Dorchester International Investment Decision: China vs Japan vs South Africa

Overview of the Investment Decision

Dorchester's decision about which foreign country in which to invest will be based on a number of different factors. The first of these is economic: beyond foreign currency considerations, the company must also evaluate the different local markets in each candidate country. Trade environments across all three countries must also factor into costing and the ability to operate. The political environment is equally important for two reasons: the three countries carry different levels of political risk, and political stability is highly correlated with exchange rate and economic stability. Finally, Dorchester needs to consider the implications of manufacturing its goods in these countries for markets beyond their domestic borders.

Japan: Technology and Stagnation

Japan is the most developed economy of the three. The country's population is essentially middle class or wealthy, but its economy is in a state of low growth. Part of this is attributable to a stagnant population, and part to Japan's struggle to maintain export dominance in recent years. The government has generally been unable to spur meaningful economic growth, raising concerns about whether the country can ever fully regain its competitiveness. Japan today competes largely on the basis of technological superiority and must maintain that advantage in order to remain a major global export player.

As noted in the currency analysis, the yen has declined in value over the past year, likely reflecting the country's prolonged economic stagnation. A falling yen makes Japanese exports more competitive, but the costs of doing business in Japan remain high. There are also significant cultural and potential political barriers to consider. The business climate in Japan is substantially different from that in the West. That said, Japan has the capability to produce technologically advanced televisions and remains an industry leader. If Dorchester intends to pursue a premium acquisition target, Japan is the most natural place to look.

China: Growth, Risk, and Manufacturing Depth

China represents an interesting proposition. Economically, the country is experiencing robust growth, which has improved Chinese consumers' ability to purchase consumer goods — televisions among them. The country also has significant manufacturing capacity and already produces a large share of the world's televisions. A strategy built on a low-cost platform would naturally point Dorchester toward China.

That said, there are economic challenges. Rising incomes have fueled inflation, pushing labor costs higher. This will erode China's cost advantage, especially given the inflexibility of the yuan. China's currency is pegged to the dollar and supported through intensive foreign currency purchases by the Chinese government. As a result, the currency moves little despite strong underlying inflationary pressures. There is, therefore, considerable economic risk in China: its current currency regime does not appear to be sustainable in the long run, but the government is reluctant to change the system because doing so would undermine the country's competitive advantage.

There is also considerable political risk. China is welcoming of foreign investment to a point — it generally prefers that joint ventures be formed, both for knowledge transfer and to give the government greater control over the activities of foreign corporations. Corruption levels are high. That said, firms with experience in the Chinese market understand the risks and tend to perform well once they are familiar with the environment. Foreign firms new to China, however, often struggle with its political and business culture in the early stages.

Works Cited

Euroinvestor (2012). How exchange rate fluctuations affect companies. Retrieved April 28, 2013, from http://www.euroinvestor.com/ei-news/2012/07/17/how-exchange-rate-fluctuations-affect-companies/19796

Eun, C. S., & Resnick, B. G. (2012). International financial management (6th ed.). Boston: McGraw-Hill Irwin.

Historical Exchange Rates. Retrieved April 28, 2013, from http://www.oanda.com/currency/historical-rates/