Abstract
International market entry requires good analysis of financial and economic performance. This is meant to help multination corporations avoid making huge losses in foreign countries. Based on this, this study will discuss key factors that must be considered to determine the viability of the Indian market by Capital One Finance Corporation which a US-based bank.
Capital One Financial Corporation Background Analysis
Capital One Financial Corporation is a well recognized bank based in the US; it is specialized in credit cards, home loans, banking, and savings products. The nature of its products indicates the need to ensure effective financial analysis before introducing any new product or engaging in any activity of market expansion both locally and internationally. The bank has enjoyed good runs in the US; this has seen the company being ranked as the eighth largest bank and holding company in terms of assets and deposits. The company’s good run growth is depicted by it 963 branches that include 10 style locations for the Capital One 360 brand and 2000 ATMs as at 2012. An analysis on the company’s international operation reveals it presence in the UK and Canada. From this point, one will be right to conclude that the company has been enjoying effective local business run which has led to the international market expansion. It is also important to note that its operations in the UK and Canada are supported by the good financial positions and exchange rates in those countries. The company has taken credit for a number of successful activities in the finance and bank industry. One such activity is the pioneer of the mass marketing of credit cards in the 1990s. Capital One’s management felt the need to communicate to the public the benefits of credit card. Thru this the company has built good image in the US market becoming the fourth largest customer of the United States Postal Service. Capital One Finance Corporation is still focused gaining much ground on the international front by gaining entry into other markets. Gaining entry into other markets like India is a move that must be taken with keen market analysis. Moving into the Indian market must involve effective analysis of it currency performance and economic stability.
International Finance Analysis
The Indian Rupee has faced situation of low performance as compared to the US dollar in the 24 months. International finance analysis is important for multinational companies with an aim of expanding their global market coverage. Expanding the global market size for an international company is a move that must involve a comprehensive analysis of the money market and other factors which influence the exchange rate. Capital One is among the multinational companies with an aim of growing its global market size. However, the economic conditions in some parts of the world may block this growing company from attaining larger market share on the global front. Like any other company in the global market, the must consider a number factors which influence the financial capability or strength of a business. It is, therefore, important the top management of any multinational company takes note of the determinants of exchange rates. This is because; the exchange rates have great determination towards the success or failure of multinational companies. Based on this, multinational companies aiming at expanding the global market share must consider factors like differentials in inflation, differentials in interest rates, current-account deficits, public debt, terms of trade and political stability and economic performance. Good analysis of these factors will offer the company effective room to make sound decisions and come with strategies need to push for success in such markets. This study will focus on the intended entry of Capital One Financial Corporation, which is a US-based bank in the Indian market. Based on the fact that company has no experience of the Indian financial market, it will important that a keen analysis of the environment is done to ensure smooth operation. Must the company through its management develops key structures that will enable this process be successful.
Determining the Viability of the Indian Market
As compared to the US, Canada and the UK where Capital One Finance Corporation has enjoyed good runs, the Indian market is considered low in performance. However, this cannot stop the company from gaining entry into the market. The company must base its analysis on the positive elements of the Indian economy likely to steer the smooth market entry. Capital One’s entry into the Indian Market will entail a comprehensive analysis of the following six international finance factors believed to be the determinants of exchange rates;
The factors listed above have key influence on the exchange rate of any economy, thus making it important for Capital One Finance Corporation to determine the viability of the Indian market through the analysis. The factors that are used determine the exchange rates of the economy are closely linked to the trading relationships between economies. Based on this, Capital One must the trade relationship between the US and India as a platform for analyzing the viability of the Indian market. This implies that the company must make one on one analysis and comparison of key sectors to obtain key information needed for successful market entry. Thru such comparisons Capital One will be able to establish the viability of the Indian. The viability of the Indian market will be based on the ability of the company to get good sales for its products. Finance and banking products are subject to all the factor listed above; however must company analyzes each factor to point out its situation in the US and India and possible ways of managing the situation. This important based on the factors not all companies quit because of tough economic times, but find ways of the managing the situations to remain relevant in the market. Finance and banking is one area that is prone to exchange rate influence, hence the need for Capital to concentrate the analysis of these factors as a way determining viability.
Inflation Variance
Inflation levels differ from one country to the other. Based on the fact that Capital considers expanding its operation from the US to India, considering inflation is key towards determining the viability of the market. From an economic analysis point, it is a general rule that a country or economy with lower inflation rates enjoys high currency value. This is because its purchasing power increases as compared other countries. In the 21st century, US has been ranked among the countries with low inflation rates despite a number of financial crises that have faced the country. It is clear that the stability of the currency (Dollar) has seen US enjoy good operation as it customers has the power to go any of its products (Fund, 2008). This is different from the Indian market. India is facing higher inflation rates as compared to the US, which brings the fast challenge to the company in its attempt to join the market. Based on this the Indian Rupee has experienced situations of currency depreciation. Based on this, it is clear that the purchasing power of the Rupee has been relatively low thus raising concerns of the successful operations of Capital One within the Indian market. Depreciation in the currency value is accompanied high interest rates which will derail successful operation of any financial institution. It is important o note the high interest rates are also a major barrier to the customers with intentions of getting access to the banking products.
Based on the situation described above, Capital One’s operation in India must be based on accurate market segmentation to ascertain the right products for both individuals and business organizations. In countries with high inflation rates like India, it is clear that banking products are mainly accessed by people of high social status and business organization. From this point, Capital One must make it entry into the market by offering more products to the high social class group and business organization. The products must bring to the people and organization easy international transaction as away of creating loyalty despite poor financial situations within the country. Apart from the products to people of high social status and business organizations, Capital One must also consider the cheap products to the lower social class as one way of building saving and banking culture in them (Summers & Per Jacobsson Foundation, 2004). This will make this group develop good relations with Capital One thus creating good operations when the inflation rates finally come down. Capital One should also join the market effective strategies like working close with SMEs to steer Indian economic growth. Capital One should use inflation differentials as a way of establishing effective strategies for entering the Indian market. Based on the fact that high inflation rates in India are no permanent, Capital One should adopt good regulation measure and wide risk spreading handling situations of high inflation. However, Capital One must take note of the fact that Indian market is in need foreign investment and the interest would be manipulated to accommodate this important group of investors. Foreign investors like Capital one can still enter the market with lower interest rates and allow the Indian market expand.
Interest Rates Variance
Inflation, interest rates and exchange rates are correlated. This implies that Capital One Finance Corporation must take keen analysis of the Indian interest rates before making any move into the market. Interest is normally set and manipulated by the central bank in any economy as away exerting influence on the inflation and exchange rates. Since Capital One operates in the banking sector it must obtain full details of the Indian interest rate and how the central bank manipulates it in different situations. High interest in any country is aimed at attracting foreign capital (Nadal-De, Razzak & International Monetary Fund, 1999). However, this is not healthy for Capital One as it will involve high cost of market entry and operation. It is, therefore, important that the company confirms the interest rate trends as away of obtaining key strategic information. Both inflation and interest rate analysis are based one key section which economy performance analysis. From the analysis, it is clear that the Indian market face poor performance as compared to the US, hence the need for Capital One to derive effective strategies to ascertain successful market entry.
Analysis of interest rate might take lightly by some investors, however, that should not be the case as a goods number of firms have failed in the international front due to their failure to take note of the interest. For successful multinational companies, it is clear that the value of the interest rate has the power to influence the business trend of the company.
Current- Account Deficit
Current accounts define the balance of trade between a country and its trading partners. It a reflection of all payments between the countries for goods and services, interests and dividend involved. A deficit in on the current account balances is an indication that the country is spending more on foreign operations than it is earning. It is, therefore, important that Capital One obtains this information as part of the key strategies to ensure it enters a high performing market. The Indian market has long durations of current account deficit as compared to the US, which enjoys massive exports leading to good foreign earning. The high deficit value on the current has seen India resort to borrowing from foreign countries as away of sustaining or financing some of its activities. Based on this, it is clear that the cost of operation in India will prove expensive hence the need to come with more diverse products as away of spreading risk (Barschel, 2007). It is, therefore, important for Capital One to consider designing other unique products which suit the Indian market like offering great support to SMEs to empower the lower social class to take up banking and finance services. Part of the company’s analysis should be built around the fact the countries like India only fight to offer basic needs to its members thus making banking service a luxury to the larger part of the community.
Public debt
A number of countries around the globe will always engage in large scale deficit to help finance public sector projects meant to open room for more economic growth. Although these activities stimulate economic growth, it is important to note they expose the country to high debts that inter keeps foreign investors away. This is because foreign investors tend to be afraid of being subject to high taxes as away of paying back such debts. It is a necessary that Capital One analyzes India’s public debt value to ascertain the possibility of high or low taxes.
Terms of trade
Terms of trade area ratio that compares the export prices to import prices. It has a close relation with current account hence the need for multinational companies to analyze it before making market entries. Favorable terms of trade should see the country’s exports price go above the imports. This is because it portrays a country of high value in terms of production, processing and delivery of essential services to the people. Being a financial institution, Capital One should consider operating in India under favorable terms of trade to ensure its products are used by both local and international trader in India.
Political stability and economic performance
Political stability and economic performance of any country have great effects on its currency or exchange rates. Countries with stable political situations tend attract investors with under average currency performance. This is because investors feels safe and give room for improvement based on the political stability. The Indian political situation has been relatively stable with minimal cases of trouble. However, it economic performance has not reached the expected standards calling for more investment activities.
References
Barschel, H. (2007). The U.S. current account deficit – Whose problem is it?: A short overview. München: GRIN Verlag.
Fund, I. M. (2008). Inflation Differentials in the EU. Washington: International Monetary Fund.
Nadal-De, S. F., Razzak, W., & International Monetary Fund. (1999). Nominal exchange rates and nominal interest rate differentials. Washington, D.C.: International Monetary Fund, Western Hemisphere Department.
Summers, L. H., & Per Jacobsson Foundation. (2004). The U.S. current account deficit and the global economy. Washington, D.C: Per Jacobsson Foundation.
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