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For Dorchester, the decision about which foreign country in which to invest will be based on a number of different factors. The first of these factors is the economic. We have considered the different elements of the foreign currency issue, but the company must also consider the different local markets. Other factors will have to include the trade environments with the three different countries, because these will also need to factor into the costing and ability to trade. The political environment is also something that needs to be considered, for two different reasons. The first is that these three countries do have different levels of political risk associated with them. The second is that political stability is highly correlated with exchange rate and economic stability. Lastly, Dorchester needs to consider the manufacture of its goods going forward in these countries, in particular for other markets beyond the domestic borders.
Japan is the most developed economy of the three. The country's entire population is basically middle class or wealthy. Japan's economy, however, is in a state of low growth. Part of this is due to Japan's population, which is not growing, and part of it is due to the fact that Japan has struggled to maintain export dominance in recent years. Japan's government has generally been unable to spur economic growth and there is concern that the company will never truly regain its competitiveness. Japan today competes largely on the basis of technological superiority, and must maintain that in order to continue to be a major world export player.
As noted in the currency analysis, the yen has seen a reduction of its value in the past year, likely a response to the prolonged economic stagnation in the country. A falling yen will make Japanese exports more viable, but the costs of doing business in the country are high. There are also significant cultural and potential political barriers that need to be taken into consideration. The business climate in Japan is substantially different from that in the West. That said, Japan has the ability to produce technologically-advanced televisions, and remains a leader in the industry. If Dorchester intends to pursue a premium acquisition target, Japan is the most natural place to look for that.
China represents an interesting proposition. Economically, China is experiencing robust growth. This has improved the ability of Chinese people to purchase consumer goods, with televisions selling well as the result of that. The country also has significant manufacturing capacity and makes a lot of televisions for the world already. Competing with a low-cost platform would guide Dorchester to China. That said, there are some economic challenges. Rising incomes have led to inflation in China, with the result being that labor costs are also rising. This will reduce China's cost advantage, especially given the inflexibility of the yuan. China's currency is pegged to the dollar and supported with intensive foreign currency purchases on the part of the Chinese government. The result of this is that the currency does not move much, despite strong inflationary underlying fundamentals. There is, therefore, considerable risk in China economically, as its current currency regime does not appear to be sustainable in the long run, but the government is nervous about changing the system because to do so would undermine the country's competitive advantage.
There is also considerable political risk in China. The country is welcoming of foreign investment to a point -- it prefers that joint ventures are formed, for knowledge transfer and to exert greater government control over the activities of foreign corporations. There is a high level of corruption in the country as well. That said, firms that have experience in the Chinese market know the risks and different situations, and as a result they perform better, and have little concern. Prior to that point, foreign firms new to the country often struggle with Chinese political and business culture.
The South African market is intriguing. As with China, South Africa is a country that has a strong wealth divided. While European South Africa is essentially a Western country with corresponding incomes and living standards, most of the country is third world. Thus, the size of the country is a little bit misleading -- the market of middle class consumers is actually quite small. That said, business culture is…[continue]
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