Small Firm Business in Cross Border Trade and Investment: Risk-Immunized and Risk-Assumed Returns

Abstract

Cross border trade and investment is always an interesting issue in view of the fact that many small business houses are involved in such transactions. Ever since the creation of NAFTA, this reality has been more demanding for further analytical study and serious examination of the economic and financial problems such firms face in our global markets while aspiring for growth and opportunities. Recently, volumes of trade and the lack of hedging instruments for management of risks and returns have assumed greater significance for many American business concerns on the Mexican borders dealing with millions and millions of dollars. The rate of yield from Mexico being enormously high, and yet the peso being the soft and the virtually un-hedge-worthy currency, U.S. business entities are quite daunted by the possibilities of being wiped out in the currency market under an adverse situation. Although this problem may appear simply an endemic one, it is essentially an issue of international trade between a hard-currency country, with any soft-currency country. It is also an issue of major significance in the emerging market structure in our global village. The question is: how to cover the trade and investment position in such a situation? What is true for a multinational corporation is certainly not valid for a small national firm in international involvement. This work attempts to deal with this specific issue of hedging and creation of hedging devices when those instruments are conspicuous by their absence in the existing market place. It then further explores the profit multiplier potential under this structure of hard-soft currency exchange. What appears to solve the usual problems of small firms in the border trade also provides the haven for high-yield investments for individual investors and currency traders in a risk-free condition and/or under a condition of deliberately-assumed risktaking.


Introduction

It has often been said that small business is the heart of American enterprise. Mom-and-pop stores have been the way to go and grow upon in business ventures. Big businesses and global undertakings have remained out of reach of ordinary people, and that is the reason for growth of small-scale firm operations. With a little capital and a lot of expectation, and later, with an enormous degree of success, these businesses have coloured the landscape of not only this economy, but of almost every economy on earth. Although not too much attention or analytical examination has been given at the professional level, this sector of the economy has caught the eyes of many. In the changing environment of what we call the global village, particularly since the demolition of the Berlin Wall, the creation of NAFTA, and the like, small firm businesses in cross-border areas have grown strongly and steadily. These firms are likened to big firms engaged in translational trade and investment in the global market. That means these firms also have broadened their operational horizons along with an additional dimension to their trading structure. Two or more currencies appear in their financial calculus, and the onerous responsibility of dealing with translation and transaction risks in the face of greater profit potential and return enhancement overwhelm or, maybe, burden these entrepreneurs.

In this work, first an attempt is made to bring out some of the prospects and problems these small firms face in their cross-border trade and investment. Secondly, we provide the design to solve the issues of risk exposure and currency hedging where hedging instruments are non-available to these firms. In these contexts, we highlight the problems faced by a U.S. firm in its trade with a firm across the border in Mexico, or a similar firm in Germany with a small firm in Poland, and vice versa. The issue is one of hard currency vis-a-vis soft currency, and the insulation against unmanageable or unpredictable exchange rate swings. The issue should have a natural ramification for any trade and investment in the emerging markets in general. Thirdly, we will examine the similarities and differences between small firm businesses in cross border trade and investment, with big companies doing international trade and other forms of financial transactions. Finally, a further look at cost of capital, capital budgeting, transfer pricing, and so on, and some concluding thoughts are presented for small entrepreneurs as well as for analysts of such issues.

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