INTB Notes Part 2

Compensation key issues

- Adjusting compensation to reflect national differences in economic circumstances and compensation practices - How expatriate managers should be paid

Purchasing Power Parity Puzzle

- Assumes away transportation costs and barriers to trade - Governments routinely intervene in trade and foreign exchange market - Investor psychology plays a role on exchange rate movements

Factors impacting export strategy

- Change in trade barriers and tariffs - Export strategy versus establishing production facilities - Currency exchange and hedging - Target country's long-term economic prospects

Polycentric approach (localization)

Host country national manage local subsidiaries and parent country nationals hold position at HQ Attractive because: - firm is less likely to suffer from cultural myopia - may be less expensive to implement Unattractive because: - host country nationals do not gain foreign experience and cannot progress beyond senior positions in their own subsidiaries - gap can form between host country and parent managers

Pros and Cons of countertrade

- Countertrade allows firms to finance an export deal when other means are not available - Firms that are unwilling to engage in countertrade may lost an export opportunity to a competitor that will - Countertrade may be required by the government of a country to which a firm is exporting goods or services - Countertrade can be unattractive - Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrade

Export-Import Bank (EXIM Bank)

- Designed to supplement, not compete, with capital lending - Provides financing aid to facilitate exports, imports, and exchange of commodities between U.S. and other countries - Has a direct lending operation to lend dollars to foreign borrowers for use in purchasing U.S. exports

Diversity improves performance because

- Diverse talents bring insights into needs of diverse customer base - It capitalizes on the talent of women and minorities - Develops a better relationships with diverse customer base - It may improve brand image - It increases employee satisfaction

Efficient Market School

- Efficient market is one in which prices reflect all available information - Forward exchange rates are the best predictors of future spot exchange rates - Investing in forecasting services is a waste of money

Describe the functions of the foreign exchange market

- Enables conversion of the currency of one country into the currency of another - Provides some insurance against foreign exchange risk

Corporate-Government Relations

- Firms can influence government policy towards the international monetary system - Firms should focus on encouraging the government

Business Strategy

- Forward market offers some protection from volatile exchange rates in the shorter term - Firms can protect themselves from exchange rate uncertainty over the longer term by building strategic flexibility into their operations - Policies imposed by the IMF can promote economic growth and expand demand

Approaches toward exchange rate forecasting

- Fundamental analysis: draws upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates. - Technical analysis: uses price and volume data to determine past trends that are expected to continue

Steps managers can take to improve their firm's export performance

- Hire an EMC to help identify opportunities to navigate paperwork - Start by focusing initially on just one or a few markets - Enter a foreign market on a small scale - Recognize time and managerial commitment involved - Devote a lot of attention to building strong and enduring relationships with local distributors and/or customers - Hire local personnel - Be proactive about seeking export opportunities - Retain the option of local production

Strategy of Organized Labor

- Trying to establish their own international organizations - Lobbying for national legislation to restrict multinationals - Trying to achieve regulations of multinationals through international organizations such as the United Nations

Steps managers can take to promote workforce diversity

- create a clear proposition value that identifies benefits of a diverse workforce - set clear goals, not quotas - lead by example - diversity workshops - create employee reference groups

Pitfalls of Exporting

- poor market analysis - poor understanding of competitive conditions - failure to customize the product offering - lack of an effective distribution program - poorly executed promotional campaign - problems securing financing - voluminous paperwork, complex formalities, and potential delays and errors

*What is the bretton woods system?

A new international monetary system. Goal was to build an enduring economic order to facilitate postwar economic growth.

Countertrade

A range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money

Switch Trading

A specialized third-party trading house buys a firm's counterpurchase credits and sells them to another firm Type of countertrade

Translation Exposure

Impact of currency exchange rate changes on the reported financial statements of a company - Deals with the present measurement of past events - Gains and losses from translation exposure are reflected only on paper

Law of One Price

In competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when it is in the same currency

Practical training

helps the expatriate manager and family ease into day-to-day life of the host country

Language training

improves the effectiveness of managers and helps them better relate to the foreign country

Foreign Exchange Market

Market for converting the currency of one country into that of another

Bandwagon effect

Occurs when expectations on the part of traders turn into self-fulfilling prophecies and traders join the bandwagon and move exchange rates based on group expectations - Government intervention can prevent bandwagon from starting but is not always effective

Externally convertible

Only nonresidents can convert their holdings of domestic currency into a foreign currency

Foreign debt crisis

When a country cannot service its foreign debt obligations, whether private sector or government debt

Currency crisis

When a speculative attack on thee exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend prevailing exchange rates.

Forward Exchange

Two parties agree to exchange currency and execute the deal at some specific date in the future

Forward exchange rates

Typically quoted for 30, 90, or 180 days into the future

Fixed exchange rate system

Countries fix their currencies against each other at a mutually agreed upon value

Inefficient Market School

- Inefficient market is one in which prices do not reflect all available information - Forward exchange rates are not the best predictors of futures spot exchange rates - Companies should invest in forecasting services

Export Credit Insurance

- Insures exporter against risk that foreign importer will default on payment - Provided by Foreign Credit Insurance Association (FCIA) - Provides coverage against commercial and political risks

Basic steps involved in export financing

- Letter of credit: issued by the bank at the request of an imposter stating the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents - Draft: most export transactions an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount at a specified time (bill of exchange - Bill of landing: Issuesd to the exporter by the common carrier transporting the merchandise Serves three purposes: - receipt - contract - document of title

Concerns of organized labor

- Multinationals can counter union bargaining power by threatening to move production to another country - Multinationals will keep highly skilled tasks in the home country and farm out only low skilled tasks - Imported employment practices and contractual agreements will reduce its influence and power

Spot exchange rates

- Rate at which a foreign exchange dealer converts one currency into another on a particular day - Determined by the interaction between supply and demand - Changes continually

Promise of Exporting

- Regional economic agreements - Decline in trade barriers under the WTO - Modern communication and transportation technologies alleviated logistical problems

Currency Swaps

- Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates - Swaps are used when it is desirable to move out of one country into another for a limited period without incurring foreign exchange rate risk

Purchasing Power Parity (PPP)

- The amount of money needed in one country to purchase the same goods and services in another country - Predicts that changes in relative prices result in change sin exchange rates

Currency Management

- The currency exchange rate system is a mixed system - Firms can protect themselves from exchange rate volatility through forward market and swaps

What are the different theories explaining how currency exchange rates are determined and their relative merits?

1. A country's price inflation 2. A country's interest rate 3. Market psychology

International monetary system affects international managers in three ways

1. Currency management 2. Business Strategy 3. Corporate-government relations

Recognize the role that forward exchange rates play in insuring against foreign exchange risk

1. Spot exchange rates 2. Forward exchange rates 3. Currency swaps

Two multinational institutions the Bretton Woods Agreement established

1. The International Monetary Fund (IMF) to maintain order in the international monetary system 2. The World Bank to promote general economic development

*Currency Board

A country commits to converting its domestic currency on demand into another currency at a fixed exchange rate - a monetary institution that issues base money solely in exchange for foreign assets

Fisher effect

A country's nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (l) in other words: i = r + l

Barter

A direct exchange of goods and/or services between two parties without a cash transaction - Most restrictive countertrade arrangement - Used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy Type of countertrade

Compensation or buybacks

A firm builds a plant in a country --or supplies technology, equipment, training, or other services to the country-- and agrees to take a percentage of the plant's output as a partial payment for the contract Type of countertrade

Hedging

A firm that protects itself against foreign exchange risk Performed by: 1. Spot exchange rates 2. Forward exchange rates 3. Currency swaps

Fixed vs. Floating Exchange Rates

A fixed exchange rate is an exchange rate policy under which a government commits itself to keep its currency at or around a specific value in terms of another currency or a commodity, such as gold. A floating exchange rate is an exchange rate policy under which a government permits its currency to be traded on the open market without direct government control or intervention.

Banking crisis

A loss of confidence in the banking system that leads to a run on the banks

Lag Strategy

Delaying collecting foreign currency receivables if the currency is expected to appreciate and delaying payables if the currency is expected to depreciate

*When did the gold standard fall apart?

After world war 1 counties started regularly devaluing their currencies to encourage exports. Confidence in the system fell, and people demanded gold for their currency, putting pressure on countries' gold reserves and forcing them to suspend gold convertibility. Ended in 1939

*Why did the gold standard make sense?

Balance-of-trade equilibrium; gold is tangible

Carry trade

Borrows one currency where interest rates are low and invests these in another currency where interest rates are high

Nonconvertible

Both residents and nonresidents are prohibited from converting their holdings of domestic currency into a foreign currency

Freely convertible

Both residents and nonresidents can purchase unlimited amounts of foreign currency with the domestic currency

Lead Strategy

Collecting foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate

Staffing policy

Concerned with the selection of employees for a particular job

How countertrade can be used to facilitate exports

Exporters use countertrade when conventional means of payment are difficult, costly, or nonexistent

Economic Exposure

Extent to which a firm's future international earning power is affected by changes in exchange rates - Concerned with the long-run effect of exchange rates on future prices, sales, and costs

Transaction Exposure

Extent to which the income from individual transactions is affected by fluctuations in foreign exchange values - Mainly concerned with short-term transactions

International Fisher Effect

For any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries

Evaluating the IMF's Policy Prescriptions

Inappropriate Policies: IMF has been criticized for having a "one-size-fits-all" approach to macroeconomic policy that is inappropriate for many countries Moral Hazard: the IMF has also been criticized for exacerbating moral hazard: people behave recklessly because they know they will be saved if things go wrong. Lack of Accountability: IMF has become too powerful for an institution that lacks and real mechanism for accountability

International Monetary System

Institutional arrangements countries adopt to govern exchange rates

Ethnocentric approach (international)

Key management positions are filled by parent-country nationals Attractive when: - lack of qualified individuals in host country to fill senior management positions - unified corporate culture is desired - firm wants to transfer knowledge of core competencies to the foreign operation Unattractive because: - limits the advancement of host country nationals - can lead to cultural myopia

Role of IMF in the management of financial crisis

Lends money to countries experience financial crisis in exchange for enacting certain macroeconomic policies

Gold Standard

Practice of pegging currencies to gold and guaranteeing convertibility

Arbitrage

Process of buying a currency low and selling it high

Currency Speculation

Short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates

Offset

Similar to counterpurchase; one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale - this party can fulfill obligation with any firm in the country to which the sale is being made Type of countertrade

Geocentric approach (global standardization and transnational)

The best people are sought for key jobs throughout the organization, regardless of nationality - not always easy to implement Advantages: - makes the best of human resources - builds a cadre of international executives who feel at home working in a number of different cultures Disadvantages: - difficulties with immigration laws - costs associated with implementing the strategy

*Where does the money from IMF come from?

The money that countries pay as their capital subscription (quotas) when they become members - Total annual I M F quotas—the amount member countries contribute to the I M F—were increased to $41 billion (today, this number is $767 billion).

Exchange Rate

The rate at which one currency is converted into another

*Floating Exchange Rate System

an exchange rate system where a country's currency price is determined by the foreign exchange market, depending on the relative supply and demand of other currencies

Managed-float or dirty-float system

When the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency

Pegged exchange rate system

When the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate

Floating exchange rate system

Where the foreign exchange market determines the relative value of a currency

Counterpurchase

a reciprocal buying agreement - Occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made Type of countertrade

Cultural training

seeks to foster an appreciation for the host country's culture

Main reasons for expatriate failure for U.S. MNEs

• Inability of spouse to adjust • Inability of manager to adjust • Other family problems • Manager's personal or emotional maturity • Inability to cope with larger overseas responsibilities