Lecture Global marketing management (7th edition): Chapter 3 - Masaaki Kotabe, Kristiaan Helsen

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,...

Chapter Overview

1 Historical Role of the U.S Dollar

2 Development of Today’s International Monetary

System

3 Foreign Exchange and Foreign Exchange Rates

4 Balance of Payments

5 Economic and Financial Turmoil Around the World

6 Marketing in the Euro Area

• 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 it has worked over

• 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

1 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

2 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

2 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

Exhibit 3-1: Foreign Exchange Rate

Fluctuations over the Past 30+ Years

2 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.

2 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

2 Development of Today’s International

• 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 EU’s euro, the British pound, the Chinese yuan, and the

Japanese yen

3 Foreign Exchange and Foreign

Where R = the exchange rate quoted in euro/$,

Infl = inflation rate,

t = time period.

3 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

3 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

Exhibit 3-4: Foreign Exchange Rates

4 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

Exhibit 3-5: U.S Balance of Payments, 1990 –

2014

4 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 do not give the investors effective control over the investment

4 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.

5 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

5 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

5 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

• 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

Exhibit 3-6: Changes in the Consumption

Pattern During a Recession

6 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

Exhibit 3-7: 19 Eurozone Countries

(as of 1/1/2015)

6 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