International Financial Management - Essay Example

UK – China Trade: Risks & Returns The business scenario is constantly changing. As the world has turned into a global village, more and more firms are interested in investing abroad. The question lies in weighing the risks and benefits for doing so because the investment climate in the country of choice may be very different from the investor’s parent company. In this report, we will discuss the feasibility of the Chinese market for the UK investor firm. New large scale markets, such as China and India, provide a strong internationalization incentive based on their higher potential demand for consumer product and services.

For a UK firm investing in China, market opportunities are wide. The country provides its international investors higher potential demand for local consumer products and services. The cost of production in the Chinese market is lower than the other large economies of the world, including the UK. China has shown a record growth in its Foreign Direct Investment with FDI figures rising to $105.7 billion in 2010. (www.economist.com) Recently, the UK and China have entered into a new double tax treaty on 27 June 2011, making China a more viable investment destination for the UK firms looking to invest abroad.

According to this treaty, the withholding tax on dividend for a UK investor has been reduced from 10% to 5%. The treaty also cuts down the tax rates on royalties along with the exemption of the capital gains tax. So, in terms of treaty and tariffs, the environment for the UK firm to invest in China is favorable. In terms of the economic growth and magnitude, China has proven to be one of the biggest economies of the world. However, for the past three years, the growth has slowed with the inflation rising at the end of 2010 for which the government has tightened its policies.

This can be seen from the decreasing consumer price indices’ graph below: (www.oecd.org) UK firms will not enjoy credit information availability in China as much as is present in the UK. The credit depth numbers below show that the credit data availability in China is less than in the UK: (www. data.worldbank.org) In terms of the corruption, figures listed below show that China ranks lower than the United Kingdom and the company investing in China might be posed to higher corruption. Also the cultural differences, exchange rate fluctuations and the economic practices might make it difficult investing in China. (www.worldbank.org) The credit ratings of the countries are listed below with the UK showing a better rating than China.

However, the Chinese ratings are also stable as compared to the rest of the world. (www.standardandpoors.com) Thus, comparing the pros and cons of investments, it is viable in terms of tariffs and treaty to invest in China but the company will have to do its homework regarding the cultural and economic analysis of China before stepping its feet outside the UK. References China in Focus: Lessons and Challenges. (2012). [Online] Available at http://www.oecd.org/dataoecd/13/10/50011051.pdf [Accessed 10th April, 2012] Credit depth of information index (0=low to 6=high). (2012). [Online] Available at http://data.worldbank.org/indicator/IC.CRD.INFO.

XQ [Accessed 10th April, 2012] Foreign Direct Investment. (2011). [Online] Available at http://www.economist.com/node/17967018 [Accessed 10th April, 2012] Kaufmann, D. (2004). Corruption, Governance and Security: Challenges for the Rich Countries and the World [Online] Available at http://www.worldbank.org/wbi/governance/pubs/gcr2004.html [Accessed 10th April, 2012] Sovereign Ratings and Country T&C Assessments. (2010). [Online] Available at http://www.standardandpoors.com/ratings/articles/en/eu/?

assetID=1245270845820 [Accessed 10th April, 2012]