Mode of entry and finance
Argentina is the second largest country in South America and 8th largest country of the world by area. The country has been facing consistent growth in GDP over the past six years (Cavallo, 1991). World Bank has classified Argentina as an upper middle income economy. Over the past few years the Argentinean Government has made all possible efforts to attract foreign investment and has entered into various bilateral and multilateral agreement and treaties with countries (Romero, 2002).
Government is providing various incentives for Foreign Investments such as taxes and duties incentives and equivalency of local investors. Regulatory Requirements The government has been very flexible, at present regulations are: 1. No restriction on percentage of local investment sharing, the foreign investor can own the entire business. 2. Argentinean Business report 2009 analyzes forest industry as one of the most attractive segments of foreign investment. 3.
Bank of Investment and Foreign Trade (BICE) has simple and easy policy structure for export financing and provides the most competitive rates among Argentinean local market. 4. Corporate Income tax on profit is same for both domestic and foreign investor and for any taxes paid to some other country can be credited. 5. Argentina is founding member of MERCOSUR comprising of Argentina, Brazil, Paraguay, Uruguay and Venezuela. No trade and duty barriers exist between these countries. Mode of Entry
Given the current regulations by Argentinean Government which facilitate Foreign Trade, and very few barriers to entry it is recommended that Direct Export and Marketing in Argentina is the best possible option. Treatment of foreign investment as local investment and levy of duties is a major opportunity if growth and development of firm infrastructure (Krueger, 1983). Similarly existence of MERCOSUR treatment allows free trade opportunities with the member countries. Government is also providing credit and investment opportunities.
BICE has been dedicated to provide competitive rates and can be utilized for export financing. Argentinean Government has also a well developed infrastructure for furniture industry which has shown a steep growth over the past few years, Brazil has been the biggest exporter of Furniture Goods (54%) followed by Chile (30%+). The research projects annual growth in excess of 12% minimum annually for the furniture industry. Waiver of additional taxes and availability of the necessary infrastructure provides the option to successfully stem business in this sector.
Exporting furniture form the manufacturing facility directly to Argentina and than developing sales and marketing offices to sell directly to locals is the best possible option. As the index provides information that Argentinean labor is highly qualified and approximately and minimum labor is US$ 1,400 which is far lesser than any developed economy. Exit strategy Latin American countries historically are considered as volatile business place because of ever changing political scenarios (Bouzas and Chudnovsky, 2004).
The situation has subdued to large extent nowadays however for a foreign investor risk is imminent. The company should keep the cost of risk in mind and over the years in their earnings and investment develop contingency accounts wherein amount should be kept to avoid any untoward situation. Similarly in finalizing the export agreement Force Majeure (correct spelling it’s a legal word)clause should be developed with comprehensive coverage of losses if incurred and every minor detail should be covered.
Similarly labor agreements should also cover the planning of possible exit. The company should acquire least of fixed assets and focus more on current assets. The idea is to keep oneself as liquid as we can. The furniture business is always in demand and there is always market for furniture, therefore, it won’t be difficult to exit the market. The owners will have the option of either selling off the business or having a merger with any other corporation. Regardless to say, a suitable number of buyers will be present if the owners decide to exit.
Financing plan Since the company is planning to export, a significant amount will be required for advertising and marketing and profit won’t be able to generate in the initial period of time. Keeping that in mind, the owners should determine whether they have the necessary cash flow available to start this business. As discussed above BICE has been a body dedicated for foreign investors, a detailed financial requirement should be prepared keeping in mind 1 year expenses as capital expenditure.
References Bouzas, R. and Chudnovsky, D.(2004), “Foreign Direct Investment and Sustainable Development: The Recent Argentine Experience”, Working Paper No. 47, Universidad de San Andres, Buenos Aires. Cavallo, D. and Cottani. J, (1991).
“The Timing and Sequencing of Trade Liberalization Policies; the Case of Argentina”. Liberalizing Foreign Trade. Vol I. Ed Basil Blackwell Ltd. Oxford. [382. 3-p-39655]. Krueger, Anne, (1983). Trade and employment in developing countries. Synthesis and Conclusions. The U of Chicago press. Chicago. Romero, L. A. (2002), A History of Argentina in the Twentieth Century, State University Press, Pennsylvania.