MNI 301 J – Notes as per the preparation slides.Slide 1- Globalisation:

What is Globalisation?Globalisation can be seen from 2 perspectives the first being from a sociological perspective and the second from the economic perspective:

Sociological perspective suggests that a process of organizational transformation of social relations and transactions. The process that diminishes international borders across the globe thereby increasing global cultural homogeneity.

From an economic perspective it can be seen that globalisation is a historical process, the result of progress of human innovation and technology. It’s the integration of economies around the world through the movement of goods, services and capital across borders. Also refers to the movement of people (labour) and knowledge (technology) across international borders.

The types of Globalisation: ref pg 6

- The globalisation of Markets: refers to merging of distinguishable and separate national markets into one global marketplace

- The globalisation of Production: refers to the sourcing of goods and services from locations around the globe to gain location-specific advantages in labour, resources and capital

DRIVERS OF GLOBALISATION:

Changes in the political environment Changes in the technological environment1. Creation of global economic/trade

regulatory bodies1. Advances in transportation technology

2. The collapse of communism 2. Company Intranets and Extranets3. Email and videoconferencing4. Internet and WWW

Changes in the POLITICAL ENVIRONMENT: Changes took place because of 2 developments: the creation of global economic trade bodies- GATT- general agreement on trade and tariffs, and the collapse of communism. Governments around the worlds restricted access to their local markets and used tariffs and quotas to restrict imports and exports of goods and services. GATT was established in 1948 to reduce protectionism, until 1994 when it was replaced by the WTO (now covering trade in services and intellectual property rights). WTO also safeguards innovation, invention and entrepreneurship.

The collapse of communism signalled a shift in the global business landscape as the fall of theSoviet Union acted as a catalyst for the spread of capitalism and the realisation of trade liberalisation across the globe.

Changes in the technological environment: 2 main contributors- that of invention and innovation. 4 main components of technological innovation contributed immensely to the global exchange of ideas, research, education products and services- those components are:

1. Email & video conferencing has made it much easier for MNE’s to communicate, transmit and share large volumes of information. This saves costs as well as travel time.

2. The internet and the WWW provide manufacturer’s with the opportunity to monitor and respond to competition, but also to provide consumers with products at reduced prices. The modern culture of consumerism would not have been possible without the internet.

3. Company Intranets and Extranets: intranet being an internal organisation wide communication network which enables the fast distribution of a large volume of information throughout the organisation. Access to the organisations data is facilitated, reducing administrative paperwork and frustrating bottlenecks. Extranet allows the suppliers to replenish inventory as and when it is required which ensures the efficiency of the supply chain.

4. Advances in transportation technology: Air travel and high speed rail innovations facilitate long-distance travel in a short time period.

Evolution of Globalisation:

Process – local firm develops into a multinational- fig 1.2 pg14 (I.A.E.E.O.O.I)7 Phases:

.

International/overseas enquiry

appointment of the export manager

establsihment of export department and direct overseas sales

establishmnent of overseas branches

overseas assembly

overseas manufacturing

integration of overseas subsidiaries

Phase 1: International or overseas enquiries The company receives an enquiry directly from a foreign business person or from an independent domestic exporter. If the product sells in the foreign market at a profit the company the company executives may look favourably at the prospect of exporting.

Phase 2: Appointment of an export managerAs exports continue to expand, the company may decide to assume a more proactive than reactive approach by appointing an export manager with a small staff to search actively for foreign markets for the company’s products.

Phase 3: Establishment of export department and direct overseas salesAs export sales increase, a fully-fledged export division is established at the same level as the domestic sales department.

Phase 4: Establishment of overseas branches and subsidiariesSales branches are established abroad to handle sales and promotional work. The branch sell directly to intermediaries in the foreign market.

Phase 5: Overseas AssemblyAssembly occurs for 3 main reasons: cheaper shipping costs for disassembled products, lower tariffs and cheaper labour.

Phase 6: Overseas manufacturing There are three methods available as per “modes of entry” below:

Phase 7: Integration of overseas subsidiariesOne MNE system is created, top management makes all the strategic decisions and operations are controlled from a global perspective.

Modes of Entry:When a MNE finds a potentially lucrative market and wishes to participate in its potential for financial benefits, it will face challenges of that host countrys steep and tough tariff quotas. That host country could even have a total ban imposed on a product if that product is already being locally produced. In this case, the MNE that is trying to penetrate the market will use the following modes of entry:

- Contract manufacturing: under contractual agreement the foreign producer sells the companys product in the foreign market but the company continues to promote and distribute it.

- Licensing: the foreign company pays a royalty to the international company for its patents, trademarks and trade secrets.

- Direct investment in manufacturing facilities: after establishing a manufacturing facility in the foreign country, there is an entire business to run with all the relevant units.

Chapter 2- PESTEL Model:In order for companies to remain competitive in the global market, it’s not only the understanding of market demands and competitors, but also of the changes in society and the economy.

The PESTEL is a good framework for a company to analyse the following factors: - like Macro Environment.

1. Political- The broader economy is influenced by polotics and government policy. The degree to which government gets involved in the economy has implications for business. Political factors include tax policy, labour laws, environmental legislation, trade restrictions and political stability.

2. Economic- A growing economy is essential for successful business. Factors include economic growth, interest rates, inflation and exchange rates

3. Social- This includes demand and tastes related to the characteristics of the population. Factors include population growth, age distribution, attitude towards work, religions and languages

4. Technological- Technology can create new industries, or destroy existing ones, can raise or lower the cost of production and influence outsourcing decisions.

5. Environmental- Environmental consciousness can affect how business is conducted. Issues such as climate changes, emission taxes of company’s

6. legal – various laws and regulations affect the cost of doing business. Strict consumer laws, antitrust laws and labour laws while providing protection for the locals do impose costs on the business and becomes very complicated whilst having many companies in different countries.

A Political Spectrum:

Democracy vs Totalitarianism :

DEMOCRACY: is based on the belief that citizens should get directly involved in the decision making, obviously when dealing with millions of people it becomes impossible to run this, so instead the people elect an individual to represent them and so this is called representative democracy. These representatives then form a government. Should the representatives fail, they can be voted out and a new representative can be voted in.

Democracy meets the following conditions:

meaningful and extensive competition amongst individuals and groups for all effective positions of government at regular intervals

a high level of political participation in the selection of leaders and policies through free and fair elections so that no sector is excluded

Civil and political liberties - freedom of expression, freedom of press, freedom to form and join organisations sufficient to ensure the integrity of political competition and participation.

TOTALITARIANISM: the most common type of totalitarianism was

1.communism. But this has collapsed since 1989. The

2.second type of totlitariansim is THEOCRATIC- found in states where political power is monopolised by a party or individual who governs by religious principles such as Saudi Arabia.

3. third type is TRIBE totalitarianism where the political party represents the interest of the tribe monopolises power

4. fourth type is that RIGHT-WING totalitarianism which allows some economic freedom but restricts political participation.

THE LEGAL ENVIRONMENT:

It is vital that management understand the legal relationships and policies that exist within the country they operate. The legal environment has close ties with the political climate of a country.3 LEGAL DIMENSIONS TO BE CONSIDERED BY THE MNE:

laws of the domestic country: these govern marketing within a country designed to protect consumers. They may also constrain marketers in the areas of product packaging and labelling.

laws of the foreign country: international law: buyers and sellers are subject to international law which governs

relationships between countries. The sources are treaties and conventions and are created when several countries agree to certain matters.

THE IMPACT OF THE LEGAL ENVIRONMENT ON INVESTMENT STRATEGIES:Companies deal with legal and political issues at different levels as they become more international. If a company selects exporting as a mode of entry, companies would not be too concerned with the legalities or the political process as much as it would do with FDI.

In difficult contracting environments where the legal framework for protecting investors is weak, entrepreneurs and managers find it tough to convince investors their money will have high returns. Investors lack the confidence to invest in a country that does not offer legal transparency and thereby raises the cost of doing business in those countries. For example – a MNE would be reluctant to invest in country where the property rights are unclear.

THE TECHNOLOGICAL ENVIRONMENT:

Technology can be defined as ‘ the method or technique for converting inputs to outputs in accomplishing a specific task’. Technological innovation refers to the increase in knowledge, improvement in skills or new and improved way of doing things/product/ service etc.

Technology is classified under : hard technology- equipment; soft technology- know how of systems and processes.

In the global arena- technology is important for the following reasons:

1. it has the facilitated the process of globalisation and has allowed companies to go international through sales and production

2. MNE’s facilitate intercompany and inter-country transfers of technology3. A country’s lack of technological advancement can act as a hinderence in its attraction of FDI.

The transfer of technology is vital for industrialised and developing countries. The transfer of technology is essential for maintaining a high level of capabilities and competitiveness.

THE GLOBAL ECONOMIC ENVIRONMENT

CONCEPT OF ECONOMIC INTEGRATION:

Means the grouping of countries by agreement or treaty usually on a regional basis, to form a trade bloc that benefits participating members through reducing or getting rid of tariffs and non-tarriff barriers in the cross-border movement of goods, services, capital and labour.

TYPES OF ECONOMIC INTEGRATION 3 TYPES:

GLOBAL, REGIONAL & BI-LATERAL:

Global: is facilitated by the rules and regulations of the institutions such as the WTO and IMF and the World Bank. They establish rules and adjudicate trade related disputes. They promote global trade and investment through treaties that are ratified by the member nations – this provides a platform for fair trade and investment.

Regional: countries that are on the same geographical region. Membership is enabled through a treaty also ratified by members. It benefits the nations by having the trade barriers removed between member states, however members can still apply trade barriers to third party’s

Bi-lateral: trade relations and agreement between 2 countries, this facilitates preferential treatment between the 2 states.

4 STAGES OF ECONOMIC INTEGRATION:

FTA- FREE TRADE AREA - Is a regional econonomic grouping of countries within which all tariff and non-tariff barriers are abolished. There is no common policy towards non-members i.e. no internal tariffs and each country imposes its own tariffs on non-member countries

CUSTOMS UNIONS – Is a FTA that not only eliminates internal tariffs, but also establishes a common tariff and trade policies towards non-members. Tariffs are also pooled and revenue shared as per an agreed formula

COMMON MARKETS – Are CU established to liberalise movement of regional production factors such as people and capital. This facilitates the movement of goods and services and aids the production process resulting in better economic productivity. i.e. it is a CU that allows factor mobility

ECONOMIC UNIONS – A common market that aims to harmonise the economic policies of member nations. Fundamental policies such as fiscal and monetary policies that affect macroeconomic variables are the main focus.

++BENEFITS OF ECONOMIC INTEGRATION++

Static / Short term effects Dynamic/ Long term effects

Static/ short term effects:

-Shift of production in the form of:

- Either Trade diversion or Trade Creation

Trade creation occurs when production shifts to more efficient member countries from inefficient domestic or outside countries. It could also occur as imports from a lower cost producer in another member country instead of domestic production or imports from another higher-cost non-member producer country.

In other words, trade creation involves a shift in domestic consumption from high-cost domestic source to a lower-cost partner source as a result of getting rid of tariffs.

Trade diversion occurs when production shifts to inefficient member countries from more efficient outsiders. As a result , countries tend to import from a higher-cost producer membercountries instead of importing a lowest-cost producer in the international market.

Trade diversion involves a shift in domestic consumption from a low-cost world source to a higher-cost partner source as result of the elimination of tariffs on imports from members and the erection of trade barriers against non-member countries

DYNAMIC/LONG TERM EFFECTS:

Results in cost reductions due to the benefits of economies of scale production. Positive effects of the learning curves and experience help with reduction of costs. Members achieve an increase in efficiency and economic growth by:

Increased competition among member nations that produce similar goods and services. Exploiting the economies of scale

Improved market size which increases consumer spending power. Attracting FDI from outside countries.

MAJOR TRADE BLOCS

EUROPE: EU27 member states, geographically close, good transport network, considerable natural resources, substantial labour and manufacturing capacity, entrepreneurial culture, formal treaties, FTA with 17 states using Euro as common currencyAMERICA: THE NORTH AMERICAN FREE TRADE AGREEMENT – NAFTAUSA, Canada and Mexico. CENTRAL AMERICAN COMMON MARKET – CACM Guatemala, Honduras, Nicaragua, El Salvador & Costa RicaSOUTHERN COMMON MARKET – MERCOSURArgentina, Brazil, Uruguay, ParaguayAFRICAN, CARIBBEAN ANS PACIFIC – ACP79 states covering 3 continents – 48 from Sub Saharan Africa, 16 from caribeanASSOCIATION OF SOUTH EAST ASIAN NATIONS – ASEANIndonesia, Malaysia, Philippines, Singapore & Thailand etc.CENTRAL AFRICAN CUSTOMS AND ECONOMIC UNION – UDEACCameroon, CAR, Chad, Rep of Congo, Equitorial Guinea and gabonSOUTHERN AFRICAN DEVELOPMENT COMMUNITY – SADCRSa, Namibia, Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia, DRC, Madagascar, Mauritius, ZimbabweSADC- SOUTH AFRICAN DEVELOPMENT COMMUNITY

Created to foster closer cooperation among the government and people of Southern Africa.

OBJECTIVES:

Objective is to create a Southern African common market. It is dedicated to the ideals of free trade, free movement of people, a single currency, democracy and human rights.

IMPORTANCE OF THE ECONOMIC ENVIRONMENT:

The business dictionary defines an economic environment as the totality of economic factors such as :

Employment Income Inflation Interest rates Exchange rates Productivity Wealth, consumer buying power and behaviour.

Political, legal, cultural environments and economic systems determine the opportunities, costs and risks of that country. The political system usually dictates the economic system of that country.

The economic environment which an international business operates is important for a number of reasons and considerations: level of economic development, extent of economic freedom, current wealth of the population, economic policies and strategies.

The potential of doing business is determined by the 3 factors:

Market size Current wealth Future economic prospects.

Some important risks of doing business in other countries:

Political instability Government attitudes toward nationalisation Expropriation of assets and private property Potential social unrest Absence of rule of law and the inefficiency of law enforcement

International business must therefore identify and evaluate policy issues, economic trends, industry trends, trends in the relevant market segments for that business in that particular country.

The purpose of economic analysis is to evaluate the overall outlook of the economy of the country both in the short and the long term and then assess how political changes can affect them.

A variety of factors must be considered but I have chosen 6 from the 12 mentioned:

1. Availability of credit2. Purchasing power and disposable income of the population3. Interest rates4. Exchange rates5. Inflation6. Employment levels.

ECONOMIC SYSTEMS:

A COUNTRY’S ECONOMIC SYSTEM can be defined as the structure and processes a country uses to allocate resources and conducts its commercial activities. Economic systems encompass all the mechanisms and institutions that have been established concerning:

Production and consumption Income and expenditure

Simply, an economic system could be regarded as a set of principles, processes, techniques.

3 TYPES OF ECONOMIC SYSTEMS:

MARKET, COMMAND AND MIXED:

MARKET:

An economic system in which economic decisions and the pricing of goods and services are guided by the interactions of the country’s citizens and businesses, with little government interaction.

Market economies work on market forces such as supply and demand and are also the best determinants for the quantity and pricing of goods and services. This system requires customer sovereignty, entrepreneurial spirit and competition.

This economic system has the major portion of nation’s land, productive facilities and other economic resources are privately owned by individuals or businesses as opposed to being owned by government/state.

A market system is a good example of a country with a strong democracy such as USA/CANADA.

Conditions for a market economy are:

Freedom of choice for the consumer Free enterprise which means the business can choose its market it wants to compete and is free to choose its

products and services to produce Price flexibility allows for the rise and fall of pricing reflecting the supply and demand forces.

In a market economy, the government should exercise marginal restrictive involvement in the business activities and they play an important enabling role in the following ways:

Enforcing antitrust laws (promote free competition by outlawing monopolies) or enhancing competition policy Preserving property rights Providing a stable fiscal and monetary environment Preserving political stability.

COMMAND ECONOMY:

This is an economic system in which the government owns the land, production facilities and other economic resources, and also plans the country’s economic activities. The goods and services produced in a country, its quantities and prices are all planned by the government.

Command economy is consistent with the political ideology of Totalitarianism.

The aim of the system is for the government to achieve a wide range of political, economic and social objectives by controlling the allocation, production and distribution of resources.

These economies have stagnated for some of the following reasons:

Failure to create economic value Failure to provide incentives for innovation and entrepreneurial behaviour Failure to measure up to the achievements of other economic systems Failure to satisfy customer needs and overall quality of life.

MIXED ECONOMY:

This is an economic system in which land, productive facilities and other economic resources are distributed more equally through private and government ownership.

The government tends to control certain sectors that are of national importance, notably the energy, transportation, security and health-care sectors. Examples like France, Germany, UK and SOUTH AFRICA.

ECONOMIC CLASSIFICATION OF COUNTRIES:

Classifying countries into specific levels of economic development is particularly important for economic analysis. It is evident that market size and the extent of market demand provides importance of strategic market planning of international operations.

Population size and population income have been identified as important factors with regards to GNP & GDP.

CLASSIFICATION BY THE WORLD BANK:

The World Bank Development Report classified countries in the following categories according to their GNP:

Lower income ( less- developed countries and developing countries) Lower middle income ( less- developed countries and developing countries) Upper middle income ( developed or industrialised countries ) High income ( developed countries and industrialised countries)

PHASES OF ECONOMIC DEVELOPMENT:

Developed countries: countries with developed economies largely correspond with high income, and possibly some of the upper middle income countries. They have the following characteristics:

Political stability Highly educated and literate population High levels of innovative and entrepreneurial activity High levels of both industrial and information technology – IT High standard of living for its citizens Well-developed infrastructure, transportation, communication & utilities Active involvement in international business and foreign trade. Well-developed financial institutions and monetary networks Sophisticated social systems (education, health care)

Less developed countries: these countries are usually associated with low-income category. Their characteristics usually:

Political instability and anarchy Government inefficiency Very low standards of living Low levels of economic wealth Shortage of investment capital Inadequate education, health care and housing Underdeveloped financial services sector

High rates of illiteracy and low levels of employment skills Strong emphasis on agricultural and mining activities. Low levels of industrial and information technology Poor or underdeveloped infrastructure Generally poor health conditions and possible food shortages High infant mortality rates Lower life expectancy than developed countries High dependence on foreign financial and social aid Abundance of natural resources, but lacking on processing of resources Low level of involvement in international business Foreign trade largely involving exports of agricultural, natural and other raw material products

Developing countries: they lie somewhere between developed and less developed countries. They have the following characteristics:

Relative political stability and tending towards market based economies. Improving educational systems, literacy rates and work-skill levels. Relatively efficient technology systems Less reliability on agricultural and mining sectors with an expanding industrial sector Rapidly developing financial sectors. Improved social conditions and a higher quality of life than before Increasingly involved in international business. International trade is less dependent on agricultural and resources

ECONOMIC GROWTH :

Per capita GNP & GDP were identified as broad-based measures of the economic activity of a country and growth per capita GNP & GDP as indicators of a country during a specific period.

This section discusses ECONOMIC GROWTH from a macro perspective:

THE MEANING OF ECONOMIC GROWTH:

Economic growth is the increase in an economy’s capacity to produce goods and services over a long period of time. Economic growth implies rising levels of output over time, produced by the economy’s available resources. This increases the quantity and/or quality of its production factors such as labour and capital overtime and improves production techniques.

Capital investment and technological innovation are regarded as important theories in the factors of economic growth.

Referring back to GDP – The annual measure of economic growth is the percentage change in the real GDP of a country from 1 year to the next.

The GDP at constant prices measures how much the economy really produces and grows

INFLATION:

This is the continuing general increase in prices of goods and services over time. Inflation is known to affect interest rates, exchange rates, cost of living as well as the general political and economic confidence in the country.

High inflation pushes interest rates higher to enable investors to achieve real return on investments. BUT- then high interest rates reduce domestic demand and adversely affect economic growth.

High interest rates means that it costs more to borrow, the reluctance to borrow sets in and business expansion can slow. Similarly, consumer spending starts to decrease as the cost of borrowing is also too expensive and the cost of living increases. Usually, salary increases might not increase, or they may increase but usually below the line with inflation.

Higher interest rates in 1 country is relative to the inflation rates in other countries hence the country’s currency depreciates relative to those other countries.

Banks offer higher interest rates to attract more money whilst governments raise interest rates to ease and dampen demand which is a political move.

Different economic policies affect international business financial decisions. E.g. Foreign currency-denominated loans vs. local currency denominated loans depending on which is more favourable.

Higher interest rates adversely affect international companies that import and are beneficial to countries whom export.

Inflation occurs when aggregate demand exceeds aggregate supply. 2 generally accepted causes of inflation are based on demand-pull and cost-push considerations.

GLOBAL MONETARY SYSTEMS AND FOREIGN EXCHANGE

THE FOREIGN EXCHANGE MARKET:

It is a worldwide market that provides a worldwide physical and institutional structure for foreign exchange transactions. It is made up of a network banks across the globe that facilitate the conversion of the domestic currency for that currency from another country.

Foreign exchange is the money of a foreign country, in the form of bank deposits, drafts or financial claims on an economic agent of the foreign country.

The exchange rate is the price or value of one currency in terms of another currency.

A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency be delivered for some other currency at a specified rate and time.

The key functions of the foreign exchange market:

Transfer of purchasing power of one currency to another The provision of credit to individuals and multinational firms that are distributed across the

globe. The minimisation of foreign exchange relating to cross border trade and investments.

FOREIGN EXCHANGE TRANSACTION:

Foreign exchange: is the money from a foreign country in the form of bank deposits, drafts or financial claims on an economic agent of another country.

Foreign exchange rate: is the price of one currency in terms of another.

Foreign exchange transaction: an agreement between buyer and seller that a fixed amount of one currency be delivered for some other currency at a specified rate and time.

DIRECT AND INDIRECT QUOTES:

DIRECT QUOTE: gives the home currency price of one unit of the foreign currency. So Rand is home and dollar is foreign – means R7/ $1 . This type of quoting is the most popular form and what we often see at Rennies travel exchange etc.

INDIRECT QUOTE: gives the number of foreign units of currency needed to buy one unit of home currency. Now we just reverse it and we ask how much of the foreign currency (dollar) to buy a Rand? (HOME CURRENCY) so it would be $0.07 for R1 etc.

BID , ASK AND SPREAD:

The bid is the price at which the bank will buy foreign exchange from another bank and the ask is the price at which a bank will sell foreign exchange.

Banks buy at lower rates and sell at higher rates and the difference is known as the spread which is the margin.

SPOT & FORWARD TRANSACTIONS

SPOT TRANSACTION:

This involves the purchase of Forex with settlement to be completed within 2 business days from the date of transaction.

SPOT RATE:

IS THE PRICE AT WHICH ONE CURRENCY TRADES FOR ANOTHER IN CURRENCY IN AN IMMEDIATE EXECUTION OF TRANSACTION.

FORWARD EXCHANGE RATE:

Is the price agreed on today for the purchase of foreign exchange at a future date.

CURRENCY SWAPS:

This is a trade that involves the exchange of 2 currencies by means of the simultaneous purchase and sale of a given amount of foreign exchange for 2 different value dates. It can be seen as an advanced forward foreign exchange contract.

Currency swaps allow for:

Moving out of one currency into another for a specified period of time without incurring Forex risk

Companies to obtain long-term foreign currency financing at lower costs than would have been possible with direct borrowing.

CROSS-RATES:

This is the exchange rate between 2 currencies calculated on the basis of their relationship with a third currency. This is usually 2 currencies that don’t trade often with each other and use the DOLLAR as base point in order to conclude transactions.

ARBITRAGE:

Cross – rates have an affiliation with Arbitrage.

Exchange rates around the world are very similar because the information is readily available. BUT where this may not be the case and that there is a noticeable difference in the value of a common currency being quoted in 2 different countries, then this presents an Arbitrage profit opportunity.

POLITICAL ECONOMY OF GLOBAL TRADE

Regulating Trade:

Political economy suggests that a government can employ protectionist measures that can regulate the quantity and quality of goods and services that are traded between the country and the outside markets.

One of the main reasons for implementing trade barriers is to encourage local production thereby making it difficuilt for outside entrants to enter the local markets. Local producers can then increase their production and gain enough experience to help them gain a competitive advantage. Governments

also tend to subsidise the operational and production processes of the local manufacturers and offer tax breaks to ensure their survival and sustainability.

*REASONS FOR TRADE BARRIERS

Application for trade barriers = 4 main reasons: PERD

1. Political2. Economic3. Retaliation/trade wars4. Domestic policies.

All of the above reasons fall into 10 points of discussion: 5P’s and IRRAA

Protection of local jobs Import substitutionProtection of infant industries Reducing the reliance of foreign suppliersProtection of national sovereignty Reduction in balance of trade payments or deficitsPromotion of exports Antidumping remediesPolitical objectives or retaliation Attraction of local production and foreign invest

Protection of local jobs Domestic markets are protected from foreign markets to ensure jobs of its local citizens, given the socio-political conditions , government discourages the import of goods that are produced locally. Government may also erect barriers that discourage mergers and acquisitions and also fdi because of the possible job shedding.

Protection of infant industries These are sectors that are too immature to compete against established rivals- their level of protection is based on their strategic importance to the nations building of its economy.

Protection of national sovereignty From an international law of view, the country is free and independent from external control. The country enjoys its full legal status, formulates its own policies and regulations. Governments protect their territories and choose their trade partners carefully.

Promotion of exports some theories suggest that the promotion of exports is good for economic enhancement and helping the manufacturers move a step closer to industrialisation

Political objectives Governments use instruments of trade policy to advance their political agenda. Such as sanctioning countries with poor human rights or child labour practices.

Import substitution

This is based on the assumption that greater industrialisation creates greater wealth. The more the manufacturing activities the more the wealth is distributed. Provided that buying locally is cheaper, then requires more output so with more demand on output means there is a demand for more input.

Reduction in the reliance of foreign suppliers the more the country relies on a foreign supplier, the weaker or more vulnerable that country may become- especially if a dispute between the 2 countries arise.

Reduction in defecits Governments implement instruments of trade policies to achieve trade equilibrium. Tariffs are used to discourage imports while at the same time trying to promote exports.

Attraction of local production and foreign investment Subsidies and other institutional mechanisms are used to attract investments in areas that are of strategic importance to the economy. Governments will give concessions to investors who are able to provide the facilitation of the production of goods and services. These mechanisms may also be offered to foreign investors to help facilitate production where the country lacks that capability.

Antidumping remedies Governments will apply trade barriers to redress dumping. These are erected against any firm that sells its product in the overseas market at a price lower than the production cost in the home market.

INSTRUMENTS OF TRADE POLICY:

Trade barriers are adopted to discourage the free flow of goods, input materials and the services across international borders.

2 main categories are TARIFFS AND NON-TARIFF barriers.

TARIFFS are price based and NON-TARIFFS are administratively based.

3 main areas discussed

Tariffs AD VALOREM EXPORT TRANSIT

SUBSIDIES Discouraging foreign imports Gaining export markets

QUOTAS Import VER- Voluntary export restraint Local content requirements

‘buy national’ restrictions Technical barriers

1.Tariffs: (TEA)

It is a tax levied on goods, input materials and services imported into a country. It is levy that is attached to each individual item that is imported for example- there is a R5.00 levy on each fridge that is imported into the country- also known as a SPECIFIC TARIFF.

1.1 AD VALOREM:

This is based on the percentage of the value of the imported item in the destination country. So the percentage of the value of the item would be multiplied by the amount of items brought in for example 1 Gucci handbag costs R25,00 so the levy is 10% (R2,50) AND 100 bags are brought in so then R250 levy is imposed.

1.2 EXPORT:

This is payable on goods and services that leave the borders of a country for another country. This is meant to increase the cost of exports and discourage the exports. This can also be applied by the government in order to raise revenue. Its not a common tariff that is used.

1.3 TRANSIT TARIFFS

This is a special duty that is paid on goods and services that pass through a country to a final destination.

2. SUBSIDIES

This is a financial payment made by the government to domestic manufacturers or service providers to reduce the burden of manufacturing or operating costs with the aim of reducing the consumer price.

Common types of subsidies are tax breaks, low interest loans.

Subsidies are aimed at achieving the 2 main objectives:

2.1 DISCOURAGING FOREIGN IMPORTS

Government uses the subsidies to lower the production costs of domestic manufacturers and service providers and to discourage importation.

By lowering the costs of domestic manufacturers, their selling price becomes cheaper and discourages a rational consumer to buy imports. Eg The EU has protected its agricultural sector by subsidising its own farmers from the imports of the developing countries.

2.2 GAINING EXPORT MARKETS:

Governments encourage the exports because they boost the trade balance of the country with the outside world. The argument against subsidies is that they help cushion inefficient foreign producers, through subsidies goods are produced and sold in foreign markets at below market prices and can kill global competition.

3. QUOTAS (non-tariff)

This is one of the most important non-tariff barriers. This type of barrier restricts the amounts of goods and services that can be imported over a certain accounting period

3.1 IMPORT QUOTAS

An import quota is one of the most prominent direct restrictions on the quantity of goods or services that may be imported into a country.

So an import licence needs to be acquired for the goods that are being imported and there is only a certain amount that is allowed to be imported over a certain accounting period of time and there is a specific tariff imposed on the goods being imported.

3.2 VER- VOLUNTARY EXPORT RESTRAINT.

This is a quota that is imposed on the quantity of goods that is exported from the country. This comes from a request from the importing country so that there is control over how much is imported to restrain trade dispute.

3.3 local content requirements:this is a requirement that a certain amount of local contents be sourced locally. Failure for the manufacturer to comply may result in heavy fines or a boycott of the product. This is implemented to stimulate the manufacturing of parts instead merely assembly.

3.4 ‘BUY NATIONAL’ restrictions:

This is applied to limit the consumption of imported goods to improve local manufacturers. “Proudly SOUTH AFRICAN”….

3.5 TECHNICAL BARRIERS:

These are used to discourage imports where the application of tariffs and other non-tariffs are unpopular. A country may have to be careful in adopting these tariffs especially when it may trigger off retaliation. So instead, the country uses technical barriers to cause importation frustration.

IMPLICATIONS OF TRADE BARRIERS:- Aribitrary and discriminatory and are applied subjectively. Their application comes from

political motives rather than economic motives. Tariffs tend to breed counter tariffs which essentially is a motivation for trade war

- The application of trade barriers requires special training, supervision and administration.

- The administration of trade barriers adds to the microeconomic problem of a country. Eg when demand surpasses supply and production capacity is at its maximum and importing is the only viable option, the tariffs on the imported products will be too expensive to bring in.

- The application of tariff-barriers encourages special-interest-privelages which means there are concessions made to certain trade allies whilst the rest of the world are treated like outcasts. This drawback affects global economic development and feeds trade-diversion.

- Tariffs increase government intervention in trade and economic matters. The involvement og government should act as an enabling role but instead, the tariffs regulate the business environment and the household consumption.

GLOBAL FINANCIAL MANAGEMENTSCOPE OF MULTINATIONAL FINANCIAL MANAGEMENT:

3 Major areas for decision making:

1. Capital budgeting2. Capital structure3. Working capital management

Capital Budgeting

Determining what new possible production opportunities (investments) could benefit the company’s wealth. Because capital budgeting is more complex for international investments than for domestic projects, the following are vital considerations:

A distinction must be made between cash flows to the project and cash flows to the parent company

Cash flows to the parent company often depend on the form or source of financing for the project

The remittance of funds to the parent company must be recognised explicitly because of differing tax systems between countries, as well as political or legal constraints which could affect the international movement of funds

Differing rates of inflation between countries could affect competitive positions and therefore the extent and value of cash flows over time

Unanticipated foreign exchange rate changes affect the value to the parent company of local project cash flows and accordingly have to be kept in mind in the capital budgeting analysis

Capital structure decisions and calculation of cost of capital are complicated, especially when host country loans are used for project financing

Political risk that arises from averse political events could have a negative impact on the availability and extent of expected cash flows from a project

Terminal value is more difficult to estimate because purchases from the host, parent or third countries may have different perspectives on the value of the project to them

Risks related to capital budgeting

1. Political Risks:a. Imposition of foreign trade and investment barriersb. Exchange controlsc. Regulations blocking the remittance of earnings to parent companiesd. New tax regimes and increased tax ratese. Even expropriation of assets

2. Economic Risks:a. Possible mismanagement of country’s economy that could negatively affect the

profitability, growth and survival of the business in that countryb. Inflation can lead to depreciation in the value of the currency of a countryc. Reliable information on macroeconomic trends have to be evaluated with a

view to their possible impact on cash flows expected from projects in that country

3. Approaches to risk adjustmenta. Treat all foreign risk as a single issue by increasing the discount rate applicable

to foreign projects relative to the rate for domestic projectsb. Adjust all relevant individual cash flow forecasts of the investment or projects to

pertinent foreign risks

Capital structure

Determining the mix of financing sources ( either debt or equity financing ) that would be the most efficient for financing the decision made for capital budgeting.

Working capital equipment

How to manage the day-to-day non-capital funding needs of the firm that allows the firm to keep its activity levels to a healthy level.

The first 2 decisions mentioned ( capital budgeting and capital structure ) are dividend policy decisions which has elements of the financial and investment sides of the firm. These are all considered to be traditional ways.

MINIMISING CASH BALANCES/ CASH LIQUIDITY LEVELS

FIRMS must keep cash balances as low as possible without jeopardising the continuity of the firm. If the firm holds cash in excess of the minimum requirements, it could incur an opportunity cost whereby it would enjoy the best interest return in an investment elsewhere.

Traditionally, 3 motives determine the cash and liquidity levels:

TRANSACTIONS MOTIVE: the need to hold cash to pay normal payments with regards to the firms operations

The PRECAUTIONARY MOTIVE: TO HOLD CASH AS A SAFETY MARGIN SO ITS LIKE A FINANCIAL RESERVE

SPECULATIVE MOTIVE: TO HOLD CASH TO TAKE ADVANTAGE OF POTENTIALLY BENEFICIAL OPPORTUNITIES.

POSITIONING FUNDS OPTIMALLY:

It is the extent to which the home government and host government regulatory authorities allow the unrestricted transfer of funds.

MNE’s can use any set of the following techniques to position funds:

Transfer pricing , multilateral netting , tax havens , fronting loans.

1) Transfer pricing:It is common practice in MNE’s to transfer goods and services between parent companies and foreign subsidiaries. The transfer price is the internal price at which goods and services are transferred between entities within the MNE.Funds can be moved out of country A by setting high transfer prices for the production inputs supplied to the subsidiary in country A and setting low transfer prices for the products sourced from the subsidiary in country A.In other words there is a large outflow of funds versus a small inflow of funds. Transfer pricing can be used to address matters of tax liabilities, negative exchange rate movements and cross-border charges.

2) Multilateral Netting:Where subsidiaries of an MNE are involved in intra-company business, each subsidiary would generally owe one or more of the other subsidiaries and in turn be owed by the others. Multilateral netting allows MNE’s to reduce the sum of standalone transaction costs of individual subsidiaries.

3) Tax Havens : MNE’s also use tax haven countrys like the Bahama’s, Jersey and the Canary Islands because they have a low or non-existent tax income rate.a firm accomplishes this tax saving by establishing a wholly owned , non-operating subsidiary in the tax haven. All transfer of funds from foreign subsidiaries to the parent company are channelled through these tax havens.

4) Fronting Loans: this is described as a parent to a subsidiary loan that is channelled through a financial intermediary, which is usually a large international bank. In fronting loans, the parent company deposits the loan amount in an international bank, which lends the same amount to the foreign subsidiary. So the bank ends up being the front.

TYPES OF FOREIGN EXCHANGE RISK MANAGEMENT:

TRANSLATION EXPOSURE, TRANSACTION EXPOSURE, ECONOMIC EXPOSURE

1. TRANSLATION EXPOSURE:This basically arises because the parent company must consolidate the financial statements of all of its subsidiaries into the parent company statement.The financial statements of the subsidiaries are then translated in home currency terms and to be added to the account balances of the parent firm at the end of the financial year. This foreign exchange risk is also sometimes known as accounting risk.The translation gain or loss is treated in one of the following 2 ways:

It is added or subtracted from the net income in the consolidated income statement It is carried over to the shareholders equity section in the consolidated balance sheet.

2. TRANSACTION EXPOSURE:Whenever an MNE’s cashflow resulting from international transactions is affected by changes in exchange rates, the MNE is said to be exposed to TRANSACTION RISK/EXPOSURE.The types of challenges that occur are when the MNE has the obligation to pay for an export or import and the eventual value uncertainty of what is to be paid arises due to fluctuations in the currency. An order for some goods could be concluded but the payment terms could be made within 90 days, now the period of 90 days could see the dollar strengthen which means you would have to pay more for the goods or the dollar could weaken which means you would probably pay less than the budgeted amount…

3. Economic exposure:The extent to which a change in the bilateral exchange rates between 2 currencies of an MNE’s dealings affects the present value of the expected future cash flows to the MNE is termed the economic exposure.It is a subjective concept and is not easily identified.It is a complex phenomenon and covers a wide spectrum of diverse risks, from the pricing of products, sourcing of supplies, future sales potential and cost trends in foreign markets to the geographical location of foreign investments.

FINANCING INTERNATIONAL TRADE:

International trade relations:

The nature of the relationship between exporters and the importers is vital to understanding the import-export financing.

There are 3 types of relationships:

Unaffiliated Unknown, Unaffiliated known, Affiliated.

Unaffliated unknown: this is the case where the importer is the new customer with which the exporter has no previous relationship, in this instance the parties will need to enter into a contract and the exporter seeks protection against non-payment.

Unaffiliated known: in this case the importer is a long standing customer with which the exporter has a relationship, the exporter may still need to enter into contract in case of non-payment.

Affiliated: this is where the importer is foreign subsidiary of the exporting parent company. This is intra-firm trade where a contract is usually not necessary.

TRADE DILEMMA

The main dilemma for international trade between exporter and importer is TRUST. Importer prefers to pay after receiving the goods and exporter prefers to be paid before shipping the goods.

There are several steps taken to overcome this dilemma:

L/C Letter of credit Draft or Bill of Exchange Bill of Lading Commercial invoice.

L/C : LETTER OF CREDIT – the bank issuing the L/C on request of the importer makes payment to the exporter on presentation of documents that meet the requirements and conditions contained in the L/C

Draft or Bill of Exchange: an unconditional order by the exporter or the importers agent to Pay the face amount of the draft on sight or at the specified future date

Bill of lading: issued to exporter by the carrier transporting the product and serves as a receipt, contract and a document of title. As a receipt it confirms that the carrier has received the product, as a contract it specifies the carrier to transport the product at a cost, as a document of title it can be used to obtain payment before the release of the product to the importer.

Commercial invoice: the exporters description of the product being shipped to the importer. It contains the name, address of buyer/supplier, weight, terms of payment, freight costs, quantity etc.

FINANCIAL DISCLOSURE:

This is known as the release of financial information by the MNE. It is presented in the company’s annual report and plays a critical role for the senior top management, investors and shareholders to make important decisions.

The information that is presented can be very sensitive and hence a company would want to present everytihing in as much of a positive light as possible as this puts a positive spin on the company share price too.

MNE’s hope to raise funds and attract further investors in its path toward economic expansion. There are 2 types of disclosure to be discussed:

1. MANDATORY2. VOLUNTARY.

MANDATORY:

This refers to the information that is required by statute, stock exchangers or prescribers of accounting standards. It accomplished through financial statements which are made of:

Income statement, Balance sheet Cash flow statement Notes to the financial statements

VOLUNTARY:

This is the disclosure of excess information more than what is required by the accounting practices. Management will disclose other information they deem it necessary for the investors and shareholders to peruse in order for the assistance of important decisions to be made.

This would be done by utilising press conferences, conferences and the firms do this so that they can try alleviate as much conflict of interest as possible.

2 main benefits to voluntary disclosure:

reducing insider share trading and reducing share price volatility.

FINANCIAL DISCLOSURE ITEMS ARE:

INCOME STATEMENT & COMPREHENSIVE INCOME BALANCE SHEET STATEMENT OF CASH FLOW STATEMENT OF CHANGES OF EQUITY

INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME:

Total Comp.I. = All the items of income and expenses are recognised in the period

Income.St.= info about the performance of the company in terms of revenue, expense & profit

Comp.Inc.= indicates how shareholders wealth has increased through trading and non-trading activities

BALANCE SHEET:

SHOWS THE COMPANIES ASSETS AND LIABLILITIES

CASH FLOW:

Reports cash receipts and payments within the period they occurred and are classified in terms of operating, investing and financing activities.

STATEMENT OF CHANGES IN EQUITY:

Reports the amount of sources of changes in equity from capital transactions by owners and includes items such as shares, additional paid-in capital retained, earnings and repurchased equity.