cites further instances of internal sources of finance which range from the sale of business assets and reducing stocks and trade credit. The author also cites that external sources of finance can range from borrowing from commercial banks, factoring services, venture capital and leasing. Historically, the sale of business assets has been a way of raising a large amount of finance which is typically needed to remain financially sound in international trade. This contention is supported by the rationale that moving part of a production process to another country with be much easier as initial costs are always high but in the long term the organisations will be compensated by through lower wages which will allow a company to increase sales in another country, securing more profits, as costs have been decreased.
Cowdell (2004) contends that trade proves to be beneficial due to countries’ diversities in relation to expenses that contribute to manufacturing various products. Cowdell also adhered to the concept of a labour value theory; which concludes that the cost of manufacturing a product evolved from the time (labour) involved in production of products (Cowdell, 2004:31). The most recent waves of investment concerns regarding a trade hot spot such as China spurred increased debate in 2005 when the China National Offshore Oil Corporation bid to buy US oil firm Unocal. The bid was ultimately withdrawn. Such instances show that even China seeks to trade globally having previously been a hotspot itself but is prone to trading vulnerably and gives little thought to exactly how it will raise capital. (BBC)
Wild (2003) cites that at one time, since the earliest days of mass production when security concerns regarding international trade appeared less intense, British and US automakers dominated the world motor vehicle industry and were very innovative in the ways their raised capital. Now, however, success of Japanese passenger vehicles imports exerts a competitive pressure on the British and U.S. motor vehicle industry. Initially, this was considered by some to be a temporary challenge. The Japanese success as automakers, however, has withstood the test of time, “based on a fundamentally different production system. The basis of Japanese quality improvements-namely, the ‘lean’ production techniques pioneered and perfected by Toyota-include lower inventories, just-in-time parts deliveries, high-performance work organisation (teamwork, job rotation, employee involvement, etc.), heavy reliance on tiers of tightly linked suppliers,” (Wild, 2003:27) plus constant development programmes throughout their systems to enhance productivity, as well as, quality. Wild (2003) is eager to site that firms abroad have successfully orientated their business strategy through long term sources of finance. Loans from a bank can be expensive due to large interest rates but some organisations such as Toyota had agreed on a certain amount repayable over a fixed period of time with no significant hikes in interest rates.
Marrewijk (2002) contends that on the downside of investing abroad in one field is that of automobile market as British automakers have not succeeded in breaking through into Japanese domestic market. This may due to the reluctance of financial institutions to lend finance in an already inflated market place and in a country who suffered a market collapse in 1997. Since this era, investment by Japanese automakers in the US contributed to the decline of trade effects. These Japanese investments, which symbolise a vital part of the globalisation, nevertheless, ultimately proved to help the United States and the UK as hundreds of thousands of new jobs were gained and this highlight how successful the Japanese have instigated their market regimes by meticulously and carefully raising finance and subsequently penetrating market abroad to claw back what they had borrowed. Floyd (2001) cites that depreciation is another internal course of financing. This is done by deducting depreciation from profit which in turn leads the business making provisions for the eventual replacement of obsolete machinery. Floyd (2001) perceived this as being another way of of profit retention.
Perman (1984) states that factoring is another impact aspect in raising finance. Factoring allows organisations to raised cash on the basis of the value of outstanding invoices. Through factoring can also outsource the sales ledger operations to utilise better and more effective credit rating systems. Thus factoring allows organisations to manage their cash flow as it enables firms to raise close to 80% on the outstanding invoices. The author enlists other such ways of raising finance which also include a shares issue which would raise finance derived from shareholders.
Pimer (2001) states that protecting the environmental may or may not be a concern for some multinational corporations, usually positioned in developed countries that frequently use foreign direct investment (FDI) to obtain established business and/or construct manufacturing facilities in poor, economically disadvantaged nations where expenses are lower. The author is also critical of ways in which firms try to raise finance to achieve a means of trading globally. Very little though goes into long term ramifications, In essence the author is claiming that organisations are compromising short term gain for long term prosperity but this is not the case with many organisations who have during a period of economic uncertainly struggled to repay bank loans and their staff and have resorted to extreme measures in trying to balance the books i.e. sale of assets and redundancies. The author cautions that firms need to holistically analyse their current position and project future economic trends on the basis of current trends and only then seek to raise finance should a contingency plan be in place.
The US leads in the realms of telecommunications, transports, as well as in, computers and information regarding international trade. Great Britain, Japan and Canada follow the U.S. in these areas, while Great Britain claims insurance prominence. In the insurance arena, The U.S., Canada and Italy fall behind Great Brittan. In financial spheres, the U.S. and Great Britain take the lead. China, Hong Kong, Singapore and Brazil are included with the top ten global exporters. Some of the smaller emerging international trade contenders include countries of Latin America and the Caribbean, as their current exports of services contribute greatly to their employment and foreign currency. In the realm of the U.S. economic dominance in Asia, China is eroding the more than 50 years of Western lead. China is reigning in an abundance of this continent’s new foreign investment, as it exports a collage of cheaply made products, “imports higher-tech products from Singapore and Japan, and launches diplomatic efforts to establish a free trade zone in East Asia, now the fastest growing trading region in the world” (Du Boff, 2003). As the United States’ leverage in the international trade market is expected to decline, Europe challenges the U.S. in Latin America. During 2000, fourteen of the twenty-five largest foreign companies in this county were European; eleven were American. Raising finance to accommodate such dreams can be hard work. In a looming recession and credit crunch it has been made even harder so organisations have in recent times been forced to raise finance internally. Some foreign investors have discontinued investing in the US and UK due to the week pound in relation to the dollar making it a currency risk. In addition, UK interest rates could start to surge, which could make it more difficult to borrow money. This in turn could cause price increases for imported goods, and ultimately drain income from purchases in the abroad and negatively impact the economy. In the end, this could just be the culmination of more bad news, or on the other hand, depending on other contributing components, including foreign and domestic investments, the start of good news regarding international trade.
The proposed research study will seek to utilise a mixed methodology approach in attempting to solicit qualitative and quantitative data. More specifically, in depth interviews will form the basis of the qualitative method where the aim will be to accumulate empirical research which is to be derived from two British organisations who in recent years have expanded globally and sought innovative sources of finance to accommodate their desires. The quantitative portion of the methodology will consist of a case study analysis and examining prewritten data to initially compare with the empirical data gained from qualitative analysis and secondly to identify potential gaps in present knowledge. To date, research linked to sources of finance has been relatively sparse due to finance being a very sensitive subject which has made the topic open to interpretation. To date, no data to date has been considered as being conclusive amongst all multinational organisations therefore the proposed research study will attempt to clarify the discrepancies present in current knowledge and holistically contribute to further study in this field.
The researcher contends that there will significantly various sources of finance dependent upon existing resources within the organisations to be examined and the financial links that they have all well as their current standing within their industry. The researcher is able to make this hypothesis based on currently available research on size, financial clout and recent economic predicaments which have caused lending institutions to be more vigilant. In addition, internal lending is bound by long term ramifications.