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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) 1 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). 2 .. 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”. 3 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 4 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. 5 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). 6 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. 7 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 8 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). 9 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 10 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). 11 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 12 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 13 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 14 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. 15 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 16 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 17 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/$. 18 ECONOMIC THEORIES OF EXCHANGE RATE DETERMINATION Exchange rates are determined by the demand and supply for different currencies. Exporters sell foreign currency and importers buy foreign currency Three factors impact future exchange rate movements: a country’s price inflation a country’s interest rate market psychology • Foreign exchange depreciation refers to a situation where more of a domestic currency is needed to purchase the same amount of foreign currency. e.g. exchange rate changes from R6/$ 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/$ 19 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. 20 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 21 CURRENCY DEPRECIATION 22 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) 23 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 24 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 25 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 26 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 27 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 28 AND NOW…………….. Questions 29