A manager needs to: Monitor foreign economic and business cycles and markets, the world is becoming increasingly more integrated and has been for soem time so correlation among various economies of the world are increasing. Meaning we go up and down more in unison than we used to and so were more interdependent on each other and a good manager needs to know the global situation as it will most likely affect their company in a way.
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 |
In many other countries monetary policy is not as stable as in the U.S. therefore it is important that one understand how independent the central bank in the country you’re monitoring is. You need to monitor whether the central bank is increasing or decreasing interest rates in the future.
Supply shocks can greatly increase the price of a product take oil as our example if there is a major supply issue and the price of oil goes way up in your country because there is less to buy it can bring your economy into a recession. Companies will produce less and then they will have to start laying off people. Fewer and fewer people have jobs so demand for agregate services goes down because fewer and fewer people can afford it.
Many smaller countries are heavily dependent on just one product. take for example oil being mostly the only export for most countries in the mid east. This makes them at a substantial and always lurking risk from swings in the price of the product. The good news is that domestic policies may be less important as if the market for that one product is strong it may be harder for bad monetary policy to screw things up. However the overall volatilty will still be greater than that of more diversity countries like in the west. Price weakness can come from either of two directions low demand or high supply. A good example of high supply would be something like cocoa or mineral, and for demand agriculture since people always need to eat. If you are a business manager selling products in a country dependent on one major product you need to monitor that product. And the first step is determining the importance of that product to it’s country. Additionally risk of a key commodity booming or collapsing can work either for a company or against it. If the company is primarily selling in the foreign country, then high prices for the key commodity are good and low prices are bad. however this changes when you go out of country. It will make it difficult for you to get that product in you foreign country.
Small countries can be at substantial risk due to problems with their major trading partner. An example is Canada sells 85 percent of it’s exports to the US. These canadians may be doing the best possible job they can do however if the US goes into a recession Canada is sure to go into one as well or at least enter a period of very sluggish economic growth. Trading partners which are very risky to a country are typically much bigger economies and nearby.
Companies should keep an eye out for foreign exchange risk. This is because profits made overseas can be exchanged at either a lower or higher exchange rate. Exchanging money from one currency to the other can cause companies to lose a large sum of money. In order to manage this potential risk you should track the performance of US currency and the country where your foreign market is located. One way to manage the foreign exchange of money is by using derivatives. When paying employees it is wise to use both local and U.S. dollars to pay people the currency which they use.
Financial crises in foreign countries can pose dramatic risk to the business in two ways. The first is foreign exchange control. This prevents movement of profits or capital from that foreign country. Secondly a finacial crisis has the risk of causing a recession in the market. These are all very negative to your company if it is involved in in this foreign market.
War and revolution both put your company at risk for seizure of assets by an invading army. They can steal your stuff. Often distribution centers are less at risk of seizure and the factories are more valuable to invaders. This creates a problem for the companies selling inside the country and an even bigger problem for companies producing and selling in the country. War and revolution also create both higher taxes and most likely inflation.
Selling in overseas amrkets is not as risky when you use a foreign country to produce goods for your home market. Strategy for firms selling to the foreign market should be very similar to dealing with a US recession. 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 businesse’s home country. A monitoring system is needed to track whether problems overseas can affect your foreign market. Monetary policy should be watch, waves of pessimism and optimism, and watching swings in government spending. It’s important to know that different counties have/use different monitory systems. For countries with the Euro this causes there system to oppose the U.S.. Euro is monitored the same in each country it’s used in 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 your home country. Firstly to avoid foreign exchange crisis is to keep capital lean in the foreign country. If you don’t do this your company may have to default on debt since because you can’t move money to the correct places. As a business manager one should aslo plan to let employees know you are a stable employer. Before going into recession a review of your real estate, raw materials supply, and transportation contracts should be renegotiable and made as strong and long as possible. However if your foreign market is in trouble because of war the most important issue should be employee safety. Second a company should know what to do if there was a possible asset seizure. in order to know about this you should know how to deal with cutoffs of electricity, oil, or natural gas. So one can deal with this plans for alternative supply chains should be put in place.
It’s important to understand that economic downturns can be different than in the US. When your company(s) are involved with the foreign market there are many more challenges which are then presented. Managers that are involved in the foreign market should diversify international operations. This will add flexibility to your company when it’s overseas. Sales oriented companies are easy to sell in a number of countries which makes them less risky. While production oriented companies have offshore facilities in different regions. In all foreign business is more complicated than domestic and requires more planning before and during the time of business to manage potential risks 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.
The relative price of one currency expressed in terms of another currency.
A Policy which sets a fixed exchange rate for its currency with a foreign one. Eventually by doing it this will stabilize the exchange rate for both of the countries.
When a countries currency price is determined by the relative supply and demand of other currencies.
When the government makes a monetary policy to reduce a currency’s value.
When the vale of a particular currency drops in terms of of its exchange rate vs. other currencies.
Restrictions that the government sets to ban or limit the use of foreign currencies. This also is then used to promote its own currency to foreigners.
This 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 policies need to change. This puts countries that receive alot of foreign investment 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 was when the Mexican government used currency devaluation to lower the value of their currency. In doing this they pegged the peso to the US dollar. The problem was that the pesos then converted over were less valuable than the US dollar specifically a 3-1 ratio. Overall the effect of this was many US citizens with business in Mexico downturns in thier profits becuase of the unequal exchange.
In Indonesia a financial crisis started because everyone seemed to be getting loaned money from international banks. Large companes would go to them while smaller companies went to local banks that borrowed from international banks. After the Asian financial crisis there was change and subsequently from this the Indonesian currency went through devaluation. This lowered the value of Indonesian people’s currency causing them to be unable to pay back loans which were given to them by the banks. Banks then had to limit credit usage which which hurt many manufacturing companies and the industry, since they could no longer be profitable because of a lack of credit needed to pay for all the necessary raw materials.
The Asian financial crisis was started by foreign exchange restrictions implemented by the government at the time. Since country’s like Malaysia implemented this you were no longer able to take your money outside of the country. This sparked a big problem for people with business in these Asian countries since they couldn’t take money out to pay pay shareholders or employees. This caused the local currency to to eventually fall to the dollar putting many businesses into bankruptcy due to unpaid debt.