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investment in another country (land, capital, etc.)
must own 10% of this company.
" The result is a new commercial reality – the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude. Corporations geared to the new reality benefit from enormous economies of scale in production, distribution, marketing and management. ... Gone are accustomed differences in national or regional preferences. ... The globalization of markets is at hand.”
The “Clash of Civilizations:” The Huntington Argument
Civilization “is defined both by common objective elements, such as language, history, religion, customs, institutions and by the subjective self-identification of people.” (p.4)
“Civilization identity will be increasingly important in the future, and the world will be shaped in large measure by the interactions among seven or eight major civilizations. These include Western, Confucian, Japanese, Islamic, Hindu, Slavic-Orthodox, Latin American and possibly African civilizations. The most important conflicts of the future will occur among the cultural fault lines separating these civilizations from one another.” (p.5)
Political, economic and legal systems differ among countries.
The differences have bearing on economic progress, but also change over time.
In general today, more political systems are moving towards individualism, and more economic systems are moving towards market-based approaches.
Legal system in which there is not one set of laws; there are multiple and realize the scope of it all.
Many laws will be based on religious views
A contract specifies
conditions under which an exchange will happen rights/obligations of parties
Disputes that can’t be resolved between parties on their own need to be resolved based on a particular country’s legal system.
Under which system to be arbitrated? By whom? Traditional litigation, mediation, arbitration? Find a third country?
Find ways to to lessen this issue:
Understand the role of contracts in business and use of courts varies considerably across the world.
UN Convention on Contracts for the International Sale of Goods (CIGS)
OECD Convention on Bribery of Foreign Public Officials in International Business Transactions
- Comparative Advantage
- Product Life Cycle Theory
- New Trade Theory
- Porter’s National Competiveness Diamond
The world does not consist of two countries and two goods; no transportation costs assumed; resources are mobile between goods within countries, but not across countries; constant returns to scale; fixed stocks of resources; and no effects on income distribution within countries.
nation’s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry.
the nature of home demand for the industry’s product or service.
the presence or absence in a nation of supplier industries or related industries that are nationally competitive.
the conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
Desire for industrialization/ agriculture
Balance of payments
Diversification: import substitution
Foreign policy, sphere of influence and national identity
Long-term it also hurts them, ex: India - companies became not as innovative, certain equipment from other countries wont be available
Parent has direct managerial control
The degree of direct managerial control depends on the extent of ownership of the foreign entity and on other contractual terms of the FDI.
Test is typically at least 10% ownershipNo managerial involvement = portfolio investment
Government Policy FDI Policies
- Home country
- Outward FDI encouragement
- Risk reduction policies (financing, insurance, tax incentives)
- Outward FDI restrictions - National security, BOP
- Host country
Inward FDI encouragement
- Investment incentives
- Job creation incentives
Inward FDI restrictions
- Ownership extent restrictions (national security; local nationals can safeguard host country’s interests)
1. Balance of Payments
2. Interest Rates
4. Monetary and Fiscal Policy
5. International Competitiveness
6. Monetary Reserves
7. Government Controls and Incentives
8. Importance of Currency in World
9. Political Party and Leader Philosophies
10. Proximity of Elections or Change in Leadership
12. Forward Exchange Market Prices
The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.
the impact of currency exchange rate variances between foreign currency holdings and the value of those holdings as reported on the financial statements of a company. The resulting accounting gains or losses are unrealized (they are “paper” gains and losses) until the time the foreign currency holdings are converted to the home country's currency (when real gains or losses from exchange occur).
The extent to which income from individual transactions is affected by fluctuations in foreign exchange.
The extent to which foreign exchange movements may affect income or costs on current (open) company obligations, such as receipt of revenue or payments due in foreign currency.
The extent to which a firm’s future international earning power (or costs) affected by changes in exchange rates.
concerned with the long-run effect of changes in exchange rates on future revenue and costs.
This is distinct from transaction exposure, which is concerned with the effect of exchange rate changes on currently open transactions, most of which will be executed within a few months.
The foreign exchange (forex) market
It is almost a 24/7 market (except weekends and bank holidays)
USD $5 trillion worth of exchange daily for:
- Risk management - Tourism
The market is connected by high-speed computers; it’s actually more like one virtual market.
London was dominant because:
- History (capital of the first major industrialized nation) & Geography(betweenTokyo/Singapore and New York)
Now some shifts noticeable to Asia, specifically Hong Kong.
the current real-time relationship between two currencies when the foreign exchange market is open (this rate can change continuously, often second by second).
Spread is the difference between the ask price (the lowest price a seller is willing to sell at) and the bid price (the highest price a buyer has offered). Remember: Depending on one's participation in the foreign exchange market (trading at the very nexus of the market on one of the proprietary exchanges or being a casual, small time participant) the spread may vary. Also the spread varies for currencies that are not traded at the volumes and frequencies that hard currencies are exchanged.
Is the main central reserve asset of many countries
Is the most used vehicle currency and intervention currency
Is in great demand worldwide as a result of its safe haven aspect and its universal acceptance*
Other currencies have problems with counterfeiting and laundering problems
Other liquid or “hard” currencies include EUR, GBP and JPY
In competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency
Example: US/Euro exchange rate: $1 = .6 euro. A jacket selling for $100 in NewYork should retail for 60 euros in Paris.
By comparing the prices of identical products in different currencies, it should be possible to determine the ‘real’ exchange rate - if markets were efficient.
In relatively efficient markets (few impediments to trade and investment) then a ‘basket of goods’ should be roughly equivalent in each country.
fixed rate offered for exchanging a currency pair at a future date in time (most often 3, 6, 9 and 12 months in the future).
They are used in forward foreign exchange contracts to help businesses hedge transaction risk.
Hard currency, also known as a safe haven currency or strong currency, refers to a globally traded currency that serves as a reliable and stable store of value. Stability for hard currencies arise from their breadth of use and global acceptance as well as the deep financial pools that back them. The currencies serve as the reserve assets for many governments. Additional factors contributing to currency’s hard status include full-convertibility, freely floating rate and the issuing country's (or group of countries) geopolitical importance. The world's current hard currencies are: USD, JPY, EUR and GBP.
In a pegged or fixed exchange rate regime a currency's value is set against the value of another single currency or to a basket of other currencies (or to another measure of value, such as gold--recall the gold standard). A fixed exchange rate is used to stabilize the value of a currency against the currency it is pegged to; it is designed to remove foreign exchange risk. In theory, fixed exchange rates are meant to impose discipline on the governments issuing the pegged currency, as they must manage the economy to "support" the rate and cannot engage in policies that cause competitive devaluations. Fixed exchange rate are also designed to diminish speculation by foreign exchange traders and others who may try to destabilize a currency (especially one issued by a relatively small economy).
helps governments retain foreign exchange reserves. Most countries need an adequate supply of reserves to:
-service international debt
-make international purchases on behalf of govt
-protect against capital flight: would effectively lead to elimination of the local currency and adoption of a foreign currency and that issuing nation's monetary policies.
-shield economies from imports
Convertibility restrictions aren't meant to effect conversion of foreign currency to local currency. Most governments want to encourage foreign funds coming into their economy for tourism, investments, etc. and which ultimately add to their reserves.
Fixed/Pegged Exchange Rate: The government plays the primary role. It sets the exchange rate, and manages the economy in an effort to "support" the rate.
Crawling Peg Exchange Rate: The government plays the primary role. It sets the exchange rate, and makes adjustments at intervals of time that it determines.
Managed/Dirty Float Exchange Rate: The government intervenes (buy & sells), as needed in the currency markets when a destabilizing event occurs. Governments typically justify their interventions in terms of “smoothing market irregularities” or “assuring orderly markets”.
Free Floating/Floating Exchange Rate: The government focuses on management of the economy rather than directly intervening in the market or setting exchange rates. (For some currencies given the volume and value of the currency traded in the forex market it might be impossible for the government to really intervene even if it wanted to.)
Fixed/Pegged Exchange Rate: The rate is mean to be fixed over a long period of time. The issuing government chooses when to revise the rate. (History has shown governments are sometimes not proactive nor prudent and market forces ultimately make governments take action on revaluing or devaluing their currency).
Crawling Pegged Exchange Rates: The rate is revised at time intervals the issuing government determines.
Managed/ Dirty Float Exchange Rate: No one revises the rates, but it changes each time there is a transaction,
responding to demand & supply. The government can acts as a player on the exchange market, buying or selling the currency and thus influencing its exchange rate.
Free Floating / Floating Exchange Rates: The rate changes each time there is a transaction in the forex market, responding to demand & supply.
Fixed/Pegged Exchange Rates: The issuing government sets the exchange rate
Crawling Peg: The issuing government sets the exchange rate
Managed/Dirty Float: The government + supply & demand in the forex market
Floating: supply & demand in the forex market
- Exchange rate regime
- Reserve asset
Government controls that limit the legal uses of a currency in international transactions
In general, only the relatively rich industrial countries have few or no currency exchange controls
1. Official exchange rates
- Example: Set your currency exchange rate at an ar'ficially low rate such that imports are not desirable for your citizens but exports are encouraged. This limits domestic citizens’ demand (exchange) of domestic currency to foreign currency and yet provides foreign currency inflows (from export earnings).
2. Convertibility restrictions
Governments intervene in the currency markets as they perceive their national interests to be served
Nations may explain their interventions in terms of “smoothing market irregularities” or “assuring orderly markets”
Closest approach to perfect competition - aggregate supply and demand for currency affects exchange rates - not government intervention
Equilibrium follows from overall macroeconomic indicators
Governments focus more on interest rates and fiscal policy
when countries agree to buy or sell gold for an established number of currency units (fixed value of exchange)
Also a government could not create money not backed by gold
By 1880 most countries on gold standard
- Balance of trade equilibrium for all countries
- Value of exports should equal value of imports
- Flow of gold used to make up differences
System broke down in 1914
Stable exchange rates were desirable
Floating or fluctuating exchange rates had proved unsatisfactory
The government controls of trade, exchange and production that had developed through WWII were wasteful and discriminatory (though this would still play out through the adoption of different economic models internally).
MF maintained exchange rate
- National governments had to manage inflation through their money supply
- Excessive drawing from IMF funds came with IMF supervision of monetary and fiscal policies - “conditionality”
- Provides loans to help members states with temporary balance-of-payment deficit
- Allows time to bring down inflation
- Relieves pressures to devalue
- Members allowed 10% devaluations and more with IMF approval
A derivative “currency” that aims to diversify reserve currency holdings
Objective is to make the SDR the principal reserve asset in the international monetary system -- to avoid over-dependence on one specific currency/asset
A currency that exists only within/between IMF and member nations - Value of the SDR
- The SDR’s value is based on a basket of four currencies: - US Dollar, Euro, Japanese Yen, British Pound
- Credibility/inappropriate policies?
- Recommended practices (crises keep happening)
- Moral Hazard?
- Lack of accountability?
- Power divide/voting power allocation
(International Bank for Reconstruction & Development)
- Refinanced post-WWII reconstruction and development
- Provides low-interest long term loans to developing economies
- Raises funds from member states
- Loans only to poorest countries
- 50 year repayment at 1% per year interest
- Voting power
- Future role?
When a currency’s forward rate is stronger than spot
When a currency’s forward rate is weaker than spot (versus the other currency)
The International Fisher Effect states that for any two countries, the spot exchange rates should change in an equal amount but in the opposite direction to the difference in their nominal interest rates.
For Example: If the U.S. nominal interest rate is higher than Japan’s reflecting greater expected rate of inflation in the U.S, the value of the dollar against the yen should fall by that interest rate differential in the future. So if the annual interest rate in the US is 10% and in Japan is 6%, we would expect the value of the dollar to depreciate by 4% against the Japanese yen over a one year period.
Nominal Interest Rate (i) = Real Rate of Interest (r) + Expected Inflation Rate (I) Equivalently, i = r + I
Nothing guaranties it; the future currency rates could happen to coincide with the calculations though that is unlikely since so many things affect currency value and we don't know what will happen in the future. The forward rate can be used to hedge transaction risks, but as we have reiterated, it is difficult (or impossible) to predict a future exchange rate/spot rate.
A system of values and norms shared by a society
Values: abstract ideas about good, the right, the desirable
Example: What is a reasonable work week?
Social rules and mores
To develop a fixed, unvarying idea about
A principle, statement or idea having general application.
to move from having knowledge (a skill) to having the ability to leverage (a strategy) by using your understanding and appreciation.
Cultures change over time so it is important to let new information in and to keep up to date.
Better understanding of yourself and your nation/society
Cultural smarts can help you find third ways of accomplishing goals and can help you become more efficient and productive as your ability to adapt grows.
Avoid misunderstandings and conflict
Richer, more meaningful interactions and relationships
Profit (or fewer costly mistakes)
Degree of social inequality considered normal, acceptable
Directive style leadership
Degree to which people in a country prefer place primary emphasis of themselves as individuals (I or me) or as a member of a group (we)
Managerial mobility between companies
Good general skills
Teamwork more difficult,
Exposure to different ways of doing business
- Loyalty and commitment to company
- In-depth knowledge of company
- Specialist skills
- Easy to build teams, collaboration
- Emotional identification with group or company (maybe enhanced loyalty)
Degree of perceived needs to avoid uncertainty about the future
Also, degree of preference for structured versus unstructured situations. Should we try to control the future, or just let it happen? What can we do to help protect against future uncertainty?
- Formal, rigid relationships and patterns (lots of social rules to
- Change and risk okay (let the future happen)
Sometimes referred to as “Quantity vs. Quality” Division of roles and values in a society
Where Masculine values prevail:
- assertiveness, competition, material rewards for success
Where Feminine values prevail:
- quality of life, maintenance of warm personal relationships, service, care for the weak, solidarity
Short Term (Normative)
- Absolute truth
- Great respect for tradiCons
- Quick results
- Small propensity to save for the future
Long Term (Pragmatic)
- Truth depends on situation, context and time
- Ability to adapt traditions to changed conditions
- Strong propensity to save and invest
External environment, situation, non-verbal behavior
Explicit information, blunt communicative style
Keeping on schedule, staying “on task”
Intercultural communication generally involves a greater investment of time
Keep context and non-verbals in mind
Avoid yes and no questions
Restate key messages using different words and phrases: “overcommunicate”
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