This report will present a discussion on the financial challenges and issues based on the Ruritanian Project case study. The report is concerned with analyzing the investment environment of the host nation, maximizing the investment return and minimizing the risks which could have a negative impact on the financial performance of the Ruritanian project. Firstly, the national economy environment will be discussed based on the national GDP growth and inflation rate; secondly, there is a discussion on the foreign exchange risks of Rutitania Crown against international currency; third, the issue of joining the Euro zone will be analyzed in terms of benefits and drawbacks; next, the taxation effect in the investment decision making will be accessed and finally there will be a discussion on the political environment.

THE NATIONAL ECONOMY AND THE IMPLICATIONS FOR THE PROJECT
2.1 The Relationship between National Economy and the Foreign Direct Investment (FDI)
The economic growth of the host nation has always had a positive relationship with the foreign direct investment decision making. The positive effect of host country economic growth on investment decision making has been supported by various studies (Ericsson and Irandoust, 2000; Dhakal, Kamal and Upadhyaya, 2007; Barrell and Pain, 1996; Grosse and Trevino, 1996; Taylor and Sarno, 1999; Trevino et al., 2002). Traditionally the economic growth of the host nation induces FDI inflow when FDI is seeking consumer markets, or when the economic growth leads to greater economies of scale and, increased cost efficiency of the project. The FDI is more likely to exist in healthy and open economies with steady growth. In addition, an earlier study by McGowan and Moeller (2011) has also argued that the causal relationship between FDI and economic growth of the nation in the long run.
2.2 The Implications for Ruritiania Project
As it can be seen from the case, the Ruritiania has enjoyed a relatively steady economic growth during the past years. This had contributed to create a positive investment environment to the company. The Gross Domestic Product (GDP) indicates the market value in the country, coming from the consumer, investment and government spending (Haidar, 2007; Graham, 2001; Steil, 1993); the GDP growth rate could be one of the most important indicators to gauge the health of a country's economy. As the case shows that the Ruritania has enjoyed a stable growth, with annual growth rate averaged around 6% per annum over the last five years. This creates a stable invest environment for the new manufacturing facility project. Meanwhile, the price inflation rate is important factor as it represents the rate at which the real value of an investment is eroded and the loss in spending power over time (Rugman, 1980; Boensztein, 1997). In the case of Ruritanian project, the price of inflation rate has been stable, with an average rate of 5.2% over the past five years. This allows a stable return rate of the investment project under the steady inflation rate. And with stable inflation rate in the future, it is expected to enjoy stable return in the following years.
However, there is a risk exits due to the low annual growth rate of 0.7% as the case shows. Comparing with the average 6% per annual growth over the past five years, the dramatic fall could be a risk indicator for the investment. According to Srinivasula (1983), economic risk is the risk that an endeavor will be economically unsustainable, for a variety of reasons ranging from a change in economic trends to fraudulent activities which ruin the outcome of the project. Hence the low growth has to be considered to determine whether or not the potential risks are outweighed by the benefits.
THE ISSUE OF FOREIGN EXCHANGE RATE
3.1 The Foreign Exchange Exposure
Among the financial risks inherent in international business operation, the foreign exchange exposure represents one of the most important considerations for the multinational corporation managers. Foreign exchange exposure is referred as the variability of a firm’s value due to uncertain changes in the rate of exchange (Dooley and Isard, 1980; Haglin, 2003, Harris&Malindretos&Bobb, 2011); and it is also defined by Dr. Hekman (1985) as the degree to which corporations’ earnings, cash flow or market value can be affected by exchange rate changes. Traditionally, there are three main types of foreign exchange exposure: translation, transaction, and economic exposure (Buckley, 2004; Hagelin, 2004; Harris, Malindretos and Bobb, 2011). The translation exposure measures the change in the value of the firm’s obligations which are incurred prior to the change in foreign exchange rates but not expected to be settled until after the exchange rates change (Bodnar, 2000; Dumas and Solnik, 1995; Harris, Malindretos and Bobb, 2011). Transaction exposure refers to gains or losses that can arise from settlement of transactions whose terns are stated in foreign currencies (Shubita et al., 2004). And economics exposure is defined as the possibility that the net present value of a company’s expected cash flow will change due to an unexpected change in foreign exchange rates. There can be an upward or downward change in value. This depends on the effect of the exchange rate change on sale, volume, prices, and costs.
3.2 The implications of Foreign Exchange Exposure
One of important obligations of the financial manager is to measure the effect of foreign exchange exposure and manage it as to maximize the investment return, net cash flow and market value of the firm (Mendizabal, 1998; Baker and Beardsley, 1993). As it can be seen from the Ruritanian Project, the Crown traditionally had enjoyed a free float exchange rate during past decades; and the government also plans to make effect to peg the currency against the major international currencies in the next few months. The company could be benefit from this in the investment project, since the stability of the value of currency always represents low uncertainty and low transaction risks of the business. Transaction risks has always create difficulties for multinational firms dealing business in different currencies, as exchange rates can fluctuate significantly over a short period of time. With the stable value of Ruritania Crown, the risk could be able to reduce. Moreover, pegging the Crown against a major international currency as the government announced also contributes to a stable exchange rate and in turn creates favorable investment environment for multinational corporations.
The Issue of Joining Euro Zone
4.1 The European Monetary System and the Euro Zone Single Currency
European Monetary System (EMS) was derived from the arrangement established in 1979 among the European Union countries; the then agreement was with two objectives: establishing a common area of exchange rate stability to encourage trade and growth of accelerating the convergence and integration of economic policies within the EU countries (Buckley, 2004). The EMS has successfully contributed to the European single currency – the Euro. According to Dabrowski and Rostowski (2003), the enlargement of the euro zone is an ongoing process within the European Union (EU). Greece joined in 2001, Slovenia joined in 2007, Cyprus and Malta in 2008, Slovakia in 2009, and Estonia joined on 1 January 2011 (Dyson, 2000; Dabrowski and Rostowski, 2003; EU NEWS 2009; BBC NEWS 2011).
4.2 The Implications for THE Project if Ruritania Join the Euro Zone
In the case study of Ruritania Project, the Ruritania has been prepared for times joining the euro zone. This could have a rage of implications of the overall project. For the bright side, the European single currency has brought great opportunities for the project and headquarters in the UK if the country successfully joins the euro zone area. As Mendizabal (1998) argued that the European Exchange Rate Mechanism ERM was a semi fixed exchange rate system. Firstly, joining the Euro Zone contributes to eliminating exchange rate uncertainty; and allows the manufacture avoid the fluctuations of the value of the Crown (Buckley, 2004; Mendizabal, 1998; Haidar, 2007; Tufano, 1996). Although the Crown seems to keep stable during several years, there are risks the Crown fluctuating up and down due to a series of reasons. If the value of crown in Ruritania fluctuates significantly, this could cause serious problems for the project engaged in trade. For example if the manufactory is exporting to the UK, a rapid appreciation in sterling would make the exports from Ruritania uncompetitive and therefore reduce profitability or even go out of business. Secondly joining the euro zone encourages further investment in Ruritania. The uncertainty of exchange rate fluctuations of Crown might reduce the incentive for the project to invest in export capacity. If joining the euro zone, long-term investment is encouraged by the sound and prudent management of Economic and Monetary Union; this helps build trust in the economy of the euro area and reduces uncertainty about the future (EU Business, 2009; Graham, 2001; Graham, 2003). Hence, the company is able to invest more in growth and new technologies in the Ruritania project rather than saving money in reserve in case of an economic downturn of Ruritania.
However, joining the euro zone might cause a range of problems. Firstly, if Ruritiania join the area, there might be no scope for devaluation of the currency. Since the start of the Euro, several countries have experienced the rising labor costs. This has made exports of euro countries uncompetitive (Mendiabal, 1998; Hagelin, 2004; Palmer, 1998). Traditionally the countries made their currency devalue to restore competitiveness in the international market; however in the Euro zone, the country would lost the opportunity to devalue the currency and might stuck with uncompetitive exports if Ruritania. This has led to record current account deficits, a fall in exports and low growth. This has particularly been a problem for countries like Portugal, Italy and Greece.
THE TAXATION EFFECTS AND IMPLICATIONS FOR THE PROJEC
5.1 The Taxation and Investment Decision Making
Minimizing the cost is one of the major objectives for the multinational corporations. The foreign tax credits could be a crucial factor affecting the financing choices of multinational organizations (Graham 2001; Talpos and Vancu, 2009). Although the relative literature about the effectiveness of taxes on cost saving on investment fairly inconclusive. There are opportunities for multinational firms to take advantage of changes of tax-avoidance and tax-evasion (Graham and Smith, 1999). Different kind of tax has different impact on the investment decision making. In this way, the kind of tax - incentives, may be classified as: value-added tax, corporate income tax, property–tax, royalty payments, import-tariffs, sales-taxes, tax-holidays, grants, depreciation allowances, enhanced deduction, tax-holiday, special investment allowance (Khoury and Chan, 1998; Lewent and Kearney, 1990). During the period of 1990s, a majority of countries reduce the corporate income tax-rate to encourage investment. Nowadays, countries are led to a downwards pressure of tax-rates and for this reason tax-rate is very significant for the allocation of investment among countries (Modigliani and Miller, 2003). For this reason, most of multinational organizations are tend to emphasize on the host-country corporate tax rates.
5.2 The Implications on Ruritania Project
As the case shows, that if the other major party elected, there is a high possibility that they would increase both corporate and personal taxation to provide additional funding for their social expenditure. This would become a disadvantage for the investment project. The increase of corporate income tax rate will be a great challenge for the company. Firstly the tax raise will directly led to a decrease of the net profit of the project in the balance sheet in Ruritania, and finally affects the dividends of shareholders overall. Meanwhile, the raise of taxation will in turn result in a loss of competitive advantages in the international market in product price.
THE POLITICAL RISKS AND IMPLICATIONS ON THE PROJECT
4.1 The Political Risks
The investment in a foreign country is subject to a number of risks; this might include expropriation and nationalization risks. The political risk is defined by Buckley (2004) as the exposure to a change in value of an investment or cash position resultant upon government actions. In most countries, governments intervene in their national economies. This has resulted in multinational organizations face increasing political risks. The political risks take various forms, like changes in taxation regulations, changes in exchange rate controls, the stipulations about local production, the commercial discrimination against foreign-controlled business to restrictions on access to local borrowings. In addition, the war and civil disturbance might cause great loss due to the destruction, disappearance, or physical damage to assets caused by politically; moreover, the motivated acts of war or civil disturbance, revolution, insurrection, and coup d'etat would also cause problems (Nagy, 1984; Buckley, 2004). Inability to convert local currency into foreign exchange as well as delays in acquiring foreign exchange caused by the host government's actions or failure to act.
4.2 The political implications on the Ruritania Project
In the case of Ruritania Project, first of all, there is the risk that a government might be able to avoid its contractual obligations through sovereign immunity doctrines due to the change of political parties in the national government; and, the project in Ruritania might have political barriers due to commercial discrimination against foreign controlled business on access to local markets and financial borrowings (Nagy, 1984; Thygesen, 1997; Buckley, 2004).
To Minimizing the political risks in Ruritania, there are a range of mechanisms for minimizing political risk. Firstly, it is essential between host nation in Ruritania and headquarter in the UK to obligate the contract; the agreements of the contract would contributes to assurance that project will not be interfered with any other political factors. For instance, to make sure the project would not affected by the election in Ruritania. Secondly, it is required to get political risk insurance from bodies which provide such insurance. By doing so the company is able minimize the political risk outside the UK and guarantee the success of the business in host nation.
CONCLUSIONS
This report has attempted to access a range of financial significant issues affecting the investment project based on the Ruritanian Project. First, the economic growth of a nation has generally pointed to a positive relationship with the foreign direct investment decision making. The relatively steady economic growth during the past years has contributed to creating a positive investment environment to the company. Second, the foreign exchange exposure represents one of the most important considerations for the multinational corporation managers. The Ruritania Crown had enjoyed a stable value against major international currencies, this represents low uncertainty and low transaction risks of the project. The aim of European Monetary System is establishing a common area of exchange rate stability to encourage trade and growth of accelerating the convergence and integration of economic policies within the EU countries, and Ruritania joining the Euro zone indicates a stable exchange rate and less transaction cost. Political environment is another consideration, it is necessary to obligate the contract between the host nation in Ruritania and headquarter in the UK to assure that project will not be interfered with any other political factors. And, get risk insurance from bodies which provide such insurance.

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