#6
FLEX Course Material
To distinguish Comparative
international management and INTERNATIONAL BUSINESS
multiple factors which impact
functional and regional AND TRADE ORGANIZATION
management decisions and
practices through the cross-
section of global business Foreign Exchange and Global Markets
To analyze the role of GATT and
NAFTA in International Trade.
Introduction
While global companies have to buy and sell in different currencies
around the world, their primary goal is to avoid losses and to fix the
price of the currency exchange so that they can manage their
profitability with surety.
Foreign Exchange
• Foreign exchange is money denominated in the currency of
another country or a group of countries.
• An exchange rate is defined as the rate at which the market
converts one currency into another.
Foreign Exchange Rate
Rates include two numbers:
The bid (or buy) is the price at which
a bank or financial services firm is
willing to buy a specific currency.
The ask (or the offer or sell), refers
to the price at which a bank or
financial services firm is willing to
sell that currency.
The Purpose of the Foreign Exchange Market
The foreign exchange market (or FX market) is the mechanism in which
currencies can be bought and sold.
Four main uses of the foreign exchange markets.
• Currency Conversion
• Currency Arbitrage
Arbitrage is the simultaneous and instantaneous purchase and
sale of a currency for a profit. Transactions are done electronically.
The Purpose of the Foreign Exchange Market
Four main uses of the foreign exchange markets.(Cont)
• Currency Hedging
One of the biggest challenges in foreign exchange is the risk of
rates increasing or decreasing in greater amounts or directions than
anticipated.
Currency hedging refers to the technique of protecting against the
potential losses that result from adverse changes in exchange rates.
Companies use hedging as a way to protect themselves if there is a
time lag between when they bill and receive payment from a customer.
The Purpose of the Foreign Exchange Market
Four main uses of the foreign exchange markets.(Cont)
• Currency Speculation
Speculation is the practice of buying and selling a currency
expecting the value will change and result in a profit. These changes
could happen instantly or over a period of time.
• High-risk, speculative investments by nonfinance companies are less
common than the current news would indicate.
Spot Rates
• Exchange rates that require immediate settlement with delivery of
the traded currency.
• “Immediate” usually means within two business days, but it implies
an “on the spot” exchange of the currencies, hence the term spot
rate.
• The spot exchange rate is the exchange rate transacted at a particular
moment by the buyer and seller of a currency..
Cross Rates
• This is the exchange rate between two currencies, neither of which is the official
currency in the country in which the quote is provided.
• The currency pairs expand the trading possibilities in the foreign exchange market
but are less actively traded than pairs that include the US dollar, which are called
the “majors” because of their high degree of liquidity. The majors are EUR/USD,
USD/JPY, USD/CAD
Forward Exchange Rate
• The exchange rate at which a buyer and a seller agree to transact a currency at
some date in the future.
• Forward rates are really a reflection of the market’s expectation of the future spot
rate for a currency. The forward market is the currency market for transactions at
forward rates.
In the forward markets, foreign exchange is always quoted against the US dollar.
Swaps, Options, and Futures
• Additional currency instruments used in the forward market.
• A currency swap is a simultaneous buy and sell of a currency for two
different dates.
• Currency options are the option or the right—but not the
obligation—to exchange a specific amount of currency on a specific
future date and at a specific agreed-on rate. Since a currency option is
a right but not a requirement, the parties in an option do not have to
actually exchange the currencies if they choose not to. This is referred
to as not exercising an option.
Swaps, Options, and Futures
• Currency futures contracts are contracts that require the exchange of
a specific amount of currency at a specific future date and at a
specific exchange rate.
• Futures contracts are similar to but not identical to forward contracts.
• Companies routinely use these tools to manage their exposure to currency risk.
• One of the complicating factors for companies occurs when they operate in
countries that limit or control the convertibility of currency. Some countries limit
the profits (currency) a company can take out of a country. As a result, many
companies resort to countertrade, where companies trade goods and services for
other goods and services and actual monies are less involved.
• The challenge for companies is to operate in a world system that is not efficient.
Currency markets are influenced not only by market factors, inflation, interest
rates, and market psychology but also—more importantly—by government policy
and intervention. Many companies move their production and operations to
overseas locations to manage against unforeseen currency risks and to
circumvent trade barriers. It’s important for companies to actively monitor the
markets in which they operate around the world.
Capital Markets
• Provide an efficient mechanism for people, companies, and
governments with more funds than they need to transfer those funds
to people, companies, or governments who have a shortage of funds.
• The international bond market consists of major categories of
bonds—including foreign bonds, Eurobonds, and global bonds.These
help companies borrow funds to invest and grow their global
businesses.
Venture Capital
• Large global firms have internal investment groups that make
corporate venture investments in early-stage and growing companies.
• Corporate VC firms may actually be the exit strategy and eventually
acquire the young company if it fits their business objectives.
• This type of corporate VC is often called a strategic investor because
they are more likely to place a higher priority on the strategic value of
the investment rather than just the pure financial return on
investment.
Monetary System: History
• Thousands of years ago, people had to barter if they wanted to get
something.
• Ancient Egypt and Mesopotamia—which encompasses the land between
the Euphrates and Tigris Rivers and is modern-day Iraq, parts of eastern
Syria, southwest Iran, and southeast Turkey—began to use a system based
on coins of gold and silver, also known as bullion, which is the purest form
of the precious metal.
• Gold and silver coins gradually emerged in the use of trading, although the
level of pure gold and silver content impacted the coins value..
• Two thousand years and bartering has long been replaced by a currency-
based system..
International Monetary System
• The gold standard provided a stable means for countries to exchange
their currencies and facilitate trade.
• The Bretton Woods system established a new monetary system based
on the US dollar. This system incorporated some of the disciplinary
advantages of the gold system while giving countries the flexibility
they needed to manage temporary economic setbacks, which had led
to the fall of the gold standard.
The Euro
• When the EU was founded in 1957, the Member States concentrated on building a 'common
market' for trade.. In 1991, the Member States approved the Treaty on European Union (the
Maastricht Treaty), deciding that Europe would have a strong and stable currency for the 21st
century.
• The benefits of the euro are diverse and are felt on different scales, from individuals and
businesses to whole economies. They include:
More choice and stable prices for consumers and citizens
Greater security and more opportunities for businesses and markets
Improved economic stability and growth
More integrated financial markets
A stronger presence for the EU in the global economy
A tangible sign of a European identity
The Euro
The single currency brings new strengths and opportunities arising
from the integration and scale of the euro-area economy, making the
single market more efficient.
Before the euro, the need to exchange currencies meant extra costs,
risks and a lack of transparency in cross-border transactions.
The Euro
• How did the world benefit?
• A single currency makes the euro area an attractive region for third
countries to do business, thus promoting trade and investment.
• Prudent economic management makes the euro an attractive reserve
currency for third countries, and gives the euro area a more powerful
voice in the global economy.
• Scale and careful management also bring economic stability to the
euro area, making it more resilient to so-called external economic
'shocks
The International Monetary Fund
Purposes :
• To promote international monetary cooperation through a permanent institution which provides the machinery for
consultation and collaboration on international monetary problems.
• To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion
and maintenance of high levels of employment and real income and to the development of the productive
resources of all members as primary objectives of economic policy.
• To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid
competitive exchange depreciation.
• To assist in the establishment of a multilateral system of payments in respect of current transactions between
members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
• To give confidence to members by making the general resources of the Fund temporarily available to them under
adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of
payments without resorting to measures destructive of national or international prosperity.
The IMF’s Current Role and Major Challenges and
Opportunities
The IMF supports many developing nations by helping them overcome
monetary challenges and to maintain a stable international financial
system.
Challenges for organizations like the IMF and the World Bank:
• Operating deficiencies
• Global political environment
• Conditions for loans
World Bank
The World Bank consists of two main bodies,
• the International Bank for Reconstruction and Development (IBRD)
and the International Development Association (IDA), established in
1960.
• The World Bank is part of the broader World Bank Group, which
consists of five interrelated institutions: the IBRD; the IDA; the
International Finance Corporation (IFC), which was established in
1956; the Multilateral Investment Guarantee Agency (MIGA), which
was established in 1988; and the International Centre for Settlement
of Investment Disputes (ICSID), which was established in 1966.
World Bank
• These additional members of the World Bank Group have specific
purposes as well.
• The IDA typically provides interest-free loans to countries with
sovereign guarantees.
• The IFC provides loans, equity, risk-management tools, and structured
finance. Its goal is to facilitate sustainable development by improving
investments in the private sector.
• The MIGA focuses on improving the foreign direct investment of
developing countries. The ICSID provides a means for dispute
resolution between governments and private investors with the end
goal of enhancing the flow of capital.
World Bank
The current primary focus of the World Bank centers on six strategic themes:
• The poorest countries. Poverty reduction and sustainable growth in the poorest
countries, especially in Africa.
• Postconflict and fragile states. Solutions to the special challenges of postconflict
countries and fragile states.
• Middle-income countries. Development solutions with customized services as
well as financing for middle-income countries.
• Global public goods. Addressing regional and global issues that cross national
borders, such as climate change, infectious diseases, and trade.
• The Arab world. Greater development and opportunity in the Arab world.
• http://www.nytimes.com
• http://www.imf.org
• Introduction to International Political Economy, 4th ed. (Upper Saddle
River, NJ: Pearson Education International/Prentice Hall), 2005.
• https://ec.europa.eu
Introduction: Global Opportunities
• GLobalization is more than companies simply exporting products to
another country.
• In a truly global industry, the core product is standardized, the
marketing approach is relatively uniform, and competitive strategies
are integrated in different international markets.
Factor That Favor Industry Globalization
• Markets
The more similar markets in different regions are, the greater the
pressure for an industry to globalize.
Homogeneous customer needs
Global customer needs
Global channels
Transferable marketing approaches
Factor That Favor Industry Globalization
• Costs
Costs favor globalization.
Large-scale and large-scope economies
Learning and experience
Sourcing efficiencies
Favorable logistics
Arbitrage opportunities
High research-and-development (R&D) costs
Factor That Favor Industry Globalization
• Favorable trade policies
Common technological standards
Common manufacturing and marketing regulations
• Competition
• Interdependent countries
• Global competitors
Reasons for Global Expansion
• To improve the cost-effectiveness of their operations
• To expand into new markets for new customers
• To follow global customers
Planning for Global Expansion
• International Market Due Diligence
Involves analyzing foreign markets for their potential size, accessibility, cost of
operations, and buyer needs and practices to aid the company in deciding whether
to invest in entering that market.
Relies on using not just published research on the markets but also interviews with
potential customers and industry experts.
Regional Differences
Understand the regional differences within the country and to not view
the country as a monolith.
Understanding Local Consumers
Price is may be an important issue to local consumers-quality of
products and the design and presentation of the product or retail
surroundings.
Differentiation and Capability
How products and services will be different from what competitors are
already offering in the market so that the new offering provides
customers value.
Companies trying to penetrate a new market must be sure to have
some proof that they can deliver to the new market; this proof could
be evidence that they have spoken with potential customers and are
connected to the market.
• Industry Dynamics
Entering a new market will depend on the specific circumstances of
the industry in which the company operates.
• Political stability, legal security, and the “rule of law
Common Mistakes
• Not doing thorough research prior to entry,
• Not understanding the competition, and
• Not offering a truly targeted value proposition for buyers in
the new market.
Common Modes Of International-Market
Entry
• Entry mode depends on the firm’s size, financial strength, and the
economic and regulatory conditions of the target country.
• A small firm will likely begin with an export strategy.
• Large firms or firms with big capital may begin with an acquisition to
gain quick access or to achieve economies of scale.
• If the target country has sound rule of law and strong adherence to
business contracts, licensing, franchising, or partnerships may be
middle-of-the-road approaches that are neither riskier nor more
expensive than the other options.
Exporting
• Easiest way to enter an international market
• Exporting is the sale of products and services in foreign countries that
are sourced from the home country.
• The advantage of this mode of entry is that firms avoid the expense of
establishing operations in the new country.
• Firms must, however, have a way to distribute and market their
products in the new country, which they typically do through
contractual agreements with a local company or distributor.
Exporting
• Disadvantages are
A. Costs of transporting goods to the country, which can be high and
can have a negative impact on the environment.
B. Tariffs on incoming goods, which will impact the firm’s profits.
C. Firms that market and distribute products through a contractual
agreement have less control over those operations and, naturally,
must pay their distribution partner a fee for those services.
Licensing and Franchising
• The granting of permission by the licenser to the licensee to use
intellectual property rights, such as trademarks, patents, brand
names, or technology, under defined conditions.
• Creates a legal vehicle for taking a product or service delivered in one
country and providing a nearly identical version of that product or
service in another country.
Licensing and Franchising
• Franchising
• Similar to a licensing agreement, under a franchising agreement, the
multinational firm grants rights on its intangible property, like
technology or a brand name, to a foreign company for a specified
period of time and receives a royalty in return.
• The difference is that the franchiser provides a bundle of services and
products to the franchisee.
Partnerships and Strategic Alliances
• A strategic alliance involves a contractual agreement between two or
more enterprises stipulating that the involved parties will cooperate
in a certain way for a certain time to achieve a common purpose.
• To determine if the alliance approach is suitable for the firm, the firm
must decide what value the partner could bring to the venture in
terms of both tangible and intangible aspects.
• Partners are especially valuable if they have a recognized, reputable
brand name in the country or have existing relationships with
customers that the firm might want to access
Acquisitions
• A transaction in which a firm gains control of another firm by
purchasing its stock, exchanging the stock for its own, or, in the case
of a private firm, paying the owners a purchase price.
• Acquisitions are appealing because they give the company quick,
established access to a new market.
• Expensive, which in the past had put them out of reach as a strategy
for companies in the undeveloped world to pursue. What has
changed over the years is the strength of different currencies.
New, Wholly Owned Subsidiary
• Also called a greenfield venture
• Complex and potentially costly, but it affords the firm maximum
control and has the most potential to provide above-average returns.
• The costs and risks are high given the costs of establishing a new
business operation in a new country.
• Firm retains control of all its operations
