A manager needs to:
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 |
The role of Monetary policy differs from country to country, some value it highly as others don’t use it very much.
A supply shock in one country can have a large impact on other countries who rely on their goods.
Many small countries are responsible for the distribution of many commodities, which puts their economy through boom/bust cycles which can be very risky
If one country relies heavily on another to import their goods, both countries would be greatly impacted in a negative way if the buying country went into a recession
Foreign exchange rarely stay consistent, this allows for risky exchanges with countries that may be having a tough time economically
Certain exchange controls are put in place during a recession in foreign countries, this can limit trade routes leaving other countries without the goods they need
Wars and conflicts play a very large role in companies that operate overseas, political stability is crucial when deciding on a foreign country to operate out of
It is important to watch foreign business cycles to know when it is smart to purchase goods from certain countries. If the country has a lot of demand for a product, then it isn’t smart to try to purchase goods from them.
Every company should have a monitoring system in place to watch the economy of all foreign countries that are significant to the company.
Contingency plans for foreign economies should be very similar to plans that deal with our own economy, just with the addition of exchange risks and capital flow risks. There should also be plans in place to pursue other supply chains in case one falls apart, you have a backup in place.
Diversifying your company into foreign countries is a great way to expand your company and generate more revenue. However, with the expansion into new countries comes risks from their economies. It is important to monitor foreign countries for recessions as it can drastically impact your business.
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 rate that profits that a company generates are exchanged from one country to another
When a government puts a fixed exchange rate to a currency that originates in that country
A floating exchange rate is set depending on the supply and demand of the currency
When a country intentionally decreases the value of their currency
When the value of a country’s currency decreases compared to other currencies
Limitations made by the government that restricts the purchase or sale of certain currencies
One currency should have the same value and buying power as another currency
Describe the characteristics of the following events briefly.
Value of the peso compared to the US dollar dropped from 1 dollar to 3 pesos, to 1 dollar to 10 pesos. This caused an error where in Mexico, the company was hitting there revenue goal in pesos, but was no where close to meeting their goals after the currency was exchanged to US currency.
Large companies took borrowed lots of money from banks, but as the value of the currency decreased, the companies were not able to repay their loans back.
Many Asian companies went bankrupt even with promising financial statements. These companies had great product turnover rates, but the debt that they owed increased drastically as the value of their currency decreasing compared to the US dollar.