kotabe gmm4 ppt ch03

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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 1

Global Marketing Management, 4e

Chapter 3

FinancialEnvironment




Chapter Overview

1. Historical Role of the U.S. Dollar

2. Development of Today’s InternationalMonetary System

3. Fixed Versus Floating Exchange Rates4. Foreign Exchange and Foreign Exchange

Rates

5. Balance of Payments

6. Economic and Financial Turmoil Around theWorld

7. Marketing in Euro-Land




Introduction

Foreign exchange is the monetary mechanismallowing the transfer of funds from one nation toanother.

The existing international monetary system always

affects companies as well as individuals whenever they buy or sell products and services traded acrossnational borders.

Although international marketers have to operate in acurrently existing international monetary system for international transactions and settlements, they shouldunderstand how the scope and nature of the systemhas changed and how it has worked over time.




Introduction

The 1990s – particularly, the second half of thedecade – proved to be one of the most turbulent

periods in recent history.

The adoption of the euro as a common currency inthe European Union in 1999 is just one example of

the many changes taking place in today’sbusiness world.




1. Historical Role of the U.S. Dollar

Each country has its own currency through whichit expresses the value of its products.

In the post-World War II period, the United States

agreed to to exchange the dollar at $35 per ounceof gold. The dollar became the commondenominator in world trade.

In the early seventies, the U.S. dollar standardwas dropped. The result has been more volatilityand a more likely tendency for the US currency todepreciate due to persistent US trade deficits.




2. Development of Today’s International

Monetary System

Post-World War II developments had long-rangeeffects on international financial arrangements.

The negotiations to establish the postwar

international monetary system took place at theresort of Bretton Woods in New Hampshire in1944 which established the International MonetaryFund (IMF).

President Richard Nixon suspended theconvertibility of the dollar to gold on August 15,1971.




2. Development of Today’s

International Monetary System The IMF oversees the international monetary

system and its functions are as follows:

– To promote international monetary cooperation

– To facilitate the expansion and balanced growthof international trade

– To promote exchange stability and to maintainorderly exchange arrangements

– To assist in the establishment of a multilateralsystem of payments in respect to currenttransactions between member nations; toeliminate foreign exchange restrictions




2. Development of Today’s International

Monetary System





International Monetary System

– To make available the general resources of thefund temporarily available to members under adequate safeguards; help members to correct

maladjustments in the balance of payments – To shorten the duration and lessen the degree

of disequilibrium in the international balance of payments to members

– The IMF created special drawing rights (SDRs)in 1969.





International Monetary System

The value of SDRs is determined by a weightedaverage of a basket of four currencies: the U.S.dollar, Japanese yen, European Union’s euro, and

the British pound. After the 1997-98 Asian financial crisis, the IMF

has worked on policies to overcome or evenprevent future crises.

Another creation of the Bretton Woods Agreementwas the International Bank for Reconstruction andDevelopment (World Bank), supporting economicdevelopment and poverty reduction projects.




3. Fixed Versus Floating Exchange Rates

Two kinds of currency floats encompass free/cleanfloat (allows no government intervention) andmanaged float (allows limited government

intervention). In March 1973, the major currencies began to float

in the foreign exchange markets.

Today, the global economy is dominated by threemajor currency blocs: The U.S. dollar, theJapanese yen, and the EU’s euro.




4. Foreign Exchange and ForeignExchange Rates

One of the most fundamental determinants of theexchange rate is Purchasing Power Parity (PPP).

Formula for PPP:

(1 + Infl Britain)R t = R 0 * _____________

(1 + Infl U.S.)

Where R = the exchange rate quoted in acurrency

Infl = Inflation rate

t = time period





The Economistpublishes a PPPstudy (Big Mac

Index) every year based onMcDonald’s Big

Mac hamburger

(see Exhibit 3-2).





Factors influencing Foreign Exchange Rates(see Exhibit 3-3):

– Macroeconomic Factors: Relative inflation, balance of payments, foreign exchange reserves, economic

growth, government spending, money supply growth,and interest rate policy. – Political Factors: Exchange rate control, election year

or leadership change. – Random Factors: Unexpected and/or unpredicted

events, fear of uncertainty, etc. Many countries attempt to maintain a lower value

for their currency in order to encourage exports.




4. Foreign Exchange and Foreign Exchange Rates





Spot versus forward exchange rates

Hard currencies are the world’s strongest and

represent the world’s leading economies.

To avoid the risk of currency fluctuations,companies use hedging.

Target exchange rate

Exchange rate pass through




4. Foreign Exchange and Foreign ExchangeRates





The balance of payment (BOP) of a nationsummarizes all the transactions that take placebetween its residents and and the residents of

other countries over a specified time period,usually a month, quarter, or year.

The BOP transactions contain three categories(see Exhibit 3-5):

– Current account – Capital account

– Official reserves





The BOP in capital account, the mirror image of the BOP in the current account, summarizesfinancial transactions and is divided into short -and

long-term capital accounts. Direct investments are controlled by residents of

other nations.

Portfolio investment includes long-terminvestments that do not give the investors effectivecontrol over the investment.





There are three balances to identify on the BOP statementof a country:

– Balance of merchandise trade account

– The current account (including merchandise trade, tradein services, and unilateral transfers)

– The basic balance (the current account and the long-term capital)

The internal market adjustment refers to movement of prices and income in a country.

The external market adjustment concerns exchange ratesor a nation’s currency and its value with respect to thecurrencies of other nations.




6. Economic and Financial Turmoil Around the World

The Asian financial crisis in the latter half of the1990s escalated into the biggest threat to globalprosperity.

China’s devaluation of its currency (yuan)triggered the Asian financial crisis in 1994.

Because of this financial crisis, Thailand lostalmost 60 percent of its baht’s purchasing power

in dollar terms in 1997. The Malaysian ringgit lost some 40 percent of its

value during the same period.





The Korean won depreciated 50 percent against

the U.S. dollar.

The acceleration in Asia economic growth since

2000 can be largely credited to the Japaneseeconomic recovery and China’s surging importdemand.

The South American Financial Crisis took place in

2001 when Argentina defaulted and lost nearly 40percent of its currency value.

The Argentina crisis also hurt Brazil.





Responses to the regional financial crises. – Consumer response to the recession (see Exhibit 3-7)

– Corporate response to the recession Pull-out

Emphasize a product’s value

Change the product mix

Repackage the goods

Maintain stricter inventory

Look outside the region for expansion opportunities Increase advertising in the region

Increase local procurement





Today the European Union (EU) consists of 25countries. Of those 25, the ten central and easternEuropean countries are less developed than theprevious 15 countries (see Exhibit 3-8).

The Euro zone economies represent a combined

33 percent of the world’s gross domestic productand 20% of overall international trade.

The Maastricht Treaty which was signed onFebruary 7, 1992 spelled out the guidelines toward

European Monetary Union (EMU). The European Central Bank is headquartered in

Frankfurt, Germany.





On January 1, 2002, the euro notes and coinsbegan to replace the German mark, the Dutchguilder and other European currencies.

Ramifications of the euro for Marketers:

– Price transparency – Intensified competitive pressure

– Streamlined supply chains

– New opportunities for small and medium-sized

companies – Adaptation of internal Organizational structures

– EU regulations crossing national boundaries

kotabe gmm4 ppt ch03

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