GROUP 4: MONETARY SYSTEM IN THE INTERNATIONAL ARENA SPOT EXCHANGE RATE

INTERNATIONAL TRANSACTIONS • the current amount one currency will trade for another currency at a specific point in time.

• idea of trading of a product, service, and manpower from a country to the others. FORWARD EXCHANGE RATE
• happens on a global scale.
• the rate of exchange, agreed upon now, for a foreign exchange market transaction that will
• Complicated by means of different monetary values. occur at a specified date in the future. The agreement to make such an exchange in the
BALANCE OF PAYMENTS future at a rate agreed upon now is called a forward contract.

• Summary statement of all transaction from the home country to the other participating NOMINAL EXCHANGE RATE
countries.
• tells how much foreign currency can be exchanged for a unit of domestic currency.
• Provide information regarding the demand and supply of Foreign Exchange.
• Summarizes a country’s transactions that require payments to other countries and REAL EXCHANGE RATE
transactions that require payments from other countries.
• A debit transaction is a flow for which the home country must pay and requires the supply of • tells how much the goods and services in the domestic country can be exchanged for the
the home currency. goods and services in a foreign country.
• A credit transaction is a flow for which the home country is paid and increases the demand EQUILIBRIUM EXCHANGE RATE
for the home currency.
• determined by the intersection of the demand supply curves.
CURRENT ACCOUNT
FACTORS
• MEASURES THE INFLOW AND OUTFLOW OF GOODS, SERVICES, INVESTMENT INCOMES AND
TRANSFER PAYMENTS. • RELATIVE NATIONAL INCOME
• RELATIVE PRICE LEVELS
CAPITAL ACCOUNT • INTEREST RATES
• A RECORD OF ALL TRANSACTIONS WHICH ALTER THE EXTERNAL ASSETS AND/OR LIABILITIES • EXPECTATIONS
OF A COUNTRY. RELATIVE NATIONAL INCOME
BOP DISEQUILIBRIUM
• The demand for a country's import is directly related to the country's income.
• A SITUATION WHEN THE PAYMENTS INTO AND OUT OF AN ECONOMY DO NOT BALANCE. RELATIVE PRICE LEVELS
FOREIGN EXCHANGE
• The demand for imports in a certain country and foreign demand for that country will
• THE FOREIGN EXCHANGE MARKET IS A GLOBAL DECENTRALIZED OR OVER-THE-COUNTER depend on the price levels prevailing in that country and abroad.
MARKET FOR THE TRADING OF CURRENCIES. INTEREST RATES
FORMULA FOR CHANGE IN VALUE OF CURRENCY
• The interest rate is the amount a lender charges a borrower and is a percentage of the
CURRENT VALUE - PREVIOUS VALUE / PREVIOUS VALUE X 100 principal—the amount loaned.
• The higher (lower) the interest rate of a certain country the higher (lower) the demand for
EXCHANGE RATES currency, the supply of currency will decrease (increase) and that currency will appreciate
(depreciate).
• the price of foreign currency that an amount of one currency can buy.
• a rate at which one currency will be exchanged for another currency.
EXPECTATIONS MANAGED EXCHANGE RATES

• Expectations about changes in the future value of a currency also exert a significant • EXCHANGE RATE SYSTEM THAT ALLOWS A NATION'S CENTRAL BANK TO INTERVENE
influence on exchange rates such as: Market fundamentals like trade flows, Inflation, REGULARLY IN FOREIGN EXCHANGE MARKETS TO CHANGE THE DIRECTION OF THE
Interest rates, Government's fiscal, Monetary Policies and etc. CURRENCY'S FLOAT AND/OR REDUCE THE AMOUNT OF CURRENCY VOLATILITY.

PURCHASING POWER PARITY INTERNATIONAL MONETARY FUND

• The Purchase power parity (PPP) theory holds that exchange rates between two countries • The IMF's primary purpose is to ensure the stability of the international monetary system —
adjust to reflect differences in the price levels between the two countries. Based on "Law of the system of exchange rates and international payments that enables countries and their
one price" citizens to transact with each other.

ABSOLUTE PPP ECONOMIC POLICIES

• This is based on the law of one price and refers to the price levels between two countries. • Stable Prices
• Absolute PPP and the "law of one price" do not held well in practice of significant barriers to • Full Employment
trades, transportation cost and other transaction cost. • Economic Growth
• Law of one price and absolute PPP refer only to traded goods; physical assets, and a large
number of services are not traded between countries. PRICE STABILITY

RELATIVE PPP • Price stability is when there is little to no change in the economy over a period of time.

• Changes in exchange rates deflect differences in relative price levels, that is inflation rates.
According to relative PPP theory, the rate of depreciation (or appreciation) equals the
GROUP 5: INTERNATIONAL ECONOMIC INTEGRATION
difference in inflation rates between 2 countries.
GLOBALIZATION
EXCHANGE RATE REGIMES
• the increase in the flow of goods, services, capital, people, and ideas across international
• The way an authority manages its currency in relation to other currencies and the foreign
boundaries.
exchange market.
• An exchange rate is simply the price of one currency in terms of another. ADVANTAGES
FIXED EXCHANGE RATES • Access to New Culture
• Spread of Technology Innovation
• APPLIED BY A GOVERNMENT OR CENTRAL BANK THAT TIES THE COUNTRY'S OFFICIAL
• Lower Costs for Products
CURRENCY EXCHANGE RATE TO ANOTHER COUNTRY'S CURRENCY OR THE PRICE OF GOLD.
• Access to New Market
FLOATING EXCHANGE RATES • Access to New Talent

• DEFINED AS EXCHANGE RATES DETERMINED BY GLOBAL SUPPLY AND DEMAND OF DISADVANTAGES

CURRENCY.
• THIS IS IN CONTRAST TO A FIXED EXCHANGE RATE, IN WHICH THE GOVERNMENT ENTIRELY • Increased Competition
OR PREDOMINANTLY DETERMINES THE RATE. • Disproportioned Growth

CONVERGENCE OF TASTE

• is the increasing similarity of product selection.

GLOBALIZATION IN PRODUCTION ECONOMIC UNION

• globalization has also occurred in the production of goods and services with the rapid rise of • an agreement between two or more nations to allow goods, services, money and workers to
global corporations. move over borders freely.

GLOBALIZATION IN LABOR MARKET MAIN FEATURES

• globalization also strongly affects labor markets around the world. • Goods
• Services
ECONOMIC INTEGRATION
• Production Factors (Capital and Labor)
• economic cooperation between countries and coordination of their economic policies, MONETARY UNION
leading to increased economic links between them. It occurs because of numerous benefits
that may be derived by the co-operating countries. • an agreement between two or more states creating a single currency area. It involves the
• was established by economists who investigated the early attempts of European countries to irrevocable fixation of the exchange rates of the national currencies existing before the
combine separate economies into larger economic regions. formation of a monetary union. Historically, Monetary Union have been formed on the basis
• also called as regional integration - refers to the discriminate reduction or elimination of of both economic and political considerations.
trade barriers among participating nations.
ECONOMIC & MONETARY UNION
NEW WAVE OF ECONOMIC INTEGRATION
• The Economic and Monetary Union is a step that the EU took to further integrate the
• The EU completed the single-market program, was joined by three new members (Austria, economic markets of the member states. The EMU countries coordinate their economic and
Finland, and Sweden) fiscal policymaking initiatives and share a common monetary policy with a common currency
• Proceeded toward economic and monetary union with the adoption of the euro as a single – the euro.
currency, and accepted 10 new members on May 1, 2004. • The fiscal policies are coordinated mainly through government deficit and debt limitations
• The United States became increasingly involved with regional integration through the under the Stability and Growth Pact (SGP). According to the SGP, government deficits must
NAFTA, which became operational in 1994. be limited to below 3% of GDP, and government debts must be less than 60% of GDP.
• The monetary policy and euro are managed by the European Central Bank (ECB) and national
EUROPEAN UNION central banks, with a medium-term inflation target of close to but below 2% across the
• Belgium, France, West Germany, Italy, and the Netherlands formed the European Union, eurozone. The 2% inflation rate is considered to be optimal for economic growth and
then called European Economic Community, on January 1, 1958. employment rate.
• The economies of European nations were devastated by war, Germany was divided into • The monetary policy decision-making is independent of outside influence. The countries that
military occupation zones, and Europe was bearing the burden of the cold war between the are members of the EU but not within the eurozone coordinate their monetary policy with
two rival blocks. the ECB.

MAIN FEATURES OF EUROPEAN UNION ECONOMIC INTEGRATIONS IN DIFFERENT PARTS OF THE WORLD

• HUMAN RIGHTS NORTH AMERICA-NAFTA

• RULE OF LAW • Created the world's largest free-trade area, encompassing the United States, Mexico and
• EQUALITY Canada. NAFTA is a pact bringing together 3 of the world's 10 largest economies with the
• DEMOCRACY World Bank ranking the United States as number one, Canada as number eight and Mexico
• FREEDOM as number nine.
• HUMAN DIDNITY
DEVELOPING COUNTRIES TYPES OF POLITICAL RISKS

• It consists of the reduction even the removal of the trade barriers between the partners. It SYSTEMATIC RISKS
primarily seeks to liberalize the trade exchanges between partners in order to improve the
overall efficiency and/or to develop the economies of the partner countries. • A risk that influences a large number of assets.

ASIA UNSYSTEMATIC RISKS

• Asian integration is focused around free trade as opposed to an attempt at deeper political • Sometimes referred to as “specific risk.” It is risk that affects a very small number of assets.
integration. It is lacks of the successful features that have shaped regional integration in the SPECIFIC TYPES OF RISK, PARTICULARLY IN STOCKS AND BONDS
EU, and is characterized by a defensive motive in reaction to regionalism elsewhere and the
slowness of multilateral trade agreements as well as the recognition of the rapid CREDIT OR DEFAULT RISK
development of regional trade.
• Risk that a company or individual will be unable to pay the contractual interest or principal
AFRICA on its debt obligations.

• Ranks near the bottom when it comes to competing in the global economy, held back by COUNTRY RISK
fragmented markets that inhibit efficiency and constrain economic growth.
• Risk that a country will not be able to honor its financial commitments.
LATIN AMERICA AND CARIBBEAN
FOREIGN EXCHANGE RISKS
• For decades, Latin American and Caribbean countries focused on preferential trade
agreements as a way to boost their international integration. However, a vast majority of • When investing in foreign countries, firms must consider the fact that currency exchange
these agreements were intra-regional. Only in recent years have South-North agreements rates can change the price of the asset as well.
become more common, especially among countries in the Caribbean and on the Pacific. INTEREST RATE RISK
MIDDLE EAST • Rise in interest rates during the term or debt securities hurts the performance of stocks and
bonds.
• Middle East has incurred huge economic and social losses from poor economic management
and conflicts requiring massive military outlays. POLITICAL RISK

• Financial risk that a country’s government will suddenly change its policies.
GROUP 6: GOVERNMENT, LAW, AND POLITICAL RISK IN INTERNATIONAL BUSINESS MARKET RISK
POLITICAL ENVIRONMENT • It is the day-to-day fluctuations in a stock’s price. It is also referred to as volatility.
• refers to factors outside the company, relating to the government or public affairs of a POLITICAL/ECONOMIC RISK
country.
NATIONALIZATION
POLITICAL RISKS
• the process of taking privately-controlled companies, industries, or assets and putting them
• is generally defined as the risk to business interests resulting from political instability or under the control of the government.
political change. Nevertheless, because of the potentially catastrophic effects of political
events, management needs to do at least two things:
o investigate political risk before entering a new market, and
o continually monitor political events that may affect ongoing operations.
EXPROPRIATION THE LEGAL ENVIRONMENT

• If a government nationalizes an industry or company and then compensates the MNC that is COMMON LAW
affected.
• The courts fulfill an important role by interpreting the law according to these characteristics.
CONFISCATION
CIVIL LAW
• When nationalization discriminates against foreign firms by offering little or no
compensation for loss of property. • Based on a detailed set of laws organized into a legal code. Rules for conducting business
transactions are a part of the code.
DOMESTIC ECONOMIC CONDITIONS
THEOCRATIC LAW
• Domestic conditions in the host country, can add to or reduce the amount of risk a company
faces in a foreign location. • This law is based on the officially established rules governing the faith and practice of a
o Usually, good infrastructure support reduces risk and thereby facilitates entry and particular religion.
expansion of business. CORRUPTION
o The enforcement of such laws could restrict how an MNC may operate in a foreign
country. In turn, this almost always increases the operational costs of the company. • dishonest or fraudulent conduct by those in power, typically involving bribery
• is broadly defined as “the abuse of public or private office for personal gain"
EXTERNAL ECONOMIC RELATIONS AS RISK FACTORS
BRIBERY
• There are also a large number of factors that deal with how a country relates economically
to another country. Furthermore, although some of the earlier factors that we considered • a criminal and corrupt practice where an entity offers something of value to a corporate or
are quite rare (civil war), virtually every country restricts its external economic relations in public official in exchange for their cooperation in influencing a decision-making process,
several ways. committing or allowing fraud against the official’s organization, or otherwise violating their
official duties.
TARIFFS

• tax imposed by the government of a country or by a supranational union on imports or GROUP 7: GLOBAL STRATEGIC PLANNING
exports of goods.
• A tariff would increase the price of a foreign product or service relative to the domestic GLOBAL STRATEGIC PLANNING
counterpart.
• is the processes of examining a multinational organization's internal and external
THE LEGAL ENVIRONMENT environments to develop its strategic plan. By looking at the internal environment, the
business is able to leverage its strengths and overcome its weaknesses.
• A domestic firm must follow the laws and customs of its home country. An international
business faces a more complex task: It must obey the laws not only of its home country but COMPETITIVENESS
also of all the host countries in which it operates.
• The laws of both the home and the host countries can affect directly and indirectly the • a plan for moving the industry toward sustained growth. It represents a vision for how firms
international companies and the way they conduct their business. might collaborate to achieve growth, rather than seeing one another simply as competitors.

POLITICAL ENVIRONMENT GLOBAL POLITICAL ECONOMY

• An important aspect of the political environment is the phenomenon of ethnicity—a driving • foreign direct investment
force behind political instability around the world. • trade financial growth
• technological transfer
FDI PROSPECTS CULTURAL CONTRASTS IN VALUE

• Services are expected to be the sector most attractive to FDI, particularly in tourism,
telecommunications and IT. Prospects for manufacturing are also expected to be good,
although varying by industry. Electronics, automobiles and machinery are expected to
perform better.

LEADING SOURCE OF FDI

• For the first time, a developing country, China, has made the list of the expected top five
home countries worldwide in terms of geographical coverage (2004– 2005), replacing Japan,
which traditionally has been a significant home country.

STRATEGIC PLANNER IN A GLOBAL MULTICULTURAL ENVIRONMENT

• RESOURCES
• HUMAN
• FINANCIAL
• PHYSICAL
• INFORMATIONAL

MULTICULTURAL MANAGERS SHOULD BE ABLE TO DO THE FOLLOWING:

• THINK LOCAL PERCEPTIONS.

• PREPARE FOR NEW WIND SHIFT.
• RE-CREATE CULTURAL ASSUMPTIONS, NORMS AND PRACTICES.
• REPROGRAM THEIR MENTAL MAPS AND CONSTRUCT.
• ADAPT READILY TO NEW CIRCUMSTANCES AND LIFESTYYLE.
• WELCOME AND FACILITATE TRANSITIONAL EXPERIENCE.
• ACQUIRE MULTICULTURAL COMPETENCIES AND SKILL.

MULTICULTURAL MANAGERS

• STUDENTS OF WORLDWIDE HUMAN RELATIONS AND VALUES.

• OPEN AND FLEXIBLE IN DEALING WITH DIVERSITY IN PEOPLE.
• COMFORTABLE OF NEWCOMERS, STRANGERS, MINORITIES AND IMMIGRANTS.
• PLANNED CHANGE AGENTS AND FUTURISTS.