ch03.ppt

Chapter 3 Copyright (c) 2009 John Wiley & Sons, Inc. 1
Global Marketing Management, 5e
Chapter 3
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 the Euro Area

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 scope and nature of the system
has changed and how it has worked over time.

Introduction
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 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 US currency to
depreciate due to persistent US trade deficits.

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.

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
Please Insert Exhibit 3-1 Here
“Foreign Exchange Rate Fluctuations over the
Past 30 Years”

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.

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.

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

Exchange Rates
Please insert latest
Exhibit 3-2 Here
“Big Mac Index”
 The Economist
publishes a PPP study
(Big Mac Index) every
year based on
McDonald’s Big Mac
hamburger (see
Exhibit 3-2).

Exchange 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.

Exhibit 3-3: Factors Influencing Foreign
Exchange Rates

Exchange 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

Exhibit 3-4: Foreign Exchange Rates
Please Insert latest Exhibit 3-4 Here
“Foreign Exchange Rates”

 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 – 2005
Please Insert Exhibit 3-5 Here
“U.S. Balance of Payments, 1990-2005”

 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.

 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.

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 (Exhibit 3-6).
 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.

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.

Exhibit 3-6: Mechanism of the Asian
Financial Crisis

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

Exhibit 3-7: Changes in the Consumption
Pattern During a Recession

 The European Union (EU) consists of 27
countries. The ten central and eastern European
countries are less developed than the others. (See
Exhibit 3-8.)
 The Euro zone economies represent 30% of the
world’s GDP and 20% of overall international
trade.
 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 3-8: 16 Euro Zone Countries
Please insert latest Exhibit 3-8 here
“16 Euro Zone Countries”

 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
– EU regulations crossing national boundaries

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