report on the key issues that must be considered by Britvic PLC in the process of constructing a new business enterprise in Mexico

report on the key issues that must be considered by Britvic PLC in the process of constructing a new business enterprise in Mexico

Introduction

The main focus of this essay is to present a report on the key issues that must be considered by Britvic PLC in the process of constructing a new business enterprise in Mexico. The essay has six major sections. Section 1 analyses the macroeconomic indicators in Mexico. Section 2 examines the Foreign Direct Investment policies in Mexico and entry mode for new foreign enterprises. Section 3 compares the key corporate governance in Codes between the UK and Mexico. Section 4 identifies the available sources of finance for Britvic PLC in the process of raising funds required for constructing the new Semen Indonesia Plant. Section 4 explores the opportunities and risks available in Mexico and the UK. Section 5 examines the foreign exchange risks which can affect Britvic PLC and their remedies.

Section 1: The Macroeconomic indicators in Mexico

Since the last quarter of 2019, the economic growth in Mexico seems to have stagnated due to the falling gross investment and government expenditure in the third quarter of the year. This is because the falling investment and government investment led to a decrease in the Gross Domestic Product in Mexico, which dragged down the Mexican economy (Bek, 2018). However, throughout November, the industrial sector seemed to be progressive with the construction of more industries. The manufacturing sector declined at a greater rate because there was a limited supply of materials and other services required due to the declining investment and government expenditure. As a result of these great changes in the economy, the country’s level of imports went high while the export level went down. This led to the negative value on the balance off-trade, leading to the low Gross Domestic Product in the year. With the decline in investment, many people became unemployed. While holding to the fact that the Mexican economy massively relies on household spending, demand went down, and the cost of living also went high. This led to economic stagnation in Mexico (Barkin, 2019).

Figure 1: Mexican economic trend since 2004

Source: Barkin, (2019)

According to Butler (2018), the consumer price index in Mexico increased from 105.93 points in December 2019 to 106.45 points in January this year. This affirms that there is an increase in the price of commodities in Mexico this year compared to the last quarter of the last year.

Figure 2: Mexico Consumer Price Index

Source: Butler, (2018)

From the change of the consumer price index demonstrated in figure 2 above, we can conclude that there is a great rise in inflation in Mexico due to the decline in the quantity of output. Holding the level of demand constant, the fall in the quantity of supply consequently leads to an increase in the price of the commodities and vice versa (Velásquez, 2019).

The labor market in Mexico from the third quarter of last year has been declining; as a resulting decline in the level of investment and government investment. This is because the two play a very important role in job creation within a given economy. Additionally, the currency strength in Mexico has been affected by the increasing level of inflation in the country (Boyd et al., 2018).

Section 2: the Foreign Direct Investment policies in Mexico and entry mode

There is no strict restriction of foreign direct investment in Mexico. Mexico is the fifteen largest economies in terms of foreign direct investment. In the Central and Southern American region, Mexico emerged to the greatest foreign direct investment center for various reasons. Firstly, besides the fact that Mexico is more open to the FDIs, it possesses a very nice orientation to the world economic order. Secondly, the country enjoys a suitable geographic location which is most convenient and favorable for foreign investors. Thirdly, Mexico is a home of a variety of natural resources that support the development of various industries both for local and foreign investors. Fourthly, the population of Mexico is growing at a faster rate. This makes the country have a larger population of youths who are highly productive and competitively looking for jobs. As a result, the investors in this country enjoy cheap labor, which favors the development of foreign industries. Fifthly, this country is one of the largest tourist destinations in the United States. This favors the development of various types of industries, including the petroleum industry (Youssef & Teng, 2019).

The government of Mexico has played an important role in making policies that encourage or restrict foreign direct investment in the country. ProMexico is an agency under the government of Mexico that is in charge of encouraging foreign direct investment in the country. This agency was formed in 2017. Due to the desire of the Mexican government to make Mexico center for foreign investments, the government created the Special Economic Zones in 2016, whose role was to promote and attract foreign direct investments in the remote and underdeveloped areas of Mexico.

The rules and regulations governing the establishment of foreign direct investment are contained in the Foreign Investment Law. According to the Article 17a of the Foreign Investment Law, the interested foreign investors are required to; firstly, prove that that duly organized according to the provisions of the law of their home country. Secondly, the prospective investor is supposed to prove that the corporate charter and other organizational documents are available and are not in accordance with the Mexican Public Policy established in the Mexican Law. Finally, all applications which qualify for the stipulated requirements shall be approved within fifteen business days from the date the application was submitted. In case the applicant does not receive a response from the ministry of trade, then the application will be deemed as it has been granted. The ministry shall thereby submit the copies application to the ministry of foreign affairs together with the authorization granted (Wiener et al., 2017)

Organized crimes have been on the rise in Mexico in the recent past. This poses a lot of risk to the FDIs in the region. As a result, many FDI has been scared, and prospective investors changed their route to other countries. However, the place is still suitable for the establishment of FDI due to the economies of scale enjoyed in Mexico (Iamsiraroj, 2016).

Secretion 3: Comparison between Corporate Governance Codes in the UK and Mexico

The key codes of governance in Mexico are contained in the General Law of Business Organizations. The corporate governance rules and regulations in Mexico provides for the rights of Shareholders and different stakeholders in the corporation. The corporate governance dictates that it is the right of shareholders to elect and remove from office the Board of Directors, to make decisions concerning the corporation, approve all financial statements of the company in order to ensure that their equity is being used well, to amend the by-laws governing the corporation, to make decision of whether to merge or dissolve the corporation even before the primary goal of making the corporation is attained. The government of Mexico came up with the strict rule governing the operation of the corporate movements in order to solve risk in corporations (Maxfield, 2019).

In the UK, codes of corporate governance are contained in the UK Corporate  Governance Code. The corporate governance code in the UK provides the directors with the principles which they should apply in order to promote purpose, values as well as the future success of the companies in the UK. The codes provide a sense of direction on the leadership, purpose, composition, as well as the responsibilities of various stakeholders in the company (McCalman & Young, 2018).

Figure 3: The structure of corporate governance

Source: García (2017).

These codes of corporate governance are not very much different from the codes of governance in Mexico. This is because the idea of corporate governance code has been made universal and, thus, the similarities. The differences in corporate management codes can only arise when the question of who manages the corporate governance in different parts of the world arises (García, 2017).

Section 4: sources of finance available for Britvic PLC company in the international market 

Globalization has made money easily available in the global market. This is because the operations of a certain company, which in this case is the Britvic PLC, which wants to establish a new business in Mexico, are not limited to only one country. As a result, there has been a rise of various international financial institutions that offer loans to international companies, for instance, the International Monetary Fund.  Therefore, companies can easily source funds from international agencies on a loan basis. Additionally, the sale of equities is open to anyone who wishes to buy them (Pacheco, 2018). As a result, the companies can sell shares to the international agencies or any international entity interested in buying the shares or selling some to the Mexican government. The third source of finance for the company is the American Depository Receipts, where the receipts are sold to the American market just like any other stock. The fourth source is acquiring the Global Depository Receipts, which are sold to any member of the public across the world. The fourth source is the Foreign Currency Convertible Bonds, which are the debt securities that can be easily converted into the stock exchange or depository receipts after a specified period of time (Grunwald, 2019).

The company can choose from the above international sources depending on the costs of the acquisition, the company’s financial strength, and by considering the risk involved with every form of financial acquisition listed above.

Section 5: risks and opportunities

The idea of the Britvic PLC choosing to invest in Mexico has both benefits and risks. There are several opportunities that the company is likely to enjoy by choosing to invest in Mexico. Firstly, as discussed earlier, the population of Mexico is growing at a very fast rate leading to a larger young population. As a result, the young population is allover seeking for jobs. As a result, the company is likely to enjoy cheap labor because as competition for job increases, remunerations are likely to fall. Secondly, the geographical location of Mexico is convenient enough for the establishment of a new company. This is because the country has a well-developed infrastructure and advanced technology in the towns and even to some of the marginal areas. This makes transport and communication easy for the company, thus increasing the likelihood of faster growth of any new company (Reyes, Castro & Landazábal, 2020).

Thirdly, Mexico is deemed to one of the greatest tourist destinations. When there is a bigger population of tourists, so is the market for fuel. Fourthly, the government of Mexico encourages the establishment of FDI by the formation of federal agencies whose role is to promote the establishment of more FDIs within the region (Seid, 2018). As a result, the FDI is not required to provide a lot of statutory requirements before they are established, which makes the process of establishing an FDI in the region cheap and short. Finally, there is a variety of natural resources available in Mexico, which can favor the development of Britvic PLC branch in the region (Jones & Wren, 2016).

The idea of establishing a Britvic PLC branch in Mexico has some risks. These risks can be commercial, cross-cultural, currency, or country risk.

Figure 4: Four risks of International Business

Source: Mulatu, (2018)

Commercial risks are the kind of risks resulting from poor planning and poor execution of the company plans. Some of the potential causes of the commercial risks are things like poor timing to entry, high completion from other investors, weaker partners, and the poor execution of the company plans. In our case, their management can make similar mistakes. For example, locating the new Britvic PLC branch in a place where there is a high competition or in a very remote area where there is a little number of customers (Okoli, Arroteia & Barish, 2019).

Country risks are the risk related to the changes that lead to the fall market of the commodities supplied by a certain company. For example, the government of Mexico may choose to subsidize their local companies, which will lead to the fall of the unit price of fuel (Col, Durnev & Molchanov, 2018). As a result, the Britvic PLC branch ends up operating at a loss leading to the closure of the company. Cross-cultural risks are related to the change in beliefs. These may not necessarily affect the new company due to the nature of the products offered.

The only internal solution to the risks is the Replacement of the Board of Directors if it seems to be dysfunctional. Secondly, the company, through the management, should ensure that there are proper planning and implementation of the strategies set in order to avoid commercial risk. Thirdly, the directors should ensure that there is a good selection of the partners by organizing for the partner analysis before getting into the business. The other risks like country risk are sometimes unavoidable, but there should selection of the right country through the observation of the economic trends of the country before choosing to invest in it (Elenurm, 2019).

Section 6: Exposure of Foreign Exchanges risks and their management

When the currency of a country appreciates, the company is the likelihood of gaining more profits. When the value depreciates, the company is likely to incur losses.

Figure 5: Transaction exposure on foreign exchange receipt

Source: Mulatu, (2018)

Changes in the exchange rates also lead to exposure to foreign exchange risks. When the value of the other country in which the company is in business with appreciates, it means that the exchange value will consequently change, which will automatically lead to the loss. Companies can avoid making losses as a result of exposure to the foreign exchange risk by forecasting earlier on any possible change in currency and withdrawing from transactions with the country before the loss occurs (Claessens et al., 2017).

Conclusion and recommendation

The main focus of the essay was to analyze the macro-environment in Mexico and give the possible opportunities and risks for engaging in foreign business with Mexico. Major sections of the essay discussed the macroeconomic indicators in Mexico, and the FDI’s policies in Mexico, a comparison of the corporate governance between Mexico and the UK. The assay also analyzed the international sources of finances, business risks, and opportunities in Mexico, and the exposure to the foreign exchange risk and management strategies. The essay recommends for a thorough analysis of the foreign country’s economic trend, weighing between the risk and opportunities resulting from the construction of a new business branch in a foreign country as well as adhering to the county’s corporate governance codes for the success of a business enterprise. Finally, the Business Enterprise should not only consider outcomes at the local level but also on the effects of the transactions on the economy of the country.