International business and International Trade - Coursework Example

International business and International Trade 1. What are the primary forces driving the increased growth in globalization and international business? International business concerns international trade. Nowadays, most companies do business worldwide. The reasons are various, among them are the contacts that people have over a wide range of countries. These contacts enable people to acquire more products and services and have access to various resources. The countries have lowered import and export barriers and many local assets are owned by foreigners. An additional reason is the rapid technological evolution and expansion. With technology people are not restricted by time and space. They communicate with each other easily so business transactions are facilitated. Furthermore, consumers since they have access to products from different countries they exercise pressure to the local companies in terms of offering more modern and cheaper products or simply of importing foreign products that are non existent in the local country. The competition is increased globally since companies look for the best suppliers offering high quality at low prices, search for international human talents and acquire the best possible know how in order to satisfy better their customers’ needs. Another reason is the change of political situations. Since most countries adopt the free market approach of doing business they adopt at the same time democracy. (Alli, Winter and May, 2007). As a result of the above mentioned the cooperation of countries is expanded. The countries understood that may gain reciprocal advantages, they can react to problems better when they work together with other countries rather than trying to solve the problems alone. Lastly, the countries with globalization main deal with issues e.g. environmental issues that are not in their territory. 2. After summarizing the positive and negative aspects of offshoring, state whether you support or are against offshoring and why. Include any experiences you or someone you know has had in which offshoring is affected. Offshoring is when the production process is moved from one country to the other. The positive aspects of offshoring are the following: it reduces company costs e.g. in employee salaries. “improvements in technology will have as a result the need for fewer employees to accomplish the same task/work, particularly for the less skilled jobs that are easiest to offshore”. (Hackos, 2004). The technology improvements will help companies to reduce their costs and thus reduce prices or invest the saved money in Research and Development. As a result, companies will grow and therefore will raise their employment rate and at the same time, they will increase highly paid positions in their countries. Another positive aspect of offshoring is that the poverty level in poor countries has been decreased. This allowed them to decrease their unemployment rate and consequently people have more income to dispose thus imports from rich countries have been increased i.e. the decrease of poverty level in poor countries is beneficial both for the poor and the rich countries. The negative aspects are the following: the product prices are not reduced although the production costs are diminished. Jobs are replaced and working conditions are deteriorated. Jobs in poor countries are low paid. When a country asks for more then the Multinational Companies move to somewhere else, somewhere cheaper. Countries that have benefited from offshoring are China and India whereas the rest of the other under developed countries remain in poverty. According to Joseph Stiglitz, during the last yeast of the last century, the number of people living in poverty conditions has increased by 100 million.(Daniels, Radebaugh & Sullivan, 2007) A personal experience that I have is from a person I know in Greece. He had been working for the local cotton industry which was blooming in the country fifteen years ago producing excellent cotton. Due to offshoring, the local cotton industrialists moved their production to the neighbor Balkan Countries (Bulgaria, FYROM). As a result, a large number of people became unemployed. These vacant positions were not covered and the state did not manage to reeducate these people who in many cases would have been quite useless since most of them were over fifty years old and there was not any company wishing to hire them. 3. Do you believe globalization is inevitable? Summarize the three viewpoints and how the viewpoint selected by a CEO might impact how the CEO plans for the company’s future. Personally, I believe that globalization is inevitable. Countries are financially and commercially interrelated. Approximately, 25% of the products produced globally are sold to other countries rather than the country of origin. (Daniels, Radebaugh & Sullivan,2007). Import and export barriers have been decreased and there is an increased in global interdependence due to technology. The anti-globalization view supports the idea that globalization leads to growing income inequality, it is a threat to national sovereignty and that the economic growth that it brings is actually detrimental to the environment. (Daniels, Radebaugh & Sullivan, 2007). A CEO is “obliged” to follow modern practices i.e. globalization and act in the modern global environment. S/he should adapt his /her strategy and actually be in the position to answer the following questions: As Alli et al (2007) suggest the writer should ask himself the following questions: “What sort of guidelines and input should guide product design? How desirable are knowledge-sharing agreements? What are the ideal features of international business partners? How should management monitor competitive activity? How can competitive advantages be created and sustained? What degree of attachment is optimal to alternative and production locations around the world?” (Alli, Winter & May, 2007). 4. In a short essay, list the various factors one follows in an attempt to predict F/X value. Include in your answer the types of questions that would apply to each factor. Exchange rates are affected by many factors but in the end the laws of supply and demand dominate the resulting currency prices. There are three main factors that influence the supply and demand of a given currency and these are: economic factors, political situation and market psychology. (http://icicibankforexonline.com/knowledge_center.html) a. Economic Factors. What is the economic situation of the country of origin and of the country that the company wants to export its goods/services? The market reacts in a negative way when the country has large budget deficits. In addition, a balance of trade deficit will impact negatively the country’s currency. Another important issue is the inflation rate. When inflation is high, the purchasing power of people is eroded. A CEO apart from the above should examine, the GDP, the employment rate, the retail sales and the degree of capacity utilization in order to check the country’s economic position. b. Political conditions What is the political condition of the country where the company aims to export its products? If the country is politically unstable or the anticipation for a new government is negative this will bring negative results to the exchange rate of the currency. c. Market psychology What kind of market conditions prevail in the targeted country? If the market conditions are negative this will affect foreign exchange rate since investors will move to “safer” places. 5. In a short essay, discuss how exchange rate changes can affect companies’ marketing, production and finance. The management should plan for operating exposure since it involves the interaction of all the strategies concerned with finance, production, marketing and purchasing. The operating exposure is dependable on the degree to which an unexpected change in exchange rates bring changes that were not anticipated in sales volume, sales price or operating costs. According to the classical exchange rate theory, a change of foreign exchange rates will affect the consumers and their purchasing power thus reducing the company’s cash flows and as a result the elasticity of demand for the company’s products. The exchange rate changes will affect the competitors since it will affect their costs and thus impart their reaction. These changes will also affect suppliers since they will transfer the changes to the prices of the products sold to the country. In order to identify the company’s exposure to foreign exchange changes the following questions need to be answered (since foreign exchange changes affect the below factors): 1. It is imperative to implement a sales breakdown (domestic and foreign) and see where the company is selling. 2. Examine who are the main competitors (domestic and foreign). 3. Where is the place of production (domestic and foreign). 4. Examine the company’s inputs and where they come from (domestic and foreign). 5. Check how the company prices its inputs and outputs in domestic and global market and the currency of determination vs. currency of denomination As a solution, the company should select production sites of low cost, apply financial hedging, from the marketing side it should search for R&D and product differentiation, look for a flexible sourcing policy and in case where it is needed it should diversify the market. 6. In a short essay, discuss how companies use foreign exchange. Companies want foreign exchange in order to pay for products and services. They do not influence to a large extent the rate of foreign exchange as banks do but still their role is important. The fluctuations in foreign exchange make the product prices of a company cheap of expensive i.e. in the current financial crisis Euro is more expensive than $US dollar i.e. US products become cheaper so exports are strengthened and companies cash flow is improved. Companies in order to overcome currency risk, they have to hedge. This way the manager knows the risks of the company and they have a comparative advantage over stockholders. Another reason for hedging is that markets are not in balance and they have imperfections. Lastly, the reduction of risk in future cash flows improves the planning schedule of the company. (http://www.som.yale.edu/faculty/jmg93/intl/notes/L03%2015%20%20Exposure.pdf) References Alli,M.A., Winter,G.S., May, D.L.(2007). Globalization: Its Effects.International Business & Economics Research Journal.Vol.6, No.1 Daniels, J.,Radebaugh,L.,Sullivan,D.(2007). International Business. Prentice Hall. Daniels, J., Radebaugh,L., Sullivan,D. (2008). Environments and Operations. Prentice Hall. Hackos, W.Jr.,(2004).Positive Feedback.CIDM e-newsletter. 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