A manager whose company is operating in foreign markets needs to be involved in the business cycles in those other countries. Merely looking at the United States is not a broad enough spectrum and can differ from those other countries. Understanding your competition and what is happening economically in those countries is important for success.
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 will be different country to country so figuring out how the policy is determined is a good start. You want to determine how independent the central bank is from the administration and how stable the opinion is about monetary policy. Figuring this out you can predict if there will swings in monetary policy, fluctuation of interest rates, and possibilities of inflation. In many countries monetary policy is dictated by short-term political interests.
Supply shocks in foreign countries are important to keep an eye on and you should know what resources the countries you are involved with have and don’t have. The most important resource to know about is oil. If your country is totally dependent on imported oil they will have a greater response to supply shocks than those that have oil. Knowing and Understanding the countries you are associated with and their dependence on materials is very important.
There is a risk in smaller countries because they typically produce one product heavily such as coffee beans in Latin American countries and Cocoa in some West African nations. Avoiding doing business in these countries is good because there is not much diversity inside the countries economy. Without any diversity can lead to product prices falling resulting in a poor economy that can’t rebound from other products and services.
A country that has a high volume of their exports going to one country are at risk if the country they are trading with goes into a recession. An example of this is Canada and how 80% of their exports go to the United States. If the United States enters a recession they are almost certain to have a downturn or have sluggish to zero growth economically.
Foreign exchange risk is important to understand because profits that are accumulated overseas could be exchanged at a lower or higher exchange rate depending the country. Exchanging from one currency to another can lead to losses and in order to manage this is by hedging foreign exchange risk using derivatives. Derivatives are complex and dangerous but with the right people making sure everything goes smoothly they can reduce risk.
A financial crisis occurs when a country no longer has the foreign exchange reserves or the credit that it needs to continue meeting its international obligations. Foreign exchange crisis can substantially hurt local businesses. During a crisis there will be limits on a businesses ability to move money around the world.
Wars are not good for countries and their economy. This is especially true for countries that are being invaded. This is due to loss of assets from invading armies. Recession are right around the corner when wars begin and the governments needs for funds will lead to high taxes, inflation, or both. Lastly war can affect the supply chain and lead to companies who are far away from the battle grounds to be affected.
Business strategies for a foreign recession are dependant on if the company is selling to the local market or using the foreign country to produce goods for the home market. There is a lesser risk for those selling to the local market rather than those producing for the home market. A strategy for businesses selling to the foreign market should be similar to dealing with a United States downturn. A strategy for businesses producing for the home market should focus on ascertaining the viability of local suppliers and using downturn to secure good deals.
The monitoring system is key for business owners to know if problems in foreign countries will effect their companies foreign market. In this you need to watch monetary policy, oil price swings, waves of optimism and pessimism, and swings in government spending. Depending on the country and how well developed they are there may be more information needed about the structure of monetary policy.
Inside the contingency will depend on the risks inside the country. All countries are succeptible to recession in which case you should include common elements, but others may have more risks. An example of these other risks would include foreign exchange crisis where you may need to keep capital lean within the foreign country. This will allow you to stay away from debt, etc. Plans for alternative supply chains should also be in place inside your contingency plan.
Fluctuations in the economy are varied and depend on what country you are trying to do business in for many factors. One way to limit risk is to diversify your portfolio as a business owner and keep track of variables inside of the countries you are associated with.
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 of the domestic currency with respect to another currency.
Policy that goves an exchange rate for its currency with foreign currency.
Exchange rate determined by supply and deman on the open market.
When a government creates a monetary policy to redice the value of a currency.
A fall in the value of a currency in terms of exchange rate versus with other currencies.
Different controls imposed by a government on the purchase or sale of foreign currencies by residents.
The rates of currency conversion that try to equalize the purchasing power of different currencies. This is done by eliminating the differences in price levels between countries.
Describe the characteristics of the following events briefly.
In 1994 the peso had a ratio to the US dollar that was 3 pesos was equal to 1 dollar but the new president, Ernesto Zedillo allowed the peso to sink and it fell to the value of 10 pesos being equal to 1 dollar. This created havoc for companies that were operating from outside the country because their numbers were not lining up anymore.
In 1998 the manufacturing sector of Indonesia relied on bank credit for finance. Large companies were were getting loans from international banks while smaller companies were going to local banks. The asian financial crisis caused devaluation of Indonesian currency. This made it so these companies could not pay back these international loans with the money they had so banks had to limit credit usage. This hurt these companies as they couldn’t continue to invest into themselves.
This financial crisis began because foreign exchange restrictions were put into place by the government which made it so you could no longer convert and take your money outside the country. This made it so businesses could not pay shareholders and fundamentally sound businesses went bankrupt because they could not meet their dollar denominated debt payments.