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- 3. BY THE TIME YOU COMPLETE THIS CHAPTER, YOU SHOULD BE ABLE TO: Identify the primary reasons companies choose to go “global.” Explain how exchange rates work and interpret different exchange rate quotations. Discuss the intuition behind interest rate parity and purchasing power parity. Explain the different opportunities and risks that investors face when they invest overseas.
- 4. MNCs are defined as an enterprise that is headquartered in one country but has operations in one or more countries.
- 5. DID YOU KNOW THAT? Almost ¾ of the total GDP of South Korea comes from only 5 MNCs of South Korea.
- 9. DEFINITION BY STRUCTURE This definition measures MNCs by how many countries it is operating in and by the citizenship of its corporate owners and top managers.
- 10. Coca Cola operates in approximately 200 nations and has widespread share holdings.
- 12. Definitions by performance depend on such characteristics as earnings, sales and assets. These performance characteristics indicate the extent of the commitment of corporate resources to foreign operations and the amount of reward from that commitment.
- 13. Definition by Behaviour According to this definition, it is the behavioural characteristicsof the top management which decides whether a firm is a multinational or not.
- 14. Some of the key reasons of crossing national boundaries are as follows:
- 15. To seek production efficiency To avoid political, trade and regulatory hurdles To broaden markets To seek raw materials and new technology To protect processes and products To diversify
- 16. TO SEEK PRODUCTION EFFICIENCY As competition increases in their domestic marketplace and as demand increases in other markets, companies often conclude that they must produce their products overseas.
- 17. To avoid political, trade and regulatory hurdles Why does the government impose tariffs, quotas and other restrictions on imported goods?
- 18. To broaden markets Product life-cycle theory
- 19. TO SEEK RAW MATERIALS AND NEW TECHNOLOGY Supplies of many essential raw materials are geographically dispersed; so companies must go where the materials are found.
- 20. TO PROTECT PROCESSES AND PRODUCTS
- 24. INTERNATIONAL MONETARY SYSTEM The framework within which exchange rates are determined; and it ties global currency, money, capital, real estate, commodity, and real asset markets into a network of institutions and instruments regulated by intergovernmental agreements and driven by each country’s unique political and economic objectives.
- 25. INTERNATIONAL MONETARY TERMINOLOGY 1. An exchange rate is the price one country’s currency in terms of another country’s currency. 2. A spot exchange is the quoted price for a unit of foreign currency to be delivered “on the spot” or within a very short period of time. 3. A forward exchange rate is the quoted price for a unit of foreign currency to be delivered at a specified date in the future. 4. A fixed exchange rate for a currency is set by the government and is allowed to fluctuate only slightly around the desired rate, which is called the par value. 5. A floating or flexible exchange rate is not regulated by the government, so supply and demand in the market determine the currency’s value. 6. Devaluation or revaluation of a currency is the technical term referring to the decrease of increase in the stated value of a currency whose value is fixed.
- 27. • Occurs when the exchange rate is determined by supply and demand for the currency Free- Floating Regime • Occurs when there is significant government intervention to control the exchange rate via manipulation of the currency’s supply and demand. Managed- Floating Regime
- 29. Canadian dollar: 1/1.256780 = 0.790972 1/0.790972 = 1.256780
- 30. INTERBANK FOREIGN CURRENCY QUOTATION American terms – The foreign exchange rate quotation that represents the number of American dollars that can be bought with one unit of local currency. Direct quotation – The home currency price one unit of the foreign currency. Indirect quotation – The foreign currency price of one unit of the home currency.
- 31. CROSS RATE – the exchange rate between any two currencies.
- 32. EXAMPLE: A German executive is flying to Tokyo on business. The exchange rate in which he or she is interested in is not Euro or Yen per dollar – rather, the issue is how many yen can be purchased with a euro.
- 33. INTERBANK FOREIGN CURRENCY QUOTATION Spot rates: € 1.182158 ¥ 0.009179 € 1.182158/$1 ¥ 0.009179/$1 = €128.7894/ ¥
- 34. We could find a number of yen that one euro could buy: Spot rates: € 1.182158 ¥ 0.009179 € 1.182158/$1 ¥ 0.009179/$1 = €128.7894/ ¥
- 35. EXERCISES: Assume that today 1 Canadian dollar is worth 0.75 U.S dollar. How many Canadian dollars would you receive for 1 U.S dollar? Assume that 1 US dollar can be exchanged for 105 Japanese yen of for 0.80 euro. What is the euro/yen exchange rate?