Transcript GLOBAL MARKETING MANAGEMENT by MASAAKI KOTABE

Global Marketing Management
Masaaki Kotabe & Kristiaan Helsen
Third Edition
John Wiley & Sons, Inc., 2004
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Management, Third Edition, 2004
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Chapter 3
Financial Environment
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Management, Third Edition, 2004
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Chapter Overview
1. Historical Role of the U.S. Dollar
2. Development of Today’s International Monetary
System
3. Fixed Versus Floating Exchange Rates
4. Foreign Exchange and Foreign Exchange Rates
5. Balance of Payments
6. Economic and Financial Turmoil Around the
World
7. Marketing in Euro-Land
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Introduction
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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
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Introduction (contd.)
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scope and nature of the system has changed and
how it has worked over time.
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 is just one example of
the many changes taking place in today’s business
world.
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1. Historical Role of the U.S. Dollar
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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 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.
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2. Development of Today’s International
Monetary System
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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.
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2. Development of Today’s International
Monetary System (contd.)
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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
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2. Development of Today’s International
Monetary System (contd.)
– 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.
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2. Development of Today’s International
Monetary System (contd.)
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The value of SDRs is determined by a weighted
average of a basket of four currencies: the U.S.
dollar, the Japanese yen, the 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 crisis.
Another creation of of the Bretton Woods
Agreement was the International Bank for
Reconstruction and Development, known as the
World Bank.
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3. Fixed Versus Floating Exchange Rates
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Two kinds of currency floats encompass free/clean
float (allows no government intervention) and
managed float (allows limited government
intervention).
In March 1973, the major currencies began to float
in the foreign exchange markets.
Today, the global economy is dominated by three
major currency blocs: The U.S. dollar, the
Japanese yen, and the EU’s euro.
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4. Foreign Exchange and
Foreign Exchange Rates
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One of the most fundamental determinants of the
exchange rate is Purchasing Power Parity (PPP).
Formula for PPP:
(1 + InflBritain)
Rt = R0 * _____________
(1 + InflU.S.)
Where
R = the exchange rate quoted in a
currency
Infl = Inflation rate
t = time period
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4. Foreign Exchange and
Foreign Exchange Rates (contd.)
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The Economist publishes a PPP study (Big Mac
Index) every year based on McDonald’s Big Mac
hamburger (see Exhibit 3-2).
Factors influencing Foreign Exchange Rates (see
Exhibit 3-3):
– Macroeconomic Factors: Relative inflation,
balance of payments, foreign exchange
reserves, economic growth, government
spending, money supply growth, and interest
rate policy.
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4. Foreign Exchange and
Foreign Exchange Rates (contd.)
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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.
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4. Foreign Exchange and
Foreign Exchange Rates (contd.)
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Spot versus forward exchange rates
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
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5. Balance of Payments
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The balance of payment (BOP) of a nation
summarizes all the transactions that take place
between its residents and 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
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5. Balance of Payments (contd.)
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The BOP on capital account summarizes financial
transactions and is divided into short -and longterm capital accounts.
Direct investments are controlled by residents of
other nations.
Portfolio investment includes long-term
investments that do not give the investors effective
control over the investment.
There are three balances to identify on the BOP
statement of a country:
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5. Balance of Payments (contd.)
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– 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.
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6. Economic and Financial Turmoil
Around the World
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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 Malaysian ringgit lost some 40 percent of its
value during the same period.
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6. Economic and Financial Turmoil
Around the World (contd.)
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The Korean won depreciated 50 percent against
the U.S. dollar.
Increased demand for Asian exports has helped the
region rebound quickly from the slump in 2001.
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.
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6. Economic and Financial Turmoil
Around the World (contd.)
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Responses to the regional financial crises.
– Consumer response to the recession
– Corporate response to the recession
» Pull-out
» Emphasize a product’s value
» Change the product mix
» Repackage the goods
» Maintain stricter inventory
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6. Economic and Financial Turmoil
Around the World (contd.)
» Look outside the region for expansion
opportunities
» Increase advertising in the region
» Increase local procurement
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7. Marketing in Euro-Land
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The European Union (EU) consists of fifteen
countries. Of those fifteen, twelve countries form
the “euro-zone” (see Exhibit 3-8).
Their economies represent a combined 28 percent
of the world’s gross domestic product.
The Maastricht Treaty which was signed on
February 7, 1992 spelled out the guidelines toward
European Monetary Union (EMU).
The European Central Bank is headquartered in
Frankfurt, Germany.
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7. Marketing in Euro-Land (contd.)
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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
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7. Marketing in Euro-Land (contd.)
– Adaptation of internal Organizational structures
– EU regulations crossing national boundaries
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Copyright © John Wiley & Sons, Inc. 2004
Chapter 3
Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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