Answer to Question #79662 in Finance for Justin Jian Hui Lam

Question

FDI Strategy. Rip Curl, an Australian designer, manufacturer and retailer of surfing sportswear has decided to establish a subsidiary in Brazil that will manufacture and sell their products there. It expects that its cost of producing their products will be one-third the cost of producing them in Australia. Assuming that its production cost estimates are accurate, is Rip Curl’s strategy sensible? Explain.

Answer 1

I think that the Rip Curl strategy is not reasonable. Rip Curl recognized the advantage of producing sportswear for surfing in Brazil in comparison with Australia. However, this is only an advantage if Rip Curl sells sports surf products produced in Brazil to the Australian market. All competitors Rip Curl in the Brazilian market will have the same production costs as the daughter company Rip Curl in Brazil, so Rip Curl will not have an advantage in the Brazilian market.