Foreign Subsidiary Investment Plan
Case: Multinational Capital Budgeting
China & Australia
MBA AF 626 Fall 2011
International Financial Management
Table of Contents
PART I – Analysis: Australia vs. China
A. Country Analysis
1. Economic Environment 3
2. Social Environment 10
3. Political Environment 12
B. Industry Analysis
1. Aluminum Industry in Australia 17
2. Airline Industry in China 18
PART II-Capital Budget Analysis
1. Weighted Average Cost of Capital 19
2. Net Present Value 20
3. Scenario Analysis 21
PART III – Conclusion: Investment ...view middle of the document...
Even though the relative size of the manufacturing sector has been declining for several decades, the industry has stabilized at around 8.5% of GDP. Furthermore, the global recovery is putting upward pressure on prices for Australia's commodity exports, causing a substantial surplus in the current account balance due to the increase in trade.
Since the 1980s, Australia has undertaken significant structural reforms transforming itself from a highly isolated, protected and regulated market-place to an open, internationally competitive and export-oriented economy. Australia is one of the few developed countries that weathered the Great Recession unscathed and like Canada its vast resource base gives the country emerging-market-like characteristics. Stable institutions and Western-style transparency make the “Land Down Under” an attractive destination for investors seeking relatively high returns with a lower variance for risk. In addition, the Australian dollar is rooted in the coal, iron ore, natural gas and other minerals and resources found there in abundance.
Fiscal irresponsibility expressed through excessive government spending is one sign of elevated country risk due to the increased probability of a government default. However, a current-account deficit or surplus is not necessarily a sign of economic weakness and vigor respectively. One country risk indicator is the government deficit as a percentage of GDP. The higher this figure, the more the government is promising to its citizens relative to the resources it is extracting in payment.
Chart 1 Australia Government Budget as a percentage of GDP (TradingEconomics, 2011)
Chart 1 shows, there has been a structural deterioration in the Commonwealth’s underlying balance since 1998, when they were generally running surpluses. As a result of sustained budget surpluses, Australia was in a stronger fiscal position until 2008. Between 2003 and 2008, Australia’s budget surplus averaged between one percent and two percent of GDP. These surpluses have been used primarily to retire government debt and Australia’s budget deficit was more than 2% in 2009-10. Australia reported a budget deficit equivalent to 4.3 percent of the GDP for fiscal year’s 2009-10 (TradingEconomics, 2011), indicating Australia’s fiscal position is slightly riskier than the years before. The gap increases the possibility that the government will need to take actions which could adversely influence the nation’s economic health, such as resorting to expropriations of property, raising taxes, or printing money, in order to meet its promises unless there is not enough capital to finance current investment opportunities. Otherwise unsavory consequences such as capital flight could dry up new investment, affecting incentives to work, save, and take risks, and which would result in monetary instability, high inflation, high interest rates, currency depreciation, etc. On a side note, it is important to point out that the deficits...