Superior Country for Manufacturing Firm to Invest in - Canada and Hungary - Case Study Example

Superior country for manufacturing firm to invest in Name: Institution: EXECUTIVE SUMMARY Having a foreign direct investment in a country requires a lot of analysis into the possible targets. Foreign investment therefore requires looking at the political, economical, legal and cultural aspects of the targeted country. Comparison of different possibilities is also critical in order to ensure that that one chosen is the most appropriate one out of the choices available. This report looks at two countries, Canada and Hungary and analyzes their political, economical, legal and cultural aspects in order to determine their suitability for an investment of an Australian manufacturing firm. The report provides in dept analysis and finalizes with the comparison of the two countries in order to determine the most appropriate country for the manufacturing firm to invest in. The report covers these analyses differently or individually in order to have an in depth understanding of the countries. The analysis of the two countries also involves detailing the advantages and disadvantages of investing in these countries in order to further understand the current situations in the chosen countries. Table of Contents INTRODUCTION……………………………………………………………………………..4 Company description 4 INVESTMENT MARKET ANALYSIS………………………………………………………4 CANADA……………………………………………………….……………………..4 Political stability……………………………………………………………………….5 Economic stability……………………………………………………………………..6 Legal aspects of Canada…………………………………………………………….....7 Cultural aspects of Canada…………………………………………………………….8 Advantages of Investing in Canada……………………………………………………9 Disadvantages of investing in Canada…………………………………………………9 HUNGARY…………………………………………………………………………..10 Political stability in Hungary…………………………………………………………10 Economic stability in Hungary……………………………………………………….11 Legal concerns in Hungary…………………………………………………………...12 Cultural aspects of Hungary………………………………………………………….13 Advantages of investing in Hungary………………………………………………....14 Disadvantages of investing in Hungary………………………………………………15 Comparison of Canada and Hungary 15 REFERENCES 17 INTRODUCTION In the business world, every person is looking for a conducive place of investment. If the conditions within a given country become favorable, it becomes appropriate to invest in that country. The choice of an investment target country becomes critical to any business. The determination of the appropriateness of a given country as the most suitable country for investing in therefore, requires an in-depth analysis and scrutiny of the target country. This in dept analysis involves looking at the political, economical, legal, social, and cultural aspects of the target country in order to determine whether the country would likely to favor the growth and development of the investment. In most circumstances, it is always better to have a comparison of two target countries for investment and then create a balance and choice based on scrutinizing the two target countries. This gives a clear and appropriate choice and analysis. Company description The company wanting to have a foreign direct investment in either the developed country or developing country is Holden Barina. Holden Barina is a Motor vehicle manufacturing company of the General Motors in the Australian branch, which manufactures small and comfortable cars, which are environmentally friendly and suitable for family and personal use. This company therefore wishes to have a foreign direct investment in Canada and in Hungary. INVESTMENT MARKET ANALYSIS CANADA In understanding the suitability of having a foreign, direct investment in Canada, it is thus critical to look at the market characteristics in Canada (Trapunski 2013). This will determine whether it is suitable for the manufacturing industry or not. In looking at the market characteristics, it is significant to look at both the positive and negative aspects of these market investment aspects. Taking a specific look at Canada, Canada is a first world (developed) country with proper and developed economy and infrastructure. Political stability Being a first world country, the political framework of Canada is that which does create a positive environment for both investment and marketing. The Canadian political structure is based on a parliamentary democracy alongside a federal system of parliamentary government. This framework has strong traditions of democracy. In relatively manner, Canada is one of the favorite countries to invest in since in most circumstances foreign investors enjoy clear political stability with less interference (Tetrault 2011). The co-sovereignty of every province in Canada creates a co-independence of control by the crown. There are also the house of majority and minority within the Canadian governments. The executive power is however, controlled by the prime minister and the cabinet ministers which oversee the various ministries and agencies. In foreign direct investment and investment in general, the political interference is minimal. This therefore, makes this country a suitable investment destination for the Australian company. However, some negative aspects of politics in Canada are likely to hinder foreign direct investment in this country. There are incidences and structures of governments that have caused serious concerns to the stability and suitability of investing in this Canada. One of the most fundamental negative aspects is the issue to do with the minority and majority governments and national unity (United Nations Conference on Trade and Development 2007). The issue of national unity in Canada has been critical ever since the forced union of the lower and Upper Canada in 1840. There is an ongoing conflict between the English-speaking minority in the rest of Canada and French-speaking majority in Quebec. The continuous Quebec’s demand for distinction as a society of its own has tempted constitutional reforms, which though has failed. Due to this, little notable political violence has erupted in Canada like in 2001 and 2007; there were violent confrontation between protestors and police, which led to some property damage. Economic stability Canada has a stable, diversified, growing economy. Canadian economy is amongst the top most in the world. Currently Canada is rated as the eleventh largest economy in the whole world. It is also considered one of the wealthiest countries in the world. Canada is a member of the Group of Eight (G8) and the Organization for Economic Co-operation and Development (OECD). The most dominant part of the Canadian economy is the service industry. Canada has a considerable size of manufacturing sector, which in most circumstances are foreign direct investments (Government of Ontario 2009). This therefore, creates a favorable atmosphere since the country has a significant value attached to foreign direct investments, especially for the manufacturing sector. Therefore, the economy of Canada provides a suitable atmosphere for investment. The country is experiencing an economic stability despite other development countries currently receding from economic meltdown. Despite the fact that Canada presents and economic stability for direct foreign investment, it is critical to understand that such stability comes with high competition and competence. This therefore calls for highly competitive markets and investments, which to some extent might be difficult to achieve on first entry with sole ownership. In such developed economies entries through sole ownership becomes difficult since this kind of economies encourage mergers. Therefore, it would require that the initial procurement of space and part in the manufacturing industry in Canada will require a great deal of competency and on the other hand, highest level of competition is likely to engulf this investment (Government of Ontario 2009). However, it will be through diversity in products that can enable such manufacturing companies to prosper in such competitive investment markets. Legal aspects in Canada A legal framework is critical in enhancing investments. In every country, there are laws, which are laid down to guide on how investments and business in general are to be carried out. In most circumstances, such legal frameworks must put control on foreign investment as compared to local investment (Global Trade 2010). This is evident in countries where the governments would want to encourage local investment. In Canada, the legal framework is highly favorable for foreign direct investment. A large variety of legal arrangements is available in Canada. In most circumstance, the appropriateness of investing in Canada mostly depends on the investor, the method of financing the investment, the nature of activity, income tax ramifications and the potential liability to the activity (Makin 2012). The Investment Canada Act (ICA) majorly controls foreign investment laws in Canada. For direct sole ownership investment in Canada, the investment is a subject to foreign investment review requirements of ICA. Therefore, there are thresholds to be met by every investor before effectively investing in Canada. Although the ICA is the only act that controls foreign investment in Canada, investment in Canada is also controlled by the provincial jurisdiction (Peng 2008). Therefore, there are differences in restrictions by foreign investments within different provinces. However, these jurisdictions confines to land purchase and other financial services. Therefore, irrespective of an investor having satisfied the ICA, still restrictions from the provincial administrations can hinder its operations and existence. Cultural aspects in Canada International investments are always subjects to cultural differences. Having an investment in foreign countries always meets the challenges of cultural difference and diversity. However, for effective investments, understanding of the cultures within the target countries becomes paramount. Especially for a manufacturing company, it is critical to understand the culture of the new target country so as to understand whether the product the company is willing to introduce is culturally accepted or not. Canada is composed of a wide cultural diversity. The Quebec region is majorly composed of the French-speakers while the other regions in Canada are mostly composed on English-speakers (Turnock & Carter 2005). The culture of Canada is mostly built on four pillars, equality, freedom peace, and law and order. The Canadian values respect the cultural differences within the different people in Canada. The cultural diversity also encourages the need for integration through commitment to social justice. These aspects provide a favorable atmosphere for direct foreign investment. However, it is understood that the discord between the two regions based on the minority and majority would have a significant effect on the cultural aspects the new investment would take. It is clear that due to the tension between the French-speakers of Quebec and the English-speakers of the other regions, there is a likely conflict of culture in Canada (Jones 2006). Therefore foreign investment willing to serve the whole of people of Canada will not have an easy task since impressing one side would likely not impress the other side. The differences between these two regions are based on language spoken, which in itself is a cultural aspect. Advantages of investing in Canada One of the major advantages of investing in Canada is the fact that Canada is the considered the safest place to invest in the whole world. The rich resources alongside the significant aspects of the financial sector create a fundamental suitable environment for investing. Another advantage is that the Canadian stock market has been significantly out-performing others around the world (Engen 2011). Canada is rich in resources. The most critical resources in Canada are precious metals, gas, oil and agricultural inputs. Therefore, since every manufacturing company requires most of these resources, Canada presents one of the best places to invest in. another advantage is the financial sound of Canada. The world economic forum did carry out a survey and found that the soundest banking system in the world is that of Canada (Engen 2011). This very strong financial position is critical to any investment in the whole country. The other advantage is the strong currency. The Canadian dollar has strengthened despite the depreciation of the U.S dollar in the financial market. Therefore, the foreign investors purchasing stocks in the Canadian exchange end up protecting their investments and at the same time gain with every drop of the U.S dollars. Disadvantages of investing in Canada One of the major disadvantages of investing in Canada is the lack of proper diversity in the Canadian market. Close to three quarters of the investments in the Canadian market are from the three major sectors, which are energy, finance and materials sectors. This makes the Canadian market quite biased towards these three sectors (Engen 2011). However the fact that the technology sectors are lacking are things to worry about since with such an economy, it is expected that technology becomes of the major drivers of the economy for prosperous future. The other disadvantage is the small size of the Canadian market. The Canadian economy only marks about 4% of the global market. Due to the poor trend in diversification, investing in Canada is becoming just a little difficult since it involves scrambling for a small market already occupied by many other investors. The other disadvantage is the currency risk (Brenner & Brenner 2010). The rising resource and commodity prices are currently soaring the Canadian dollar. The bank of Canada is placed in a predicament position with the Canadian interest rates remaining at ultra-low levels. HUNGARY Hungary is one of the landlocked countries of the Central Europe. This country is largely located on the Carpathian basin and boarders seven countries with its capital being in Budapest. Hungary for a long time had be one of the greatest power countries until the World War I when by then kingdom lost close to 72% of its territory. Being one of the most developing countries, having investments in this country promises a lot of opportunity and growth. This is because developing countries have a favorable atmosphere for a thriving industrial boom than developed or underdeveloped countries (Deloitte touché Tohmatsu 2012). Developing countries encourage investments that are favorable and likely to enhance the growth of its economy. In understanding the suitability of Hungary as a potential country for investing in, it is thus paramount to look at the various factors of stability within this country. Political stability of Hungary The current political landscape of Hungary is that one, which is shunning away violence as from 2007. Hungary has experienced a major significant political transformation in the last decade since the transformation of its political structure. Before, Hungary was a communist country ruled under communism (Eder 2012). This to some extent did not work well with the political stability of this country. However, with the transition to democracy from communism, there has been a record of peaceful negotiations alongside the four peaceful changes in government. The democratic way of choosing leaders through the ballot has proven to be effective and has brought significant transformation and stability. Therefore, the country has started enjoying a suitable political stability, which encourages both foreign and domestic investments. Good news for foreign investors is that the country has not reported any direct violence on foreign-owned companies and this encourages direct foreign investments. However, it is still evident that there are traces of evidence of political riots, insurrections and political terrorism in this country. In 2006, the country experienced a significant uptick in protests. There are also reports of possible interstate wars in Hungary and this is likely to kill the mood and render this country unsuitable for investments (Plummer & Macrory 2005). Since manufacturing firms are long-term investment entities, the fact that the future of political stability is still not clear presents a threat to effective investing and marketing within this Country. It is good that there are no reports on foreign–owned company attacks, but this does not promise and violence-free environment for foreign investment. Economical stability of Hungary Hungary records one of the fastest growing and recovering economies. The recovery from the 2008/2009 economic meltdown has reported a tremendous pick up thereby creating a favorable atmosphere for foreign investments (Bureau of Economic, Energy and Business Affairs 2011). The various efforts by the Hungarian government to prioritize open economy has attracted and is still attracting major foreign investments. The country through the Hungarian investment and Trade Development Agency (ITDH) records that foreign direct investment has created a major boost to the economy of this country (Pain & Holland 2007). Due to the open economy and FDI, the country’s economic, performance remains at its thriving, and growing level since these foreign investments are properly fueling export growth and increasing productivity and stability in a major way (Makojević 2011). Over the past several years, Hungary has been on the lead as the major destination for foreign direct investments. Another significant builder to the Hungarian economy is the high-quality infrastructure, availability of highly skilled labor and the strategic geographical location. These factors have significantly contributed in attracting destination for investment. The government has also reformed tax incentives, which makes it more suitable to invest in Hungary (Zanakis et al 2011). However, despite the above-mentioned proponents to good investments, some of the Hungary’s economic aspects are worrying. Some of the major complaints from some of the foreign investors are the lack of predictability and transparency in the economic sector. Reports in corruption especially in the procurement sector of the economy by the government remain nightmares to investors (Sass 2013). There are also reports of barriers related to excessive red tape. There is also the issue of crisis tax introduced by the Hungarian government in 2010, which targeted energy, banking, retail and telecommunication sectors. This has resulted to displeasure by many foreign companies and is therefore, likely to affect having a foreign direct investment in Hungary. Legal concerns in Hungary As indicated in discussing the legal aspects of Canada, it is critical to note that the various laws and regulations that are put in place to govern investment and business in general in any country is significant. This is because the laws define to what extent and how business is to be transacted within that country. It is these laws that balances between and creates an atmosphere that might favor or hinder investments in a country (Raffaele 2013). Foreign investment in Hungary is controlled by a substantial body of laws, which provide national treatment and encourages profit repatriation. The major significant laws are the 1988 Law on Business Organizations, which was amended in 1997. There are also the 1990 Law on Enterprise and 1992 law on transforming state companies. The foreign investment Act 1988 is the most significant law to foreign investment. This law provides full protection to investments and guarantees equal treatment between foreign and national investors (Barbosa & Mendell 2013). The law also allows foreign investors free opportunity to remit profits and investment capital to their mother countries in the event of complete or partial termination of their enterprises. However, Hungary has recorded various loopholes in the laws laid down to protect investors. This is majorly evident in the various complaints launched by foreign investors especially those, which concerns procurement of foreign investments (International Monetary Fund 2003). Despite these favorable laws, there is still lack of effective implementation framework that would ensure that these laws are followed to the latter. Evidence so corruption within the government level shows lack of proper and effective mechanism to ensure that these laws are effectively implemented. Cultural aspects in Hungary Hungarians are one of the citizens in the whole world known to be best custodians of their cultural practices and beliefs therefore plays a significant role in maintaining the identity of the Hungarian people. From various cultural celebrations to preservation of various traditions, the Hungarian people know exactly what culture means to a person (Froot 2008). In fact it is on record that one of the best reasons why Hungary thrives in the tourism industry is the fact that most people from all over the world value how Hungarians preserve their culture. Such cultural attachment brings people together and this creates significant favorable grounds for foreign investments (Johan & Cumming 2010). This is particularly evident if the foreign investors conform and respect the cultural practices of the Hungarians. Since it is critical for any foreign investor to conform to the cultural practices of the certain country it wishes to invest in. it would be amazing to invest in a country where cultural practices are valued and embraced. However, with such cultural attachments, some aspects of corporate responsibility and business ethics might not conform to the spirit of keeping the culture and conducting business (United Nations 2007). Therefore, sticking to such cultural beliefs wholly can present a challenging environment to a foreign investor such as this manufacturing firm since the firm would have to understand and practice such culture for it to be accepted within this market. Advantages of investing in Hungary The advantages are far much more than the disadvantages. One of the advantages of investing in Hungary is that it provides comfortable grounds for legalizing minimal international tax since it minimizes double taxation. The other advantage is that investing in Hungary comes with an advantage of possibility of transferring to other legal entities like trusts, foundations or offshore corporations (Nikola & Petar 2011). Confidentiality is also another major advantage of investing in Hungary. The fact that foreign investors are having a great access to the emerging markets in Hungary is also another major advantage. There is also significant availability of human resources-related services. These include recruitment of staff, attainment of visas and payroll supports. There is also ready access to financial services, which is a key aspect of successful offshore investment strategy. Disadvantages of investing in Hungary There are only three major disadvantages of investing in Hungary. One of the disadvantages is that when The Heritage Foundation carried out the 2010 Index of Economic Freedom, Hungary was poorly ranked at the 51st position as world’s freest economy (Riboud & Kaminski 2005). The other disadvantage is that Hungarian companies are subjects to around 16% corporate profits tax on the worldwide income. Finally, the last major disadvantage is a Hungarian entity is necessary in order to come up with an annual report in the event of Hungary company incorporation. Comparison of Canada and Hungary These two countries present a great deal of opportunity for investment. It is clearly evident that it in both countries there are significant levels of similarities and difference despite the fact that Canada is a developed country while Hungary is a developing country. While the economic aspect of Canada is highly promising due to its stability, and growth, the fact that close to 70% of that economy is majorly controlled by only three major sectors does pose serious concerns (George & Blazenko 2013). This is because for manufacturing industries, there is need to have various sectors of economy active because it does not only depend on energy, materials and financial sectors only. Raw materials and labor becomes critical components of manufacturing firms. Therefore, Canada would pose challenges of its future prospects in economic scale if these three sectors fail to perform as projected. Another major significant aspect of manufacturing industry is technology. With the current improvement in technology, manufacturing firms find it more convenient and efficient to use technology in mechanizing its major production areas (Marinov & Marinova 2003). This is majorly critical in enhancing speed of production, lifting and moving of heavier materials such as vehicle body parts and carrying out autonomous duties that are not easily and effectively done by human beings due to fatigue. However, in Canada there is still not much focus on technology. This can therefore pose a challenge to investing especially for a manufacturing firm. However, in Hungary, the open economy is creating a major significant environment for all sectors of economy with technology being one of the major priority sectors alongside financial sectors. Another aspect discussed in the political stability. The political stability in Canada is more favorable than that in Hungary. Despite the differences between the majority and minority in Canada, the relative peaceful environment that has been created for investors both national and foreign in Canada has proven to boost the urge to invest in Canada. On the other hand, despite Hungary promising significant improvement in political stability due to its change, from communism to democracy, it is still engulfed with uncertainties that create doubts on investors’ minds (Milanovic 2010). This therefore might pose a hindrance in investing in Hungary. The other aspects of culture and legal aspects seem to provide a favorable atmosphere to both countries. However, due to the fact that Hungary is a highly developing country and has its political realignments taking shape, for future investments and for a long lasting manufacturing firm, it would be appropriate to consider Hungary as compared to Canada. 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