As markets for commodities continue to grow overseas, Unites States manufacturers and businesses are compelled to venture into those markets. This is done by either exporting already finished products, establishing assembly outlets overseas, or investing in equity from other profitable foreign firms.
Export based strategies may be challenging in execution due to the environmental differences that exist between the domestic and foreign markets. However, with a careful analysis of why a commodity sales domestically and a selection of similar markets overseas can change the success of a firm but with a little product modification. Export based strategy requires a firm to adapt to the ever changing international markets such as, technology, government import controls, fluctuating foreign currency (Hilmola, Abraha & Lorentz, 2008).
Piercy, (2014) notes that it is important when venturing into foreign markets to analyze facts, goals, and constraints before creating an action statement. The action statement contains objectives and the time frame for their implementation in addition to milestones for measuring the degree of success in the foreign market.
With the new techniques that have allowed drillers and firms like the Chevron Corp. to tap natural gas and oil, production has increased. The prices for both gas and oil have gone down significantly giving the domestic manufacturers a cost advantage over their competitors in other parts of the world. Opportunities for drillers and oil and gas marketers is thus high in the foreign market due to the low cost of production at home and the rising demand abroad with most countries relying heavily on imports. Export of United States natural gas and oil would increase Gross Domestic Product, raise incomes, reduce the country’s trade deficit, and create more jobs.
Since not many countries extract natural gas and oil, no strict tariffs are imposed to protect domestic businesses and prices are mostly determined by supply costs and currency fluctuation. This may make it easy for U.S firms to venture in oil and gas markets abroad. Firms in the oil business may enter the export market to expand their sales opportunities in the foreign markets and expand their growth opportunities. It can serve as a better way to boost the firms’ efficiency and product quality domestically and abroad especially in the countries that produce their own gas and oil, for example Russia, Nigeria, and the Middle East due to competition.
Firms can achieve economies of scale and thus spread costs over a greater revenue volume due to increase in export production and sales of natural gas and oil (Piercy, 2014). The average unit cost of a barrel is reduced while increasing the overall profitability and competitiveness. With the global capacity for liquefied gas deemed to rise sharply by 2020, the United States producers are expected to reap the benefits once a competitive pricing is achieved. The oil-linked pricing structure, long-term contracts for gas agreements, and transport costs are also expected to fall to favorable rates thus making the export market attractive and lucrative (Whitney & Behrens, 2010).
Despite the benefits of exporting natural gas and oil, federal approval is needed for exporters to enjoy the full benefits. The United States government permits are required for most World Trade Organization members but once the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership are completed, this constraint may be repealed. Moreover, domestic consumers may affect export of natural gas and oil if the prices increase as supply falls. Adverse environmental impacts of gas production may also affect the growth of the domestic Liquefied Natural Gas industry thus affecting the export market (Whitney & Behrens, 2010).
Prediction of price effects depends on the Organization of the Petroleum Exporting Countries, the cartel that markets oil to the global markets. However, booming supply of Light Tight Oil and its export may affect the demand for OPEC oil thus benefiting the United States exporters, who may in turn choose to give discounts to consumers.
With more countries opening up their markets for foreign firms to venture in, companies and individuals are moving in to invest in equity. This involves holding of securities that are highly liquid, for example foreign bonds, stock and other financial assets which do not require active control or management of the issuer by the foreign investor. Investment in equity overseas is easy to buy and sell off, thus the investor can pull out any time they feel like making it more volatile than foreign direct investment (Lane & Milesi-Ferretti, 2004). This kind of investment helps an economy to grow rapidly as it takes advantage of the opportunities in foreign markets hence creating jobs and wealth. In case the economy takes a slump, the investors are likely to shy away thus damaging the economy further.
Overseas investment in equity where the investor holds less than 10 percent of a company’s shares are termed as portfolio investment or flows and are recorded in a country’s balance of payment financial account. Overseas equity investment is characterized by risk reduction through geographic diversification and high rates of return. The returns are in non-voting dividends or interest payments.
Mutual funds business can be lucrative for United States firms as they consist of a pool of funds from various investors for investment in securities, for instance bonds, stocks, and money market instruments. Investors in the country can take advantage of the market for debt instruments overseas. Head and Ries, (2002) assert that debt instruments help investors to invest in equity with minimal exposure to country-specific risks. They safeguard the invested capital and the income flows they provide on a regular basis. For example, bonds provide strong stability to an equity heavy portfolio and at the same time providing more frequent dividends than individual bonds. Investors can also take advantage of the foreign government infrastructure bonds, mutual funds, treasury bills, securities, and notes. Treasury bills, notes and securities are usually very safe and can be adopted by the risk-averse investors.
Firms and individuals can also invest in overseas equity because it can be inflation protected. Investment in government mutual fund can be rewarding with some fetching more than 10 percent per annum. Mutual funds’ portfolios are structured and maintained to fit the investment objectives that are outlined in the prospectus. Lane and Milesi-Ferretti (2004) further argue that mutual funds provide small investors with an access to professionally managed and diversified equity, bonds, and other securities portfolios which would otherwise have been hard to create with limited capital. Mutual fund units are issued and can be purchased or redeemed at their prevailing net asset value per share.
As these funds are invested abroad, investment is normally in the currency of the foreign country where the investment is made hence investors are subject to currency exposure. This means that the investment depends on the behavior or fluctuation of that foreign currency, for instance depreciation against the dollar means more earnings to the U.S investors. Global funds are treated as debt funds when being taxed. Any capital gain from the funds is taxed at a lower rate without indexation. Short-term capital gains from an investor’s debt funds are added to their income and taxed as per their tax slab (Head & Ries, 2002).
Moreover, those investors who want to diversify within equity may invest in international funds. Global funds are advantageous because they absorb the investor of country-specific risks, for example accusations of government policy paralysis. Investors should thus take advantage of investing in international firms that are growing faster than domestic firms as well overseas bullish markets.