Fletcher Ch 02

8/4/2019 Fletcher Ch 02

1/37

1Copyright 2002 Pearson Education Australia Pty Ltd

CHAPTER TWO

APPRECIATING THE

INTERNATIONAL

ECONOMIC AND

FINANCIALENVIRONMENT


2/37

Copyright 2002 Pearson Education Australia Pty Ltd2

Appreciating the InternationalEconomic and Financial

EnvironmentLearning Objectives

After studying this chapter, you should be able to:

Identify ways of segmenting the global economicenvironment and appreciate the ways in which

countries differ from each other in terms of economicvariables;

Measure international markets to predict likelyoutcomes of involvement;

Appreciate how the international financial systemoperates;

Recognise how foreign exchange variations impacton the successful undertaking of internationalbusiness;

Identify the role of aid in international businessopportunities.


3/37


Introduction

It is estimated that one fifth of the worldspopulation lives on less than one dollar aday. Farmers in poor countries not onlyhave to compete against subsidised foodexports, they also face high importbarriers.

Developing countries are finding it easierto compete in international markets, butstill face higher barriers to entry thanmore developed economies.


4/37


The Global Economic Scene

When discussing the globaleconomic scene we will look at:

Recent trends

Economic Systems

Economic Structure

Stages of Economic Growth


5/37


Recent Trends

Keegan and Green (2000) suggested thatthe world economy has changedsignificantly due to the emergence ofglobal markets and the development ofglobal competitors.

The emergence of international marketshas been accompanied by a reduction oftariffs and non tariff barriers.


6/37


Recent Trends

Domestic markets are therefore faced withincreased import competition. This can beattributed to four factors:

1. Capital movements rather than trade, are now thedriving force in the world economy.

2. Production is no longer directly linked toemployment.

3. The world economy has more impact on economicoutcomes within a country than the national state.

4. The contest between capitalism and socialism isover the economies of socialist countries becomingincreasingly market orientated.


7/37Copyright 2002 Pearson Education Australia Pty Ltd 7

Economic Systems

Since World War II, countries havebeen classified according to theireconomic system. They were

classified as:

Market Allocation System

Command Allocation Mixed System



Economic Structure

Another method of classifying countriesis according to their economic structure.

The classification reflects the relativedominance in the economy of the countryin the following:

Agriculture Industrial

Services



Stages of Market Development

This involves grouping countriesaccording to GNP per capita.

For example:

Low income countries

Lower middle income countries

Upper middle income countries

High income countries


10/37Copyright 2002 Pearson Education Australia Pty Ltd

10

International EconomicEnvironment

Historically, countries have beendominated by a desire to protectdomestic industry from foreign

competition. There have beenmany attempts to regulate theinternational economicenvironment in the interests of

freeing up trade betweencountries.



11

International EconomicEnvironment

In recent years trade barriers havefallen in most countries, howeverthey have been replaced by non

tariff barriers, including:

Import Licensing

Tariff Quotas

Quarantine Restrictions

Standards (e.g quality)



12

The World Trade Organisation

The World Trade Organisation wasformed in1974 and involves 142 countries (although moreare joining regularly).

GATT established guidelines for the conduct ofinternational trade and provided a forum for thenegotiations of multi lateral reductions in tariffsand non tariff barriers.

The WTO, accounts for in excess of 80% of worldtrade. It has endeavored to address theshortcomings of GATT through broadening itscoverage of international trade to includeagriculture, investment and intellectual property.



13

The World Trade Organisation

Since the end of World War II, there has been amove towards economic integration.

Integration can be categorised as:

Preferential trading arrangements

Free trade areas

Customs Unions

Economic Unions



14

Other Trading Groups

Over the years a number of other trading groupshave emerged:

ASEAN (Asian Region Group)

APEC (Another Asian group which includesAustralia)

OECD (Organisation of Economic Co-operation)

EU (European Union)

NAFTA

This is by no means a complete list of economicgroups around the world.



15

Trade Patterns

Trade patterns are usuallymeasured in terms of a countrysbalance of payments.

The balance of payments is dividedinto:

Current Account

Capital Account


16/37


Consumption Patterns

Both income and population impacton consumption patterns. Engleslaw states that as income rises

above a certain minimum,expenditure on food as apercentage of total incomedecreases.

Another issue is that productsaturation levels increase as percapita national income increases.


17/37


Merchandise Trade

Since the end of World War II,merchandise has grown at a fasterrate than world production and it is

the high income countriesresponsible for more than 80% ofimports and exports ofmerchandise.


18/37


Services Trade

Services is the fastest growingsector in international trade. Thegrowth in services trade is one

possible explanation for theincreasing disparity in world tradebetween the developed anddeveloping nations.


19/37


Trading Environment

The trading environment governswhat firms can and cannot dowhen they go offshore. Trading

environments are regulated bygovernments. Most governmentswish to control the internationalflow of trade into and out of their

countries.


20/37


Trading Environment

International flow of trade ismotivated by :

Financial issues

Security issues

Safety issues

Health issues

Protectionist issues


21/37


Measuring Markets:Income

Countries are often classifiedaccording to levels of income andmeasured by GNP per head:

Low income countries US$9,266 perhead


22/37


Measuring Markets:Population

The fact is: the larger thepopulation, the more attractive themarket is in terms of potential.

Distribution of population issignificant in terms of:

Age

Location


23/37


Measuring Markets:Physical Quality of life

Economic advancement is usuallyaccompanied by a price tag. Whilewealthy countries have the luxury

of being able to trade offdevelopment for quality of life, thisluxury eludes many less developedcountries.


24/37


Measuring Markets:Infrastructure

Infrastructure in very generalterms refers to:

Facilities and services necessary for

functioning of the economy. Transport and communications.

Commercial and financial services.

Infrastructure impacts on physicaldistribution as well as on the ability offirms to supply international markets.


25/37


Measuring Markets:Debt

Debt is another key indicator ofeconomic difference between

countries. In many developingcountries, interest on debtconsumes a major percentage ofexport receipts.


26/37


Measuring Markets:Resources

Resource endowment varies fromcountry to country andtraditionally was an indicator of

relative prosperity as reflected incommodity exports. In somecountries the wealth is almosttotally dependent on a single

resource (e.g oil).


27/37


Financial Environment:Foreign Exchange Issues

The foreign exchange market is a marketfor currencies through which thecurrency of one country is exchanged forthe currency of another.

Key issues in foreign exchange include:

Dynamics

Forecasting Managing exchange risk

Multiple exchange rates


28/37


Foreign Exchange Issues:Dynamics

One of the problems which facesinternational business is thefluctuations that occur in exchange

rates. The sometimes extremefluctuation in rates has, and willcontinue to have, an affect onprofits of large global firms.


29/37


Foreign Exchange Issues:Forecasting

There are a number of factors thatinfluence the forecasting of exchangerates.

Economic factors: these factors are, policy andperformance, real interest rates and theimportance of the currency in the worldsfinancial system.

Political factors: are important in the valueattributed to a currency. These include, partyphilosophy, stability of Governments, nature ofunderpinning power, sources of impendingchange and the nature of Government.


30/37


Foreign Exchange Issues:Managing Foreign Exchange Risk

When a firm undertakes transactions inforeign currencies, the firm runs the riskof losses or gains from change in thevalue of the currency involved.

The exposure takes three forms:

1. Transaction exposure

2. Translation exposure

3. Economic exposure


31/37


Foreign Exchange Issues:Multiple Exchange Rates

When there is a differencebetween the official rate ofexchange and what people think itis worth, a black market forcurrency is possible.

Often this is caused by:

Government setting rate. Balance of payment reasons.

Currency may be pegged to another


32/37


Financial Management:Sources of Funds

Some of the common sources of funds:

Banks

Government Forfeiting and factoring


33/37


Financial Management:Types of Financial Risk

There are a number of differentsources of financial risk, including:

Commercial risk Political risk

Foreign exchange risk


34/37


Financial Management:Coping with Recession

The Asian currency crisis and theJapanese recessionmake it imperative for international marketers to haveavailable plans to cope with recession. Kotabe andHelsen (2000) propose eight strategies:

Pull out

Emphasize a products value

Change the product mix

Repackage goods

Maintain stricter inventory

Look outside the region for expansion opportunities

Increase advertising in region

Increase local procurement

Th I t ti l Fi i l


35/37


The International FinancialSystem:

International Monetary FundThe IMF has six objectives:

1. Promote international cooperation amongmembers on international monetary issues.

2. Facilitate the balanced growth of internationaltrade and contribute to high levels of real

income, employment and production.3. Promote exchange stability and orderly exchange

arrangements and avoid competitive currencydevaluation.

4. Foster multilateral system of payments and

transfers, and eliminate exchange restrictions.5. Make financial resources available to all

members

6. Seek a reduction of imbalances in payments.

The International Financial


36/37



The World Bank

The world bank has approximately150 members and had traditionallyoperated as a development bank,

channeling technical assistanceand finance to developingcountries. The primary focus of itslending program until recently, has

been on project financing foreconomic and social infrastructure.

The International Financial


37/37


International Aid

The motives underlying aid vary, theyinclude:

Political

Financial Altruistic

Aid can also take many forms including:

Multilateral aid Bilateral aid

Non Government aid

Documents

Fletcher Ch 02