Reference no: EM132938620
Question - You have been appointed as an advisor to a leading pharmaceuticals manufacturing company (PharmSave Ltd (PSL) - a hypothetical company) established in Australia. The company owns a number of reputable vitamin product lines which have been protected by international patent rights law.
As an expert in international finance and banking, you are required to assist PSL to expand its current operation into a number of overseas markets.
The company currently engages in export and import activities using a well-linked international network of agents. The company distributes its product in China using its own subsidiary. In addition, they also have a very good presence in the cyber market.
The company currently uses AUD as their international trading currency and all suppliers are required to invoice in AUD PSL is considering to change this policy. The proposed change in policy is instead of using AUD as invoicing currency, to use either the currency of the trading partner'' country or the USD when transacting with foreign partners in the future. PSL allows three months to settle with their foreign customers. However, PSL are allowed four months to settle their suppliers' invoices.
PSL expects to expand its operations into Thailand and Japan by forming two subsidiaries in these two countries. In Japan, they plan to establish a network of small retail outlets in leading supermarkets. Most products for proposed outlets network in Japan are expected to be shipped from its current manufacturing facility in Australia.
Currently, the company sources some raw-materials from Thailand. A feasibility study conducted last year revealed that locating a manufacturing plant in Thailand would bring a huge cost advantage. Therefore, the company will construct a state of the art manufacturing facility in Thailand to produce some of its vitamin products using local labour and materials. The Thai operation will be used to satisfy the growing demand in South-East Asia.
PSL's policy is to review the cash flow situation of all its subsidiaries every three months and remit any excess cash balances to the head office in Australia. Currently, excess cash are transferred any time whenever the subsidiary cash balance exceed the allowed limit. Consequently, the parent in Australia transferred cash to the subsidiaries when they are in short in cash.
Why do you think establishing a foreign subsidiary is more appropriate than the other available modes of internationalisation? Explain possible advantages PSL can enjoy through a foreign subsidiary.