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Chapter financial environment. What you should learn from chapter 3: The basis for the reestablishment of world trade following World War II, the importance of balance-of-payment fi gures to a country’s economy, the effects of protectionism on world trade, the several types of trade barriers, the provisions of the Omnibus Trade and Competitiveness Act,...
GLOBAL MARKETING MANAGEMENT Seventh Edition MASAAKI KOTABKE | KRISTIAAN HELSEN Chapter PowerPoint Financial Environment Chapter Overview Historical Role of the U.S Dollar Development of Today’s International Monetary System Foreign Exchange and Foreign Exchange Rates Balance of Payments Economic and Financial Turmoil Around the World Marketing in the Euro Area Chapter Copyright © 2017 John Wiley & Sons, Inc Introduction • Foreign exchange is the monetary mechanism allowing the transfer of funds from one nation to another • The existing international monetary system always affects companies as well as individuals whenever they buy or sell products and services traded across national borders • Although international marketers have to operate in a currently existing international monetary system for international transactions and settlements, they should understand how the scope and nature of the system has changed and how has worked over Copyright © 2017 John Wiley &itSons, Chapter Inc Introduction • The 1990s – particularly, the second half of the decade – proved to be one of the most turbulent periods in recent history • The adoption of the euro as a common currency in the European Union in 1999 has challenged the supremacy of the dollar as a global currency • Financial crises in Latin America and the U.S have reverberated throughout the world as a global recession Chapter Copyright © 2017 John Wiley & Sons, Inc Historical Role of the U.S Dollar • Each country has its own currency through which it expresses the value of its products • In the post-World War II period, the United States agreed to exchange the dollar at $35 per ounce of gold The dollar became the common denominator in world trade • In the early seventies, the U.S dollar standard was dropped The result has been more volatility and a more likely tendency for the U.S currency to depreciate due to persistent U.S trade deficits Chapter Copyright © 2017 John Wiley & Sons, Inc Development of Today’s International Monetary System • Post-World War II developments had long-range effects on international financial arrangements • The negotiations to establish the postwar international monetary system took place at the resort of Bretton Woods in New Hampshire in 1944 which established the International Monetary Fund (IMF) • President Richard Nixon suspended the convertibility of the dollar to gold on August 15, 1971 Chapter Copyright © 2017 John Wiley & Sons, Inc Development of Today’s International Monetary System • The IMF oversees the international monetary system and its functions are as follows: – To promote international monetary cooperation – To facilitate the expansion and balanced growth of international trade – To promote exchange stability and to maintain orderly exchange arrangements – To assist in the establishment of a multilateral system of payments in respect to current transactions between member nations; to eliminate foreign exchange restrictions Chapter Copyright © 2017 John Wiley & Sons, Inc Exhibit 3-1: Foreign Exchange Rate Fluctuations over the Past 30+ Years Chapter Copyright © 2017 John Wiley & Sons, Inc Development of Today’s International Monetary System – To make available the general resources of the fund temporarily available to members under adequate safeguards; help members to correct maladjustments in the balance of payments – To shorten the duration and lessen the degree of disequilibrium in the international balance of payments to members – The IMF created special drawing rights (SDRs) in 1969 Chapter Copyright © 2017 John Wiley & Sons, Inc Development of Today’s International Monetary System • The value of SDRs is determined by a weighted average of a basket of four currencies: the U.S dollar, Japanese yen, European Union’s euro, and the British pound • After the 1997-98 Asian financial crisis, the IMF has worked on policies to overcome or even prevent future crises • Another creation of the Bretton Woods Agreement was the International Bank for Reconstruction and Development (World Bank), supporting economic development and poverty reduction Chapter Copyright © 2017 John Wiley & Sons, Inc 10 Foreign Exchange and Foreign Exchange Rates • One of the most fundamental determinants of the exchange rate is purchasing power parity (PPP) • Formula for PPP: Rt = R0 (1 + Infleuro) * _ (1 + InflU.S.) Where R= the exchange rate quoted in euro/$, Infl = inflation rate, t= time period Chapter Copyright © 2017 John Wiley & Sons, Inc 12 Foreign Exchange and Foreign Exchange Rates • Factors influencing Foreign Exchange Rates: – – – • Macroeconomic Factors: Relative inflation, balance of payments, foreign exchange reserves, economic growth, government spending, money supply growth, and interest rate policy Political Factors: Exchange rate control, election year or leadership change Random Factors: Unexpected and/or unpredicted events, fear of uncertainty, etc Many countries attempt to maintain a lower value for their currency in order to encourage exports Chapter Copyright © 2017 John Wiley & Sons, Inc 13 Foreign Exchange and Foreign Exchange Rates • Spot versus forward foreign exchange • Hard currencies are the world’s strongest and represent the world’s leading economies • To avoid the risk of currency fluctuations, companies use hedging • Target exchange rate Exchange rate pass-through Chapter Copyright â 2017 John Wiley & Sons, Inc 14 Exhibit 3-4: Foreign Exchange Rates Chapter Copyright © 2017 John Wiley & Sons, Inc 15 Balance of Payments • The balance of payment (BOP) of a nation summarizes all the transactions that take place between its residents and the residents of other countries over a specified time period, usually a month, quarter, or year • The BOP transactions contain three categories (see Exhibit 3-5): – Current account – Capital account – Official reserves Chapter Copyright © 2017 John Wiley & Sons, Inc 16 Exhibit 3-5: U.S Balance of Payments, 1990 – 2014 Chapter Copyright © 2017 John Wiley & Sons, Inc 17 Balance of Payments • The BOP in capital account, the mirror image of the BOP in the current account, summarizes financial transactions and is divided into short -and long-term capital accounts • Direct investments are controlled by residents of other nations • Portfolio investment includes long-term investments that not give the investors effective control over the investment Chapter Copyright © 2017 John Wiley & Sons, Inc 18 Balance of Payments • There are three balances to identify on the BOP statement of a country: – Balance of merchandise trade account – The current account (including merchandise trade, trade in services, and unilateral transfers) – The basic balance (the current account and the long-term capital) • The internal market adjustment refers to movement of prices and income in a country • The external market adjustment concerns exchange rates or a nation’s currency and its value with respect to the currencies of other nations Chapter Copyright © 2017 John Wiley & Sons, Inc 19 Economic and Financial Turmoil Around the World • The Asian financial crisis in the latter half of the 1990s escalated into the biggest threat to global prosperity • China’s devaluation of its currency (yuan) triggered the Asian financial crisis in 1994 • Because of this financial crisis, Thailand lost almost 60 percent of its baht’s purchasing power in dollar terms in 1997 • The Indonesian rupiah lost a whopping 80 percent of its value during the same period Chapter Copyright © 2017 John Wiley & Sons, Inc 20 Economic and Financial Turmoil Around the World • The Korean won depreciated 50 percent against the U.S dollar • The acceleration in Asia economic growth since 2000 can be largely credited to the Japanese economic recovery and China’s surging import demand • The South American Financial Crisis took place in 2001 when Argentina defaulted and lost nearly 40 percent of its currency value • The Argentina crisis also hurt Brazil Chapter Copyright © 2017 John Wiley & Sons, Inc 21 Economic and Financial Turmoil Around the World • Responses to the regional financial crises: – Consumer response to the recession (see Exhibit 3-6) – Corporate response to the recession • • • • • • • • Chapter Pull-out Emphasize a product’s value Change the product mix Repackage the goods Maintain stricter inventory Look outside the region for expansion opportunities Increase advertising in the region Increase local procurement Copyright © 2017 John Wiley & Sons, Inc 22 Exhibit 3-6: Changes in the Consumption Pattern During a Recession Chapter Copyright © 2017 John Wiley & Sons, Inc 23 Marketing in the Euro Area • The European Union (EU) consists of 28 countries The 13 central and eastern European countries are less developed than the others (See Exhibit 3-7.) • The eurozone economies are based in 19 member countries and represent 22% of the world’s GDP • The Maastricht Treaty, signed in 1992, spelled out the guidelines toward European Monetary Union (EMU) • The European Central Bank is headquartered in Frankfurt, Germany Chapter Copyright © 2017 John Wiley & Sons, Inc 24 Exhibit 3-7: 19 Eurozone Countries (as of 1/1/2015) Chapter Copyright © 2017 John Wiley & Sons, Inc 25 Marketing in the Euro Area • On January 1, 2002, the euro notes and coins began to replace the German mark, the Dutch guilder and other European currencies • Ramifications of the euro for marketers: – – – – Price transparency Intensified competitive pressure Streamlined supply chains New opportunities for small and medium-sized companies – Adaptation of internal organizational structures – EU regulations crossing national boundaries Chapter Copyright © 2017 John Wiley & Sons, Inc 26 ... categories (see Exhibit 3- 5): – Current account – Capital account – Official reserves Chapter Copyright © 2017 John Wiley & Sons, Inc 16 Exhibit 3- 5: U.S Balance of Payments, 1990 – 2014 Chapter Copyright... hedging • Target exchange rate • Exchange rate pass-through Chapter Copyright © 2017 John Wiley & Sons, Inc 14 Exhibit 3- 4: Foreign Exchange Rates Chapter Copyright © 2017 John Wiley & Sons, Inc... eliminate foreign exchange restrictions Chapter Copyright © 2017 John Wiley & Sons, Inc Exhibit 3- 1: Foreign Exchange Rate Fluctuations over the Past 30 + Years Chapter Copyright © 2017 John Wiley