A manager needs to: pay attention and be concerned about business cycles in other countries, as looking at the United States isn’t 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 |
In many countries, monetary policy serves short-run political interests. Not only is formal independence of the central bank an important issue, the degree of consensus on how to conduct monetary policy is also important. Countries vary in their underlying attitudes about the role of monetary policy.
Susceptibility to a supply depends on the country’s dependence on the material in short supply which is typically oil.
Countries whose economy is dependent on one or two commodities are prone to boom-bust cycles caused by price fluctuation of those commodities. Risk of a key commodity booming or collapsing can work either for a company or against it.
A country that has a large concentration of its exports to one other country is at risk if the key trading partner goes into recession.
Exchange rate fluctuations can make overseas profits translate into more dollars or fewer dollars. Exchange rate fluctuations can change the underlying profitability of overseas operations.
Foreign exchange crises can wreck local businesses that were fundamentally sound. Foreign exchange controls that limit a corporation’s ability to move money around the world are often imposed during a crisis.
Wars, coups d’etat and assassinations pose serious risks to companies operating overseas. Thus, political stability must be evaluated carefully before making large foreign investments.
Business strategy for a foreign recession varies depending on whether the company is selling to the local market or using the foreign country to produce goods for the home market. A recession strategy for firms selling to the foreign market should be much like one for dealing with a U.S. downturn. A recession strategy for firms producing overseas for the home market should focus on ascertaining the viability of local suppliers and using the downturn to secure good deals.
An early warning system should be established for every foreign country of importance to your company. Early warning systems for developed countries will resemble a U.S. early warning system, with foreign exchange risk added. In less-developed countries, the system must also include the potential for foreign exchange crisis, war and political upheaval, commodity risk, and trading partner risks.
Contingency plans for a foreign recession should include the common elements of a domestic plan, plus plans for the various exchange rate and capital flow risks. Plans for alternative supply chains should be in place, including utility service.
Economic fluctuations are more varied in certain foreign countries, especially those less developed. One approach that managers may want to consider is diversifying their international operations. Doing business abroad can be quite profitable, but only if the economic risks are understood, monitored, and planned for.
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 price in which one currency is express for in another currency.
When a government or central bank sets a rate fixed for which its currency is traded for with other currencies, this helps stabilizes the rate exchange between countries.
When a currency exchange rate price is set based on supply and demand relative to other currencies.
When the value of one currency is decreased against another.
The fall in value of a one currency in terms of exchange rate compared to other currencies.
Various forms of restrictions placed by a government on it’s people and businesses to purchase/sell foreign currencies or restrictions of non-residents to purchase it’s currency.
The amount of one currency needed to be converted into that of another country’s currency in order to purchase the same amount of goods and services in each country.
Describe the characteristics of the following events briefly.
So in 1994 Mexico had been pegging the peso to the dollar ratio of 3 pesos to 1 dollar. A new president let the peso float or in this case sink which made the peso fall from 1/3 of a dollar to 1/10 of a dollar. This caused American and other foreign companies in Mexico that a peso of earnings translated into less USD. Managers who were hitting their numbers in pesos were now unable to hit their numbers in USD. Which causes an economic crisis in Mexico.
The Indonesian financial crisis of 1998 showed how a foreign exchange crises can lead to domestic recession. So what happened was that manufacturing sector relied on bank credit for financing. Large companies borrowed from international banks, with them having to repay in dollars. Smaller company’s had to borrow from local banks which had to borrow dollars from international banks. Then when the Asian financial crises lead to Western investors to rethink the soundness of their investment with the devaluation of the rupiah lead caused large manufacturers and local banks from repaying their western dominated loans to the large international banks which lead to the restriction of credit the smaller manufacturers, which caused collaspse.
So what happened was that a number companies in Southeast Asia that were fundamentally sound on the bases they could transform raw material into a finished good at a solid profit margin sound went into bankruptcy because their value of their debt had skyrocketed due to their local currency had dropped compared to the dollar. Thus their customers had to either seek a new vendor, buy the vendor, or to provide financing to the vendor.