A manager needs to: It is important for a manager to be aware that when there company is in a foreign market they must also focus on business cycles in other countries. Most of the the US market and the Foreign markets are very similar. But, examples such as the Asian financial crisis show that it is very important to also be very aware of foreign business cycles and downturns. When dealing with a foreign market it can be especially hard to build in flexibility and at most times can never be reached at the same level as the US.
For a major industrialized country, the monitoring system would closely resemble that used in the United States with an addition of foreign exchange risk.
For a less developed country,
| Risk | Indicators |
|---|---|
| monetary policy | varies depending on individual countries |
| foreign exchange risk | divergence between PPP and actual exchange rate |
| capital control | country’s bond credit ratings and stock exchange prices |
| oil | know how dependent the country is on imported oil |
| commodity | commodity price |
| trading partner risk | know who the major trading partners are (including tourism) |
| war or rebellion | local press |
Monetary policy around the world vary and can affect your business greatly. When Learning about a countries monetary police a manager should watch the federal reserve. One style of banking monetary policy that can affect a company is “not an independent bank” which see greater swings in monetary policy. Other countries have a style of banks that are “focused on getting people to work”. This style of banking occurs when there are low interest rates in the short-term with high interest rates in the long-term. In order to watch for this type of policy and make sure it doesn’t affect your business you should skim articles in international publications for research on new monetary policies. Next you should figure out if the economic policy effects your company. Lastly, if it does I would hire an economist to help with your struggles.
A company should focus on Supply Shocks in foreign countries because supply shocks could cause massive downturns for your company. In order to see whether supply shocks will affect your business in the foreign market you should check to see how dependent that country is on others. Greater dependency, the greater harm that country is in for a large spike of prices in materials like oil.It is also important to know that at this time the net exporters will gain, examples include Saudi Arabia.
Many smaller countries are dependent on just one product. Countries that are dependent on just one product get put at risk from price swings in the price of the product. This means if the price of a product goes down this country would be receiving much less and people will be economically worse. Business manager should try not to do business in these countries since the less diverse a country is the more business done in that country is at risk. One example of this can be seen when looking at agriculture. Agriculture doesn’t see a change in demand but often see changes in supply. The more supply there is the lower the price of what the farmers are growing.
In many smaller countries an issue can occur when there are problems with there major trading partners economy. When a country is heavily exporting most there exports to one country this can cause the exporting country to also be affected by the downturn. One example of this in Canada where 85% of the exports go to the US. Since Canada is so heavily reliant on exporting to the US if the US goes into a recession so will Canada. Two common themes to spot out trading partner risk is the countries are usually close by and are typically larger economies. In order to avoid this a business manager should scan a country s major export partners and determine from there the risk.
Companies should watch for foreign exchange risk since profits made overseas may be exchanged at a lower or higher exchange rate. Exchanging money from one currency to the other can cause companies to lose a lot of money. In order to manage this you should track the performance of US currency and the country were your foreign market is. One way to manage with foreign exchange of money is by using derivatives. Derivatives are payoffs that are derived from value of financial asset or something else. Companies in order figure out whether they can survive changes in value of currency should be able to survive a significant adverse exchange movement. Lastly, When paying employees you should use local and US dollars to pay people the currency they use.
Financial crisis in Foreign countries can drastically affect your companies performance if they are involved in the foreign market. the first risk financial crisis has is foreign exchange control; prevents movement of profits or capital from the foreign country. Secondly, financial risk may cause recession in target market. Financial crisis’s occur when a country has run out of foreign exchange reserves or the credit it needs to meet their international obligations. Financial crisis’s can cause devaluation, foreign exchange restrictions, loss of domestic credit facilities, and recession. These are all very negative for your company if it is involved in this foreign market. Also during a financial crisis there is often a limit on on a corporations ability to move money around the world. This can cause your company great distress when trying to move money around.
War and revolution both put you company at risk for seizure of assets by the invading army. Often times the distribution centers are less at risk of seizure and the factories are more valuable to invaders. This creates a problem for company’s selling in the country but, an even bigger one for companies that produce and sell in the country.War and revolution also causes higher taxes and most likely inflation.
Selling into the overseas market is not as risky as when using a foreign country to produce goods for the home market. Strategy for firms selling to the foreign market should be very similar to dealing with the US recession. But, firms producing in a foreign country should focus on ascertaining the viability of local suppliers and using downturns to secure good deals. This especially puts vendors selling to locally owned businesses at risk of bankruptcy.
Management for Foreign Markets is mainly done in a business’s home country. A monitoring system is necessary to track whether problems overseas will affect your companies foreign market. Monetary policy should be watch, waves of pessimism and optimism, and watching swings in government spending. It is important to know that different countries have different monitoring systems. For countries that use the euro the monitoring system is different oppose to in the US. Euro is also monitored the same in each coutry where it is used. As for smaller countries it is important to do research and figure out what monetary policy is and how there currency is affected and valued.
Preparing your Foreign market for a recession is more difficult than in the US. First way to avoid foreign exchange crisis is to keep capital lean in foreign country. Essentially this means you should try to borrow in the foreign country you are doing business in. Doing this will allow your company to continue to repay debt since cash won’t be needed to be moved around internationally. Without this doing this your company may have to default on debt not cause they had no money but because they couldn’t move money to the right places. As a business manager you should also plan to let employees know you are a stable employer(you will keep them). Before going into recession a review of your real estate, raw materials supply, and transportation contracts should be renegotiate and mad as strong and long as possible. But, if your foreign market is in trouble because of war the most important issue should be employee safety. Secondly, a company should know what to do if there were a possible asset seizure. In order to know about this you should know how to deal with cutoffs of electricity, oil, or natural gas. In order to deal with this plans for alternative supply chains should be put in place.
Overall it’s important to understand that economic downturns can be different than in the US. When your companies are involved with the foreign market there are many more challenges presented. Managers that are involved in the foreign market should diversify international operations. This will add flexibility to your company overseas. Sales oriented companies are easy to sell in a # of countries which makes them less risky. While production oriented companies have offshore facilities in different regions. Overall foreign business is more complicated and requires more planning before and during the time of business to manage potential risk and downturns.
Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
Relative price of one currency expressed in terms of another.
policy that sets a fixed exchange rate for its currency with a foreign currency. Eventually this will stabilize the exchange rate for both countries. Ex: China was pegged with US dollar until 2015.
When a country’s currency price is determined by the relative supply and demand of other currencies.
When government makes a monetary policy to reduce a currency’s value.
A drop in the value of a currency in terms of its exchane rate versus oter currencies.
Restrictions that the government sets to ban or limit the use of foreign currencies. Also used to promote its own currency to foreigners.
Purchasing power parity is the exchange rate at which two different currencies buy the same amount of goods in their two countries. Significant differences can show that monetary policy needs to change. This puts countries that receive a lot of foreign investments at risk of crashing. In order to manage this problem a company must have an early warning system for every foreign country the company is involved with.
Describe the characteristics of the following events briefly.
El error de diciembre is when the Mexican government used currency devaluation to lower the value of there currency.In doing this they pegged the peso to the US dollar. Problem is that the peso’s converted over where less valuable than the US dollar at a 3-1 ratio. Overall the effect of this was many people with business in mexico but from the US saw steep downturns in profit because of the unequal exchange.
In Indonesia a financial crisis was started since everyone seemed to be getting loaned money from international banks. Large companies would go right to them. While smaller companies went to local banks that borrowed from international banks. After the Asian financial crisis there was change that cause a change and Indonesian currency went through devaluation. this lower the value of the Indonesia peoples currency causing them to not be able to afford paying back loans given to them by the banks. Banks then had to limit credit usage which hurt the many manufacturing companies. since they could no longer be profitable because of the lack of credit needed to pay for raw materials.
The Asian Financial crisis was started due to foreign exchange restrictions implemented by the government at the time. since country’s like Malaysia implemented this you could no longer take your money outside the country. This sparked a big problem for people with business in these Asian countries since they couldn’t take money out to pay shareholders or employee’s. this caused the local currency to eventually fall to the dollar putting many business’s into bankruptcy due to un payed debts.