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INTERNATIONAL BUSINESS/ECONOMICS
MASTER OF BUSINESS ADMINISTRATION
(MBA)
Presented by:
Shepherd Muzamba
Bcom: Acc (Fort Hare)
MCom: Eco (Fort Hare)
MSc: Finance & Eco (Univ. of Manchester, UK)
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GLOBALISATION

Globalisation is the process of international integration arising from the
interchange of world views, products, ideas, and other aspects of culture. It is a
process that widens the world-wide exchanges of national and cultural
resources.

Globalisation is a process of interaction and integration among the people,
companies, and governments of different nations.

Globalisation is a process where an increased proportion of economic,
social and cultural activity is carried out across national borders.

“Globalisation is the process through which an increasingly free flow of
ideas, people, goods, services and capital leads to the integration of economies
and societies” (IMF).

The term globalisation is generally used to describe an increasing
internationalisation of markets for goods and services, the means of production,
financial systems, competition, corporations, technology and industries (OECD).
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GLOBALISATION…..cont

The world is moving away from self-contained national economies towards an
interdependent, integrated global economic system

Globalisation refers to the shift towards a more integrated and interdependent
world (global) economy.

Globalisation has two facets:
◦ the globalisation of markets
◦ the globalisation of production

The globalisation of markets refers to the merging of historically distinct and
separate national markets into one huge global marketplace.

In many industries, it is no longer meaningful to talk about the “South African
market” or the “American market”. Instead, we talk about one “global
market”.
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DRIVERS OF GLOBALISATION

Advances in transportation and telecommunications infrastructure, including the
wide use of internet, are major drivers of globalisation, generating further
interdependence of economic and cultural activities.

Some of the other key drivers of globalisation are trade transactions, capital and
investment movements, movement (or migration) of people and the dissemination of
knowledge through information technology (wide usage of internet and other IT
modes).

Factors driving trends towards greater globalisation include:
◦ Reduction in trade barriers, thus creating a free flow of goods, services and
capital
◦ Technological advancement
◦ Global bodies such as IMF,WB, G-20, UN etc
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THE GLOBALISATION DEBATE

Is the shift towards a more integrated and interdependent global economy a
good thing?

Supporters believe that increased trade and cross-border investment mean
lower prices for goods and services, greater economic growth, higher
consumer income and more jobs

Critics worry that globalisation will cause job losses, environmental
degradation and the cultural imperialism of global media and MNEs.
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GLOBALISATION, JOBS, AND INCOME

Globalisation critics argue that falling barriers to trade are destroying
manufacturing jobs in advanced countries

Supporters contend that the benefits of globalisation outweigh the costs—that
countries will specialize in what they do most efficiently and trade for other
goods—and all countries will benefit (trade creation).
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FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) occurs when a firm invests directly in new
facilities to produce and/or market in a foreign country

Once a firm undertakes FDI it becomes a multinational company
 Greenfield investments - the establishment of a wholly new operation in
a foreign country.
 Brownfield investment - acquisitions or mergers of existing firms in a
foreign jurisdiction.
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FOREIGN DIRECT INVESTMENT IN THE WORLD ECONOMY

The flow of FDI refers to the amount of FDI undertaken over a given time
period

The stock of FDI refers to the total accumulated value of foreign-owned
assets at a given time
 Outflows of FDI are the flows of FDI out of a country
 Inflows of FDI are the flows of FDI into a country
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TRENDS IN FDI

Anecdotal evidence suggests an increase in both the flow and stock of FDI in
the world economy

It is suggested that FDI has grown because of:
 the general shift toward stable democratic political institutions and free
market economies
 firms seek to ensure that they have a significant presence in many regions of
the world (geographical diversification).
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THE DIRECTION OF FDI

Most FDI has historically been directed at the developed nations of the world,
with the United States being a favourite

FDI inflows have remained high during the early 2000s for the United States,
and also for the European Union

South, East, and Southeast Asia, and particularly China, are now seeing an
increase of FDI inflows

Latin America (South America) is also emerging as an important FDI destination

Gross fixed capital formation summarizes the total amount of capital
invested in factories, stores, office buildings etc.

All else being equal, the greater the capital investment in an economy, the
more favourable its future prospects are. So, FDI can be seen as an important
source of capital investment and a determinant of the future growth rate of an
economy
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THE SOURCES OF FDI (IN TERMS OF COUNTRIES)

Since World War II, the U.S. has been the largest source-country for FDI

The United Kingdom, the Netherlands, France, Germany, and Japan are other
important source-countries

It is argued that Africa is rarely a source of foreign investment, but as a
destination with its major sources being the United States, Europe and
increasingly, China (problematic in my view).
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THE FORM OF FDI: ACQUISITIONS VERSUS GREENFIELD
INVESTMENTS

Most cross-border investments are in the form of mergers
and
acquisitions rather than greenfield investments

Firms prefer to acquire existing assets because:
 mergers and acquisitions are quicker to execute than greenfield
investments
 it is easier and perhaps less risky for a firm to acquire desired assets
than build them from the ground up
 firms believe that they can increase the efficiency of an acquired unit
by transferring capital, technology or management skills
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THE SHIFT TO SERVICES

FDI is shifting away from extractive industries and manufacturing towards the
services sector

The shift to services is being driven by:
 the shift in many developed countries toward the service sector ie as
countries become more developed their share of the service sector as a %
of GDP grows
 the fact that many services need to be produced where they are consumed
 a liberalisation of policies governing FDI in services
 the rise of internet-based global telecommunications
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WHY FOREIGN DIRECT INVESTMENT

?
Why do firms choose FDI instead of:
 exporting - producing goods at home and then shipping them to the
receiving countries for sale
 licensing - granting a foreign entity the right to produce and sell the
firm’s product in return for a royalty fee on every unit that the foreign
entity sells

It is because:
 An export strategy can be constrained by transportation costs and
trade barriers
 Foreign direct investment may be undertaken as a response to actual or
potential future trade barriers such as import tariffs or quotas
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WHY FOREIGN DIRECT INVESTMENT
?..cont
 licensing may result in a firm giving away valuable technological knowhow to a potential foreign competitor
 licensing does not give a firm the tight control over manufacturing,
marketing, and strategy in a foreign country that may be required to
maximise its profitability
 a problem arises with licensing when the firm’s competitive advantage is
not based on its products but on the management, marketing, and
manufacturing capabilities.
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BENEFITS AND COSTS OF FDI
Host-Country Benefits

Government policy is often shaped by a consideration of the costs and benefits
of FDI
 Resource transfer effects - FDI can make a positive contribution towards
a host economy by supplying capital, technology, and management resources
that would otherwise not be available
 Employment effects - FDI can bring jobs to a host country that would
otherwise not be created there
 Balance of payments effects – improvements in the BOP through
increased exports
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BENEFITS AND COSTS OF FDI

The current account is a record of a country’s export and import of goods and
services

Governments typically prefer to see a current account surplus than a deficit

FDI can help a country to achieve a current account surplus if the FDI is a
substitute for the importation of goods and services, and if the MNE uses its
subsidiary to export goods and services to other countries

Effects on competition and economic growth-FDI in the
form of
greenfield investment increases the level of competition in a market, driving
down prices and improving the welfare of consumers (citizens).
 Increased competition can lead to increased productivity growth, product
and process innovation, and greater economic growth
 Provision of learning experiences for local firms
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THE FOREIGN EXCHANGE MARKET

The foreign exchange market is the market in which currencies are traded
and there is no central marketplace for currency exchange; trade is conducted
over the counter

A firm’s sales, profits, and strategy are affected by events in the foreign
exchange market

The foreign exchange market is a market for converting the currency of one
country into that of another country

The exchange rate is the rate at which one currency exchanged against
another eg R9.80/$.
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ECONOMIC THEORIES OF EXCHANGE RATE
DETERMINATION

Exchange rates are determined by the demand and supply for different
currencies.

Exporters sell foreign currency and importers buy foreign currency

Three factors impact future exchange rate movements:
 a country’s price inflation
 a country’s interest rate
 market psychology
• Foreign exchange depreciation refers to a situation where more of a
domestic currency is needed to purchase the same amount of foreign
currency. e.g. exchange rate changes from R6/$ to R9/$
 Foreign exchange appreciation refers to a situation where less of a
domestic currency is required to purchase the same amount of foreign
currency. e.g. exchange rate changes from R9.70/$ to R8.9/$
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EXCHANGE RATE DETERMINATION: FREE FLOAT

Under a flexible or floating exchange rate the value of a country’s currency
changes quite frequently.

The market rate will depend on the demand for and supply of that currency in
the FOREX markets.

When there is no intervention in the free market operations by a government
agency a “clean float” is said to exist.
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EXCHANGE RATE DETERMINATION: FREE FLOAT
The demand curve (DD) indicates the quantity of Australian dollars that buyers (those people who hold
US dollars) are willing to purchase at each possible exchange rate.
The supply curve (SS) shows the quantity of Australian dollars that will be offered for sale (those people
who hold Australian dollars) at each exchange rate.
At the equilibrium exchange rate of $A1.00 = $US0.50 the equilibrium quantity supplied and demanded is
Q1 Australian dollars. At an exchange rate above equilibrium, such as $A1.00 = $US0.60, an excess supply
of Australian dollars exists and market forces will force the exchange rate down towards equilibrium.
If the exchange rate is below equilibrium, such as $A1.00 = $US0.40, an excess demand situation exits and
market forces will put upward pressure on the value of the Australian dollar
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CURRENCY DEPRECIATION
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THE FUNCTIONS OF THE FOREIGN EXCHANGE
MARKET

The foreign exchange market is used to:
 convert the currency of one country into the currency of another
 provide some insurance against foreign exchange risk (the adverse
consequences of unpredictable changes in exchange rates)
 International companies use the foreign exchange market when:
 the income they receive for selling exports, the income they receive from
foreign investments, or the income they receive from licensing agreements
with foreign firms are in foreign currencies
 they must pay a foreign company for its products or services in its country’s
currency
 they have spare cash that they wish to invest for short terms in another
country
 they are involved in currency speculation (the short-term movement
of
funds from one currency to another in the hopes of profiting from shifts in
exchange rates)
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INSURING AGAINST FOREIGN EXCHANGE RISK

The foreign exchange market can be used to provide insurance to protect
against foreign exchange risk (the possibility that unpredicted changes in
future exchange rates will have adverse consequences for the firm)

A firm that insures itself against foreign exchange risk is insuring against
exchange rates movements

The spot exchange rate is the rate at which a foreign exchange dealer
converts one currency into another currency on a particular day

Spot rates change continually depending on the supply and demand for that
currency and other currencies

To insure or hedge against a possible adverse foreign exchange rate movement,
firms engage in forward exchanges

A forward exchange occurs when two parties agree to exchange currency and
execute the deal at some specific date in the future
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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—it is not located in any one place

The most important trading centers are London, New York, Tokyo, and
Singapore

High-speed computer linkages between trading centers around the globe
have effectively created a single market—there is no significant difference
between exchange rates quotes in the differing trading centers

If exchange rates quoted in different markets were not essentially the same,
there would be an opportunity for arbitrage (the process of buying a
currency low and selling it high), and the gap would close

Most transactions involve dollars on one side—it is a vehicle currency
along with the euro, the Japanese yen, and the British pound
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PRICES AND EXCHANGE RATES

The law of one price states that in competitive markets, free of transportation
costs and barriers to trade, identical products sold in different countries must
sell for the same price when their price is expressed in terms of the same
currency

Purchasing power parity (PPP) theory argues that given relatively efficient
markets (markets in which few impediments to international trade and
investment exist) the price of a “basket of goods” should be roughly equivalent
in each country
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PRICES AND EXCHANGE RATES….CONT

A positive relationship between the inflation rate and the level of money
supply exists

When the growth in the money supply is greater than the growth in output,
inflation will occur

PPP theory suggests that changes in relative prices between countries will lead
to exchange rate changes, at least in the short run

A country with high inflation should see its currency depreciate relative to
others and the opposite should be equally true
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EXCHANGE RATE FORECASTING

The efficient market school argues that forward exchange rates do the best
possible job of forecasting future spot exchange rates

The inefficient market school argues that companies can improve the foreign
exchange market’s estimate of future exchange rates by investing in forecasting
services
Approaches to Forecasting

There are two schools of thought on forecasting:
 Fundamental analysis draws upon economic factors like interest rates,
monetary policy, inflation rates, or balance of payments information to
predict exchange rates
 Technical analysis charts trends with the assumption that past trends and
waves are reasonable predictors of future trends and waves
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AND NOW……………..
Questions
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