1. Global Marketing Management
Masaaki Kotabe & Kristiaan Helsen Third Edition John Wiley & Sons, Inc., 2004
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

2. Financial Environment
Chapter 3
Financial Environment
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

3. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
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
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

4. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
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
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

5. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

6. 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

7. 2. Development of Today’s International 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

8. 2. Development of Today’s International Monetary System (contd.)
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
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

9. 2. Development of Today’s International Monetary System (contd.)
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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

10. 2. Development of Today’s International Monetary System (contd.)
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 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

11. 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

12. 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
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

13. 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

14. 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

17. 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
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

19. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
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
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

20. 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:
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

21. 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

22. 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

23. 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

25. 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
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

26. 6. Economic and Financial Turmoil Around the World (contd.)
Look outside the region for expansion opportunities
Increase advertising in the region
Increase local procurement
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

27. 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.
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

28. 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
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

29. 7. Marketing in Euro-Land (contd.)
Adaptation of internal Organizational structures
EU regulations crossing national boundaries
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

30. Copyright © John Wiley & Sons, Inc. 2004
Chapter 3
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004