A manager needs to monitor the monetary policy in the countries they are operating in. The company must be concerned about business cycles in other countries because looking just at the United States is not enough.
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 serves as short-run political interests for many countries. Countries can vary in underlying attitudes about the role of monetary policy. Monetary policy differs than that of the United States. For example treasury officials can determine policy in other countries whereas the United States treasury has independence from the president and other branches of government.
Supply shocks depend on the countries dependence on a material that is in short supply. A great example is Europes current crisis with oil. Countries such as Germany are at a crossroads with the Ukraine war as they have vastly decreased import of oil from Russia causing prices to soar to around $8 a gallon.
Countries whose economy that’s dependent on one or two commodities can be prone to boom-bust cycles caused by price fluctuation of those commodities. Countries with less to offer tend to be a area of risk for business. Being prone to bust cycles can cause greater issue in supply lines for these products.
Countries who are limited to exporting most their materials to a singular country are at more risk when their trading partner go into recession. St. Lucia is a great example of this as they send 80% of their banana exports to the United Kingdom.
Exchange rate fluctuations can make overseas profits translate into more or fewer dollars. These can also change the profitability of operations that occur overseas. This causes problems for many companies with overseas operations as profits must be translated. Swings in exchange rates can sometimes eliminate profits from these operations.
Fundamentally sound businesses can be destroyed by foreign exchange crisis. Foreign exchange controls that limit a companies ability to move money around the globe can be imposed durng a crisis. These events can destroy citizens ability to purchase goods and services.
Wars can create serious risk to companies operating overseas. Political stability must be carefully evaluated before making large foreign investments. Countries that show signs of revolution should be considered red flags for any company.
Business strategy for a recession can vary depending on whether the company is selling to local markets of using the country to produce products for the companies home country. Dealing with recession can be similarly acted as the like of the U.S. recession cycle. Using a foreign recession as a time to use local suppliers and decuring good deals is a smart tactic for corporation to take.
Creating early warning systems that are built for every specific country must be put in place. Developed countries should resemble the like of an American system with foreign exchange risk added to the system. Lesser developed countries must include a system with foreign exchange crisis, war, commodity risk, and even trading partner risks.
These plans should include the basic elements of a domestic plan including plans for various exchange rates and capital flow risks. Plans for alternative supply chains and utility service must be put into place as well.
Doing business abroad can be profitable, but only if economic risks are understood, planned for, and monitored. This is especially important as foreign economic fluctuations in less developed countries are more common. Proper actions must be in place, more than that of the U.S. business system
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.
Foreign exchange rate is the price of a domestic currency in relation to another currency.
Commonly known as a fixed exchange rate is when a currency is attached to another currency
The floating exchange rate is when a currencies price fluctuates based on the foreign exchange market.
A lowering of a value of currency where the financial authorities lower the exhchange rate in correlation to a foreign currency.
The fall in the value of a currency based on it exchange rate to other countries.
Government restrictions on the movemnet of money, mostly out of the country.
Exchange rate which two different currencies buy the same amount of goods in their countries,.
Describe the characteristics of the following events briefly.
Mexico pegged the peso at the same rate of the dollar at the ratio of three pesos per greenback. The president let the peso float-sink. the dollar went from one third a dollar to one-tenth a dollar.
Indonesia’s manufacturing sector relied on bank credit for finance. Larger companies would borrow from international banks, with obligations in dollars. smaller companies would borrow from local banks who had borrowed dollars from international banks. Devaluation of the Rupiah prevented manufacturers from repaying their dollar loans to international banks. This industry collapse led to Indonesian currency devaluation which spiked imported goods prices. Families had less purchasing power which in turn worsened the recession ### The Asian financial crisis of 1997-1998 (page 189)
Foreign exchange restrictions caused the financial crisis in Asia. Taking money outside given countries caused businesses to falter. Currency devaluations and massive flights of capital were the beginning of a dominoe effect of financial issues for the continent.