¶ … Risks of Trading and Investing: Involving a Developing Country with a Developed Country's Business

Description of XYZ Corporation

It will be the assumption within this paper that the multinational corporation depicted resides within the United States, a developed country, while it is trying to generate business with Ecuador, a developing country. A multinational corporation is a corporation that operates by supervising or transports products or services to more than one country. XYZ Corporation is a competitive multinational corporation deeply interested in expanding its business to countries in which they have not already established business in. The company currently focuses on the manufacturing and the wholesale of products in the oil and petroleum industries. Most of XYZ Corporation's foreign entities are located in the Middle East. Recently, a member of the XYZ team has given vital information to corporate executives explaining that Ecuador has enormous oil and petroleum potential that could greatly benefit the company. XYZ Corporation chief executive officer is now requesting information to assist in the assessment of exporting from or having direct foreign investment within Ecuador's oil and petroleum industries.

1.1 Explanation of Opportunity at Hand

XYZ Corporation has been fortunate enough to have the opportunity to choose to export from Ecuador, have direct foreign investment with Ecuador, or a combination of the two. XYZ Corporation has been searching for a new international location to expand to. Ecuador's crude oil has become its number one export to America, at somewhere near eighty percent of its exports and roughly $7.1 billion. Petroleum products have developed to be Ecuador's fastest growing export to America, with an enormous increase of 87.3% and $157.4 million (EcuadorExpolorer.com, 2009). It is important for XYZ Corporation to seriously consider involving itself immediately in the Ecuadorian oil and petroleum industries during this time of vast potential.

2.0 Ecuador's National Business System & Cultural Conditions

When two companies in separate countries decide to partake in business with one another, there are an assortment of situations and choices the multinational corporation must consider. When a multinational corporation has made the decision to enter a different country, it has a certain amount of ethical and social responsibility to uphold to the home and the foreign countries.

Ethics are defined as the "process of distinguishing the right and the good from the wrong and the bad (Godiwalla & Damanpour, 2006)." A multinational corporation has an ethical duty to uphold the right and good when entering another country. This is for the sake and protection of both parties. In some instances, cultural differences can blur the lines between good ethics and bad ethics. Perhaps what deems polite and proper in one country may be considered bribery or immoral in another country. At the time XYZ Corporation has determined whether or not to enter a different country for business, the company must be fully aware of what its ethical obligations are, as well as its social customs (Godiwalla & Damanpour, 2006).

In order for XYZ Corporation to gain proper respect from its shareholders and from the public, the multinational corporation will want to practice social responsibility within the newly occupied culture. According to Archie Carroll, corporation social responsibility professor at the Florida State University, there are four levels of to the pyramid of corporate social responsibility that a multinational corporation must thrive to obtain (Godiwalla & Damanpour, 2006).

The first level of responsibility that an MNC holds is economic responsibilities (Carroll, 1991). Historically speaking, business organizations were created in order to produce goods and services that consumers needed and wanted. As time progressed, companies began changing their profit goals in order to produce the largest profit possible. Because the other company goals are based on the economic responsibility of the time, it must be considered in all decision making processes (Carroll, 1991).

The second level of responsibility that a multinational corporation must abide to is legal responsibility. With focus on economical responsibility, many businesses lose focus on complying with local laws and regulations (Carroll, 1991). In order to gain respect from the shareholders and the public in either country, a multinational corporation must take action to comply with local laws. Where there are clear ethical gaps in the local government systems, the multinational corporation has the opportunity to make an ethical decision to practice the right actions, despite the lack of the government forcing the company to act (Carroll, 1991). If a company wants an ethical decision to be long lived, a company may write the practice into their policy.

At the third level of the pyramid, a multinational corporation must abide by ethical principles. Though choosing...

In following expected ethical responsibilities, a company is embodying standards, norms, and expectations that are of concern as well as upholding the rights to those involved with the company, including consumers, employees, shareholders, and the community (Carroll, 1991)
Finally, the last level that Carroll's pyramid regards is that of the multinational corporation's philanthropic responsibilities. In order to reach the fourth level of the pyramid, the corporation must reach the first three levels of responsibility. Once reaching the first three levels, the company has met all of its organizational performance needs and is able to focus on the fourth and final level (Godiwalla & Damanpour, 2006). To attract customers and shareholders, a company will want to complete market research on what organizations or issues their target demographic is concerned with most. Acting upon the concerns of involved parties will show corporate social responsibility, philanthropic responsibility, and create a potential for profit by gaining consumer and shareholder attention (Hill, 2007).

It is very important for any multinational corporation entering a different country or culture to be fully ethically aware of the views of their home country and the new country they are entering. By assessing the cultural conditions, the multinational corporation will be more capable of successfully entering any national business system.

3.0 Assessment of Trends and Patterns

Ecuador has become known for its petroleum and crude oil exports, but has recently come to be successful in the exportation of other products, including cut flowers, fish, shellfish, fruits, and cocoa beans, each of which have helped Ecuador stabilize its otherwise weak economy. The United States and Ecuador are already familiar trading partners, both aware of imports and exports from one another. In 1998, America provided nearly thirty percent of Ecuador's total imports, while taking about forty percent of Ecuador's exports. These transactions have made America the leading trade partner with Ecuador (Workman, 2009).

The company in question would financially benefit by generating business within Ecuador. Ecuador is a leading producer in the petroleum and crude oil sources, and XYZ Corporation is one of America's oil manufacturers. Not only is oil the top export from Ecuador to America, but Ecuador succeeds in producing other petroleum products as well. The two products combined have constituted over $7.2 billion from America to Ecuador. This number has increased 62.9% since 2007 (EcuadorExplorer.com, 2009).

Ecuador is a country that thoroughly enjoys doing business with other countries. It thrives for doing business with countries like America, Chile, Venezuela, and Paraguay. Such countries are most favorable to Ecuador after the signing of the International Investment Agreements. These agreements, each individually designed by the countries involved, help protect both parties against such risks as: Inconvertibility of foreign currency, political violence, and suspension of payments to agents abroad (HipEcuador.com, 2007). Ecuador began initiating these agreements in the early 1990s in an effort to guarantee fair treatment to their foreign investors and inform those investors about certain controversies, reasonable compensation for expropriation, and the enforcement of agreements, among other actions (HipEcuador.com, 2007).

3.1 Protection Measures Against Imports and Foreign Investment

Having established foreign investment measures in enforcement would be most beneficial if the company decides to invest in Ecuador. The Foreign Investment policy would allow Ecuadorian partners to trade with XYZ Corporation without feeling any sort of financial threat. Conversely, the American base would be protected by the same level of comfort with the Ecuadorian counterpart. With an agreement set up, risk has been reduced by a considerable amount.

4.0 Exchange Regimes Between America and Ecuador

When two countries have an exchange regime, also known as a currency regime, it is the exchange rate at which the two decide to trade their goods or services for a specific currency at. An exchange rate can change depending on either the flexible foreign exchange rate or how an issuing bank sets the rate. With the American economy and the Ecuadorian economy so closely intertwined in oil and petroleum business, it is more desirable to use the fixed exchange rate rather than a flexible exchange rate (EconomyPoint.org, 2006).

The fixed exchange rate is the type of exchange regime in which one country matches the exchange rate of another country or group of other countries' currency to another measurable value, such as precious metals. The fixed rate is better for business transactions because it can act somewhat as a hedge in the regard that it can stabilize inflation problems. This allows a purchaser to avoid transaction…