Answer to Question #79657 in Finance for Justin Jian Hui Lam

Question

Impact of a Weak Currency on Feasibility of FDI. Fisher and Paykel Appliances, a New Zealand manufacturer of white goods, plans to establish a subsidiary in Indonesia in order to penetrate the Indonesian market. Their executives believe that the Indonesian Rupiah’s value is relatively strong and will weaken against the New Zealand dollar over time. If their expectations about the rupiah’s value are correct, how will this affect the feasibility of the project? Explain.

Answer 1

If their expectations are true the project will be extremely profitable. The more the Indonesian currency will weaken, the more profitable it will be to produce goods there. This is due to the fact that the investment will come in New Zealand currency, then converted into a rupee. If the dollar is strengthened, the cost of labor, raw materials and logistics will be more profitable for New Zealand investors.
In addition, there are no expenses for international logistics and customs clearance of goods.