Reference no: EM133151721

Question - Stigma Co. (Stigma) is a large listed company in Sweden, producing pharmaceutical products which are exported around the world. Recently, Stigma's earnings growth rate is low. The directors are considering to diversify its business.

The board of directors is proposing to set up a subsidiary in Lusa, one of the countries in South African, to process frozen food. The frozen food will be sold to retailers in nearby countries. The Lusa's government is keen to promote the frozen food industry. The inflation rate in Lusa is high and the government is unstable. The citizens are not happy with the corrupted government. Protest on the streets and worker strikes are common sights in the city.

The frozen food factory is going to be built on a football field due to its strategic location for logistics purposes. On hearing this news, the people staying near the football field were very unhappy and protested. However, the government was able to suppress the protestors and the construction of the factory was eventually able to proceed.

Lusa's regulators stipulate that at least 30% of equity shares capital of the subsidiary must be held by the local population. In addition, at least 50% of members on its Board of Directors must be from Lusa.

Stigma wants to finance the subsidiary using a mixture of debt and equity. It wants to raise 30% equity in the capital market in Lusa and 70% of the equity funds from its own cash flows.

Required -

(a) Discuss ANY FIVE (5) key risks that Stigma should consider when setting up a subsidiary company in Lusa.

(b) Recommend how the risks identified in part (a) above could be managed and mitigated by Stigma.

(c) Discuss ANY FIVE (5) reasons why corporate governance is important to multinational companies.