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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 1
Global Marketing Management, 4e
Chapter 3
FinancialEnvironment
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 2
Chapter Overview
1. Historical Role of the U.S. Dollar
2. Development of Today’s InternationalMonetary System
3. Fixed Versus Floating Exchange Rates4. Foreign Exchange and Foreign Exchange
Rates
5. Balance of Payments
6. Economic and Financial Turmoil Around theWorld
7. Marketing in Euro-Land
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 3
Introduction
Foreign exchange is the monetary mechanismallowing the transfer of funds from one nation toanother.
The existing international monetary system always
affects companies as well as individuals whenever they buy or sell products and services traded acrossnational borders.
Although international marketers have to operate in acurrently existing international monetary system for international transactions and settlements, they shouldunderstand how the scope and nature of the systemhas changed and how it has worked over time.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 4
Introduction
The 1990s – particularly, the second half of thedecade – proved to be one of the most turbulent
periods in recent history.
The adoption of the euro as a common currency inthe European Union in 1999 is just one example of
the many changes taking place in today’sbusiness world.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 5
1. Historical Role of the U.S. Dollar
Each country has its own currency through whichit 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 ounceof gold. The dollar became the commondenominator in world trade.
In the early seventies, the U.S. dollar standardwas dropped. The result has been more volatilityand a more likely tendency for the US currency todepreciate due to persistent US trade deficits.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 6
2. Development of Today’s International
Monetary System
Post-World War II developments had long-rangeeffects on international financial arrangements.
The negotiations to establish the postwar
international monetary system took place at theresort of Bretton Woods in New Hampshire in1944 which established the International MonetaryFund (IMF).
President Richard Nixon suspended theconvertibility of the dollar to gold on August 15,1971.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 7
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 growthof international trade
– To promote exchange stability and to maintainorderly exchange arrangements
– To assist in the establishment of a multilateralsystem of payments in respect to currenttransactions between member nations; toeliminate foreign exchange restrictions
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 8
2. Development of Today’s International
Monetary System
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 9
2. Development of Today’s
International Monetary System
– To make available the general resources of thefund 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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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 10
2. Development of Today’s
International Monetary System
The value of SDRs is determined by a weightedaverage 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 evenprevent future crises.
Another creation of the Bretton Woods Agreementwas the International Bank for Reconstruction andDevelopment (World Bank), supporting economicdevelopment and poverty reduction projects.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 11
3. Fixed Versus Floating Exchange Rates
Two kinds of currency floats encompass free/cleanfloat (allows no government intervention) andmanaged 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 threemajor currency blocs: The U.S. dollar, theJapanese yen, and the EU’s euro.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 12
4. Foreign Exchange and ForeignExchange Rates
One of the most fundamental determinants of theexchange rate is Purchasing Power Parity (PPP).
Formula for PPP:
(1 + Infl Britain)R t = R 0 * _____________
(1 + Infl U.S.)
Where R = the exchange rate quoted in acurrency
Infl = Inflation rate
t = time period
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 13
4. Foreign Exchange and ForeignExchange Rates
The Economistpublishes a PPPstudy (Big Mac
Index) every year based onMcDonald’s Big
Mac hamburger
(see Exhibit 3-2).
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 14
4. Foreign Exchange and ForeignExchange Rates
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. – 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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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 15
4. Foreign Exchange and Foreign Exchange Rates
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 16
4. Foreign Exchange and ForeignExchange Rates
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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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 17
4. Foreign Exchange and Foreign ExchangeRates
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 18
5. Balance of Payments
The balance of payment (BOP) of a nationsummarizes all the transactions that take placebetween 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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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 19
5. Balance of Payments
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 20
5. Balance of Payments
The BOP in capital account, the mirror image of the BOP in the current account, summarizesfinancial transactions and is divided into short -and
long-term capital accounts. Direct investments are controlled by residents of
other nations.
Portfolio investment includes long-terminvestments that do not give the investors effectivecontrol over the investment.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 21
5. Balance of Payments
There are three balances to identify on the BOP statementof a country:
– Balance of merchandise trade account
– The current account (including merchandise trade, tradein 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 ratesor a nation’s currency and its value with respect to thecurrencies of other nations.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 22
6. Economic and Financial Turmoil Around the World
The Asian financial crisis in the latter half of the1990s escalated into the biggest threat to globalprosperity.
China’s devaluation of its currency (yuan)triggered the Asian financial crisis in 1994.
Because of this financial crisis, Thailand lostalmost 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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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 23
6. 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 Japaneseeconomic recovery and China’s surging importdemand.
The South American Financial Crisis took place in
2001 when Argentina defaulted and lost nearly 40percent of its currency value.
The Argentina crisis also hurt Brazil.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 24
6. Economic and Financial Turmoil Around the World
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 25
6. Economic and Financial Turmoil Around the World
Responses to the regional financial crises. – Consumer response to the recession (see Exhibit 3-7)
– 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
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 26
6. Economic and Financial Turmoil Around the World
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 27
7. Marketing in Euro-Land
Today the European Union (EU) consists of 25countries. Of those 25, the ten central and easternEuropean countries are less developed than theprevious 15 countries (see Exhibit 3-8).
The Euro zone economies represent a combined
33 percent of the world’s gross domestic productand 20% of overall international trade.
The Maastricht Treaty which was signed onFebruary 7, 1992 spelled out the guidelines toward
European Monetary Union (EMU). The European Central Bank is headquartered in
Frankfurt, Germany.
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Chapter 3 Copyright (c) 2007 John Wiley & Sons, Inc. 28
7. Marketing in Euro-Land
On January 1, 2002, the euro notes and coinsbegan to replace the German mark, the Dutchguilder 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
– EU regulations crossing national boundaries