Global Marketing Management Masaaki Kotabe & Kristiaan Helsen Third Edition John Wiley & Sons, Inc., 2004



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Global Marketing Management

  • Masaaki Kotabe & Kristiaan Helsen Third Edition John Wiley & Sons, Inc., 2004


Financial Environment

  • Financial Environment



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



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



Introduction (contd.)

  • 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.



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 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.



Post-World War II developments had long-range effects on international financial arrangements.

  • 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.



The IMF oversees the international monetary system and its functions are as follows:

  • 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


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 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.


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.

  • 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.



3. Fixed Versus Floating Exchange Rates

  • 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.



4. Foreign Exchange and Foreign Exchange Rates

  • 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



4. Foreign Exchange and Foreign Exchange Rates (contd.)

  • 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.


4. Foreign Exchange and Foreign Exchange Rates (contd.)

    • 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.







4. Foreign Exchange and Foreign Exchange Rates (contd.)

  • 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





5. Balance of Payments

  • 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


5. Balance of Payments (contd.)

  • The BOP on capital 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.

  • There are three balances to identify on the BOP statement of a country:



5. Balance of Payments (contd.)

    • 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.



6. 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 Malaysian ringgit lost some 40 percent of its value during the same period.



6. Economic and Financial Turmoil Around the World (contd.)

  • 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.





6. Economic and Financial Turmoil Around the World (contd.)

  • 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


6. Economic and Financial Turmoil Around the World (contd.)

      • Look outside the region for expansion opportunities
      • Increase advertising in the region
      • Increase local procurement


7. Marketing in Euro-Land

  • 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.



7. Marketing in Euro-Land (contd.)

  • 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


7. Marketing in Euro-Land (contd.)





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