Global Awareness for

Corporate Decision Making

Day 1

Dr. Balraj Kistow

 Workshop Aims
• The purpose will be to develop individuals with a
global mindset aiming to make a positive impact
on the world by:
– Understanding of the complexities of managing
businesses effectively in the global environment; and
– Having an awareness of the impact of cross border
deals on their country and communities in which they
operate and on larger global issues.
– Respect for diverse cultures, social norms and
legitimate business practices;
 INTERNATIONAL BUSINESS

By definition INTERNATIONAL BUSINESS means “between

or among nations”.

Transaction that are devised and carried out across

national borders to satisfy the objectives of individuals
and organizations.

GLOBAL BUSINESS takes place on a worldwide scale

rather than among a few nations—emphasis is on
interconnections.
 INTERNATIONAL BUSINESS

Complexities of Managing International

Business:
 Countries are different – no one method fits all
 Involves greater complexities – where to locate to
minimize cost or control over dispersed location
 Requires an understanding of the rules governing
international trade and investment
 Dealing with foreign exchange risk
 The Nature of International Business

• All value-adding activities including sourcing,

manufacturing, and marketing, can be
performed in international locations
• The subject of cross-border trade can be
products, services, capital, technology, know-
how, and labor
• Firms internationalize via exporting, foreign
direct investment, licensing, franchising, and
collaborative ventures

International Business: Strategy,

Management, and the New Realities
The Four Risks of International Business
 The Four Types of Risks in IB
• Cross-cultural risk: a situation or event where a
cultural miscommunication puts some human value
at stake
• Country risk: potentially adverse effects on company
operations and profitability holes by developments in
the political, legal, and economic environment in a
foreign country
• Currency risk: risk of adverse unexpected
fluctuations in exchange rates
• Commercial risk: firms potential loss or failure from
poorly developed or executed business strategies,
tactics, or procedures
International Business: Strategy,
Management, and the New Realities
 THE WORLD TODAY
 Decreased Barriers – cross-border trade and
investments
 Loosening of regulatory and Admin barriers
 Shrinking Distance – telecoms & transport
 Merging of Cultures and Taste
 National Economies merging into interdependent
global economy
 US$4.5 trillion in foreign transaction everyday
 Security issues transcends national borders
 International efforts for global issues – e.g debts and
security, climate change, civil conflicts.
 Increased levels of nationalism
The Process of:
 Globalization of Markets: A Macro Concept

• Market globalization refers to the interconnectedness

of national economies and growing interdependence of
buyers, producers, suppliers, and governments in
different countries.

• Globalization of production - allows firms to view the

world as one large marketplace for goods, services,
capital, labor, and knowledge.

International Business: Strategy,

Management, and the New Realities
 DRIVERS OF GLOBALIZATION
 Two mega trends have altered the international
business landscape: globalization and
technological advances.

 Declining trade and investment barriers – rise of

global institutions
 Technological changes:
Microprocessors and telecoms
Internet and WWW
Transport
 Activity 1
• Debating the Merits of Globalization.
 Political Economy
The term POLITICAL ECONOMY is used to
stress that the political, economic and legal
systems of a country are not independent of
each other. They interact and influence each
other and in so doing affect the level of
economic well-being of a country
 Political Ideologies (1 of 3)
“The system of government in a nation”

Collectivism:
 A political system that stresses the primacy of
collective goals over individual goals
 Advocated by Plato in the “Republic”
 In modern times, the Socialists advocate Collectivism
Socialism:
 Trace intellectual roots to Karl Marx
Argued that the pay of workers does not reflect
the full value of their labor
 Advocated state ownership of production, distribution, and
exchange (businesses), thereby ensuring that workers
were fully compensated for their labor
 Political Systems (2 of 3)
“The system of government in a nation”

Individualism:
 Opposite of Collectivism
 Guaranteed individual rights and freedom
 Individual should have freedom in political
and economic pursuits
 Advocated by Aristotle
 Private property is more productive than
communal property and will thus stimulate progress
 Revived in the 16th century in England and Netherlands
Hume (1711-1776)
Adam Smith (1723-1790)
John Stuart Mill (1806-1873)
 Political Systems (3 of 3)
“The system of government in a nation”

Capitalism:
 All factors of production should be privately owned
 Government should be restricted to only those functions
which the private sector cannot perform:
public roads, national defense, international relations
 No country practices such laissez faire
literally, “let do”
Social Democracy:
in French
 Government ownership of the basic means of production,
distribution, and exchange
 Social democratic governments in practice act more
capitalist than socialist
i.e. Sweden, Germany
 Democracy versus Totalitarianism

Democracy Totalitarianism
 Government by the  Government in which
people -- exercised one person or political
either directly or party exercises
through elected absolute control over
representatives all spheres of human
life and opposing
political parties are
prohibited.
 Economic Systems
• Market Economy:
All productive activities are privately owned -- most OECD
• Command Economy: A group of 29 “wealthy” nations

Goods and services produced, their quantity, and prices are

determined by the government -- Cuba and North Korea
• Mixed Economy:
Parts of the economy are left to private ownership and free
market mechanisms while other sectors are state-owned
and have government planning -- adapted by most nations
• State-Directed Economy:
The state plays a significant role through its “industrial policy”
and setting national goals -- Japan and South Korea
 Legal Systems
Rules, or laws, that regulate behavior
and the processes by which laws are
enforced and grievances redressed

• Businesses must observe:

– Home country laws
– Host country laws
– International Laws and Treaties
 Legal Systems

• Common Law – based in tradition,

precedents and customs (England, US)
• Civil Law Systems – based on a detailed set
of laws organized into codes (France, Japan)
• Theocratic Laws – based on religious
teachings (Pakistan, Iran Saudi Arabia)
 Property Rights
The legal rights over the use of a resource and
the income derived from it. It can be violated
by:
Private Action:
Theft, piracy, blackmail, kidnapping and the like by
private individuals and groups.
Public Action and Corruption:
Violation of property rights by public officials (such
as politicians and government officials) by
extorting income or resources from property
holders
 Differences in Economic Development

Gross National Product (GNP)

Common yardstick for measuring
economic activity
Measures total value of goods and Both give
services produced annually a static
picture of
Does not consider the differences in development
costs of living
Purchasing Power Parity (PPP)
Uses U.S.A. cost of living for basis of
adjustment among countries
 GDP Estimates 2050
2050 Country 2000 2010 2020 2030 2040 2050
Rank Name GDP GDP GDP GDP GDP GDP
1 CHI China 1078 2998 7070 14312 26439 44453
European
* EU 9395 12965 16861 21075 28323 35288
Union *
United
2 USA 9825 13271 16415 20833 27229 35165
States
3 IND India 469 929 2104 4935 12367 27803
4 JPN Japan 4176 4601 5221 5810 6039 6673
5 BRA Brazil 762 668 1333 2189 3740 6074
6 RUS Russia 391 847 1741 2980 4467 5870
United
7 UK 1437 1876 2285 2649 3201 3782
Kingdom
8 GER Germany 1875 2212 2524 2697 3147 3603
9 FRA France 1311 1622 1930 2267 2668 3148
10 ITA Italy 1078 1337 1553 1671 1788 2061
Amartya Sen- Theory of social development
• Development should be measured less
by material output measures such as
GNP per capita and more by the
capabilities and opportunities that
people enjoy
 This requires removal of:
 Poverty
 Tyranny
 Poor economic opportunities
 Systemic social deprivation
 Neglect of public facilities
 Intolerance of repressive states
• U.N.’s Human Development Index
 HDI is based on:
 Life expectancy at birth
 Educational attainment
 Whether average income is sufficient
 Political Economy and Economic
Development

Innovation and Entrepreneurship are Engines of Growth

Innovation and Entrepreneurship Require a Market Economy

Innovation and Entrepreneurship Require Strong Property Rights

What kind of
political system?

Economic Progress Most Often Begets Democracy

 Plantation Economy & Development

Typical features of Caribbean economies:

Concentrated Production
Weak internal linkage
Production of goods and services dominated
by government and public enterprises.
(Best and Levitt 1975)
 Activity 2
• You have been asked by your company to
explore the prospects of entering new markets
within LATAM.
• What steps would you take to mitigate against
country and commercial risk?
The Foreign Exchange
Market
 The Nature of the Foreign
Exchange Market

• The foreign exchange market is a global network of banks, brokers

and foreign exchange dealers connected by electronic
communications systems
• Everyday approximately $1,200b are traded on FX markets
• The most important trading centers include: London, New York,
Tokyo, and Singapore
• London’s dominance is explained by:
– History (capital of the first major industrialized nation)
– Geography (between Tokyo/Singapore and New York)
• Two major features of the foreign exchange market:
– The market never sleeps
– Market is highly integrated
24 Hour Trading
 The Functions of the
Foreign Exchange Market

• The foreign exchange market serves two main functions:

– Convert the currency of one country into the currency of

another so that we can purchase foreign goods.
– Provide some insurance against foreign exchange risk
• Foreign exchange risk: the adverse consequences of
unpredictable changes in the exchange rates
 Currency Conversion

• Consumers can compare the relative prices of goods and

services in different countries using exchange rates
• International business have four main uses of foreign
exchange markets
– To exchange currency received in the course of doing
business abroad back into the currency of its home
country
– To pay a foreign company for its products or services in its
country’s currency
– To invest excess cash for short terms in foreign markets
– To profit from the short-term movement of funds from one
currency to another in the hopes of profiting from shifts in
exchange rates, also called currency speculation
 Insuring against Foreign
Exchange Risk

• A spot exchange occurs

when two parties agree to
exchange currency and
execute the deal
immediately
• The spot exchange rate is
the rate at which a foreign
exchange dealer converts
one currency into another
currency on a particular day
– Reported daily
– Change continually
 Cross Rate

• Exchange rate calculated using two other exchange rates

• Use direct or indirect exchange rates against a third currency

Dollar Euro Pound SFranc Peso Yen CdnDlr

Canada 1.3931 1.6466 2.4561 1.0695 0.1198 0.0122 ....
Japan 114.50 135.32 201.85 87.898 9.8420 .... 82.185
Mexico 11.633 13.749 20.510 8.9309 .... 0.1016 8.3504
Switzerland 1.3026 1.5395 2.2965 .... 0.1120 0.0114 0.9350
United Kingdom 0.5672 0.6704 .... 0.4355 0.0488 0.0050 0.4071
Euro 0.8461 .... 1.4917 0.6495 0.0727 0.0074 0.6073
United States .... 1.1819 1.7630 0.7677 0.0860 0.0087 0.7178
 Insuring against Foreign
Exchange Risk

• Forward exchanges occur when two parties agree to exchange

currency and execute the deal at some specific date in the
future
– Exchange rates governing such future
transactions are referred to as forward exchange
rates
– For most major currencies, forward exchange
rates are quoted for 30 days, 90 days, and 180
days into the future
• When a firm enters into a forward exchange contract, it is
taking out insurance against the possibility that future
exchange rate movements will make a transaction unprofitable
by the time that transaction has been executed
 Swaps Options Futures

Currency swap
Simultaneous purchase and sale of foreign exchange
for two different dates. A common kind of swap is spot against forward

Currency option
Option to exchange a specific amount of a currency on a
specific date at a specific rate

Currency futures contract

Contract requiring the exchange of a specific amount of a currency
on a specific date at a specific rate, with all conditions
fixed and not adjustable
 Forward vs Futures

• Forwards – tailored made by the banker in terms of

quantities, time and rate. This is made for the
merchant.

• Futures – fixed in terms of delivery date and

quantity. Available for most widely traded currency
in specific markets.
 Economic Theories of
Exchange Rate Determination

• Exchange rates are determined by the demand and supply

of one currency relative to the demand and supply of
another
• Price and exchange rates:
– Law of One Price
– Purchasing Power Parity (PPP)
– Money supply and price inflation
• Interest rates and exchange rates
• Investor psychology and “Bandwagon” effects
 Law of One Price

• In competitive markets free of transportation costs and

trade barriers, identical products sold in different
countries must sell for the same price when their price is
expressed in terms of the same currency
• Example: US/French exchange rate: $1 = .78Eur
A jacket selling for $50 in New York should retail for
39.24Eur in Paris (50 x .78)
 Purchasing Power Parity

• By comparing the prices of identical products in different currencies,

it should be possible to determine the ‘real’ or PPP exchange rate - if
markets were efficient

• In relatively efficient markets (few impediments to trade and

investment) then a ‘basket of goods’ should be roughly equivalent in
each country. If a basket of good cost $US200.00 and Y20,000 then
the PPP exchange rate would be $1 = Y100

• The Big Mac Index - an informal way of measuring the (PPP)

between two currencies and provides a test of the extent to which
market exchange rates result in goods costing the same in different
countries.
 Big Mac Index
it "seeks to make exchange-rate theory a bit more digestible".

• The Big Mac PPP exchange rate between two

countries is obtained by dividing the price of a Big
Mac in one country (in its currency) by the price of
a Big Mac in another country (in its currency). This
value is then compared with the actual exchange
rate; if it is lower, then the first currency is under-
valued (according to PPP theory) compared with the
second, and conversely, if it is higher, then the first
currency is over-valued.
• For example, suppose the price of a Big Mac is
$2.50 in the US and £2.00 in the UK; thus, the PPP
rate is 2.50/2.00 = 1.25. If, in fact, the $1US buys
£0.50 (or £1 = $2.00), then it is under-valued (1.25
< 2.00) with the respect to the pound by 38% in
comparison with the price of the Big Mac in both
countries.
2007
 Activity 2
• How can an understanding of political economy
help to reduce risk in international business?
• Briefly describe the purpose and structure of the
following reports/site and explain how the
information can help organizations in reducing
risk in IB:
1. WEF Global Competitiveness Report
2. Human Development Index
3. GlobalEDGE
4. World Bank Doing Business Report
5. Corruption Index