enu business risk pel 050812
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Business risks, Political, Legal, Economic, Foreign exchange risksTRANSCRIPT
Go Global !Global Economic Environment :Global Economic Environment :Sources of Business RiskSources of Business Risk
By
Stephen OngStephen OngEdinburgh Napier University Business School
[email protected] Professor, College of Management, Shenzhen
University5 August 2012
AgendaAgenda
1.1. Political RiskPolitical Risk2.2. Legal RiskLegal Risk3.3. Economic RiskEconomic Risk4.4. Foreign Foreign
Exchange RiskExchange Risk
Learning Objectives
To assess a range of political, economic and legal risks faced by companies operating globally
To evaluate the main measures taken to offset these risks
To analyse three different types of exposure to foreign exchange risk
Introduction
Political and Legal Factors Influencing International Business Operations
The Political Environment
Every country has its own political and legal environment
Companies must determine where, when, and how to adjust their business practices without undermining the basis for success
The Political Environment
Managers evaluate, monitor, and forecast political environments
A country’s political system refers to the structural dimensions and power dynamics of its government that specify institutions, organizations, and interest groups, and define the norms that govern political activities
Individualism vs. Collectivism
Individualism
primacy of the rights and role of the individual
Collectivism
primacy of the rights and role of the community
Political Ideology
A political ideology stipulates how society ought to function and outlines the methods by which it will do so
Most modern societies are pluralistic different groups champion competing political ideologies
Democrats vs. Republicans in the United States
Democratic Party vs. Liberal Party in Japan
Spectrum Analysis
A political spectrum outlines the various forms of political ideology
Political freedom measures the degree to which fair and competitive
elections occur
the extent to which individual and group freedoms are guaranteed
the legitimacy ascribed to the general rule of law
the freedom of the press
Spectrum Analysis
The Political Spectrum
Democracy
In a democracy all citizens are politically and legally equalall are equally entitled to freedom of thought,
opinion, belief, speech, and associationall equally command sovereign power over
public officials
Prominent types of democracy include RepresentativeMultipartyParliamentarySocial
Totalitarianism
A totalitarian system subordinates the individual to the interests of the collectivedissent is eliminated through indoctrination,
persecution, surveillance, propaganda, censorship, and violence
Prominent types of totalitarianism includeAuthoritarianismFascismSecularTheocratic
The Standard of Freedom
Freedom House assesses political and civil freedom around the world
Freedom House recognizes three types of political systemsFree
Partly free
Not free
The Standard of Freedom
Map of Political Freedom, 2010
Trends in Political Ideologies : Third Wave of Democratization
Third Wave of Democratization number of democracies doubled in two
decades
Engines of Democracy
1. The failure of totalitarian regimes to deliver economic progress
2. Improved communications technology
3. Economic dividends of increasing political freedom
Democracy: Recession and Retreat
Democracy’s retreat just 26 of the world’s democracies are full
democracies
Engines of totalitarianism Economic development
Inconsistencies
Economics problems
Standards of democracy
Democracy: Recession and Retreat
Freedom in the World: Number of Electoral Democracies
Democracy: Recession and Retreat
Freedom in the World: Gains and Declines
Political Ideology and the MNE
What will the political map look like in the future?The Washington ConsensusThe Beijing ConsensusThe Clash of Civilisations
Clash of Civilisations
Political Risk
Political risk refers to the risk that political decisions or events in a country negatively affect the profitability or sustainability of an investment
Types:Systemic
Procedural
Distributive
Catastrophic
Classifying Political Risk
Characteristics of Political Risk
The Legal Environment
The legal system is the mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction
Types:Common law
Civil law
Theocratic law
Customary law
Mixed systems
The Legal Environment
The Wide World of Legal Systems
Trends in Legal Systems
What is the basis of rule in a country?
The rule of man
legal rights derive from the individual who commands the power to impose them
associated with a totalitarian system The rule of law
systematic and objective laws applied by public officials who are held accountable for their administration
associated with a democratic system
Trends in Legal Systems
The Worldwide Distribution of the Rule of Law
Operational Concerns
Operational issuesStarting a business
Entering and enforcing contracts
Hiring and firing local workers
Closing down the business
In generalrich countries regulate less
poor countries regulate more
Strategic Concerns
Strategic issues
Country of origin and local content
Marketplace behavior
Product safety and liability
Legal jurisdiction
Intellectual property
Intellectual Property: Rights and Protection
Intellectual property refers to creative ideas, expertise, or intangible insights that grant its owner a competitive advantage
Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiersno “global” patent, trademark or copyright exists
Intellectual Property: Rights and Protection
Attitudes towards intellectual property
Legal legacies
rule of man versus rule of law Wealth, poverty, and protection
levels of economic development Cultural orientation
individualism versus collectivism
It’s a Knockoff WorldIt’s a Knockoff World
SPOT the DIFFERENCE
Patent Litigation
Source: bbc.co.uk 30th August 2005
Creative wins MP3 player patent
One of Apple's main rivals, Creative Technology, hasbeen awarded a patent in the US for the interface
used on many digital music players.
"The first portable media player based upon the user interface covered in our Zen Patent was our Nomad Jukebox MP3 player," said Creative CEO Sim
Wong Hoo. "The Apple iPod was only announced in October 2001, 13 months after we
had been shipping the Nomad Jukebox based upon the user interface covered by our Zen Patent."
In its press release, Creative said Apple had filed for a patent for a user interface in a multimedia player in late 2002, but its application had been
recently rejected.On 24 August 2006, Apple and Creative announced a broad settlement to end their legal disputes. Apple will pay Creative US$100 million for a paid-up license, to use Creative's awarded patent in all Apple products. As part
of the agreement, Apple will recoup part of its payment, if Creative is successful in licensing the patent.
Automatic hierarchical categorization of music by metadata
Patent number: 6928433Filing date: Jan 5, 2001Issue date: Aug 9, 2005
Application number: 9/755,723
A method, performed by software executing on the processor of a portable music playback device, that automatically files tracks
according to hierarchical structure of categories to organize tracks in a logical order. A user interface is utilized to change the hierarchy, view
track names, and...Inventors: Ron Goodman, Howard N. Egan
Assignee: Creative Technology LTD
Apple pays US$100m for use of Patent
Source: bbc.co.uk 30th August 2005
SPOT the DIFFERENCE
NASDAQ AAPL
Market Cap : US$308.8 B
PINK CREAFMarket Cap : US$0.150 B
CREATIVE vs APPLE
Big Money, Big RisksBig Money, Big RisksProduct piracy refers to the illegal imitating,
copying, or counterfeiting of registered products
The cost of piracy is $600 billion $600 billion per year
Intellectual property theft has grown 10,000% since 1982
Profit margins for counterfeiters are high gross margins of 500-5,000% are common
Problems for all products – luxury and ordinary
Poses health and safety concerns
Waging a Mulitfront War
Companies, governments, and industry associations are fighting back lawsuits and anti-copying technology
government sanctions against countries that do not police piracy
pressure on transnational bodies to enact and enforce anti-piracy laws
WIPO
TRIPS
The Bandits Are Everywhere
Despite these efforts, piracy continues to rise especially in China and India
demand for pirated goods is increasing
Crafty pirates
staying one step ahead
Is Piracy Inevitable?
Has the war on piracy already been lost?
Ethical issues regarding the use of pirated products
Effect of consumer income on demand for pirated goods
Cultural differences on low-priced software is it a right?
Dejavu ?Dejavu ?
Economic Risks Economic Risks
Managers assess a country’s economic environment knowing Countries differ in different ways
Economic and political changes alter market circumstances
It is important to understand connections, change, and consequences
The challenges of the comeback
Choices of citizens, policymakers, and institutions
International Economic Analysis
A universal assessment of economic environments is difficult becauseit is difficult to stipulate a definitive set of
indicators to estimate the performance and potential of a country’s economy
today’s set of perfect measures may prove imperfect tomorrow
interdependencies complicate interpreting the relationship among elements of the economic environment
International Economic Analysis
Economic Factors Affecting International Business Operations
Economic Freedom
Economic freedom – people have the right to work, produce, consume, save, and invest the way they prefermeasured across business freedom,
monetary freedom, fiscal freedom, investment freedom, freedom from corruption, property rights, trade freedom, government size, financial freedom, and labor freedom
Economic Freedom
Economic Freedom by Region, with Population
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Economic Freedom
Global Distribution of Economic Freedom
Hong Hong Kong, Kong,
Singapore, Singapore, Australia, Australia,
CanadaCanada
Value of Economic Freedom
Economic freedom affectsGrowth rates
Productivity
Income levels
Inflation
Employment
Life expectancy
Literacy
Political openness
Environmental sustainability
Trends in Economic Freedom
The trend toward increased economic freedom is no longer certainQuestions about the legitimacy of
free markets
The benefits of more state control
Types of Economic Systems
An economic system refers to the mechanism that deals with the production, distribution, and consumption of goods and services
TypesMarket economy
Command economy
Mixed economy
Types of Economic Systems
Types of Economic Systems
Market Economy
In a market economy individuals rather than governments make most economic decisionsCapitalism
private ownership of capital Laissez-faire
governmental noninterference in economic affairs
Command Economy
In a command economy the visible hand of the state supersedes the invisible hand of individualsGovernment
owns and controls resources
determines pricesCommunism
Mixed Economy
Most economies are mixed economiesfall between market and command
economies
Socialism regulate economic activity with a
focus on social equality and a fair distribution of wealth
State Capitalism: Detour or Destination?
State capitalism refers to a system in which the government explicitly manipulates market outcomes for political purposespromote certain industries to encourage
economic development
develop national companies into global leaders
foreign companies restricted from strategic industries
Economic Development, Performance, and Potential
Broad classes of countries include developing countries
largest number of countrieslow per capita income
emerging economies
fast growing, relatively prosperousBRICs – Brazil, Russia, India, and China
developed countries
high per capita income and standard of livinglike the U.S., Japan, France, Australia
Gross National Income
Gross national income (GNI) the broadest measure of economic activity for a
country
Gross national product (GNP) the total value of all final goods and services
produced within a nation in a particular year
Gross domestic product (GDP)the total market value of goods and services
produced by workers and capital within a nation’s borders
Improving Analysis
GNI data should be adjusted for
the growth rate of the economy
the number of people in a country
the local cost of living
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Improving Analysis
GNI per capita, 2009
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Improving Analysis
GNI per capita adjusted for Purchasing Power Parity
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Broader Conceptions of Performance and Potential Green economics
gauge economic performance in terms of the effect of current choices on long-term sustainability
Sustainable development meet the needs of the present without compromising the
ability of future generations to meet their own needs
Happynomics importance of emotional prosperity in addition to financial
prosperity
Features of an Economy
Managers should also consider Inflation
Unemployment
Debt
Income distribution
Poverty
Balance of payments
Inflation
Inflation a measure of the increase in the cost
of living
Deflation when prices for products go down not
up
Reflation increase the money supply and reduce
taxes to accelerate economic activity
Unemployment
Unemployment rateshare of unemployed workers
seeking employment for pay relative to the total civilian labor force
Misery index the sum of a country’s inflation
and unemployment rates
Debt
Debt the total of a government’s financial obligations
internal debt
external debtGrowing public debt signals
tax increases
reduced growth
rising inflation
increasing austerity
Income Distribution
Income distribution estimates the proportion of the
population that earns various levels of income
Gini coefficient measures the extent to which the
distribution of resources deviates from a perfectly equal distribution
Poverty
Poverty the state of having little or no money and few or no material possessionsextreme poverty
less than $1.25 per daymoderate poverty
less than $2.00 per dayToday the world population is 80% poor, 10%
middle income, and 10% richBase of the Pyramid
Frugal engineering
Balance of Payments
Balance of payments reports a country’s trade and financial
transactions with the rest of the world
Current accounttracks merchandise trade
Capital account tracks loans given to foreigners and loans
received by citizens
Balance of Payments
Components of a Country’s Balance of Payments
Balance of Payments (2011)
Current Account Balances: The Top and Bottom Five
Foreign Exchange & The International Monetary Fund
The goals of the International Monetary Fund (IMF) (1945) are toensure stability in the international monetary
system
promote international monetary cooperation and exchange-rate stability
facilitate the balanced growth of international trade
provide resources to help members in balance-of-payments difficulties or to assist with poverty reduction
The International Monetary Fund
The Bretton Woods Agreement established a par value, or benchmark
value, for each currency initially quoted in terms of gold and the U.S. dollar ($35/oz)
The dollar became the world benchmark for trading currencies and continues in that role today
The IMF Today
The Quota Systemevery member contributes a quota
Assistance Programsthe IMF lends money to ease balance-of-
payments difficulties
Special drawing rights (SDRs)the IMF’s unit of account
The Global Financial Crisis and the IMF
The global crisis in 2008-2009 raised concerns over global liquidityprompted the G20 to inject huge amounts of
cash into the IMF
Greece’s 2010-2011 financial crisis required assistance from the IMF and the EUthe IMF required Greece to adopt very
unpopular austerity measures
Evolution to Floating Exchange Rates
The Smithsonian Agreement (1971)8% devaluation of the dollar
revaluation of other currencies
widening of exchange rate flexibility
The Jamaica Agreement (1976)provided greater exchange rate flexibility
eliminated the use of par values
Exchange Rate Arrangements
Under the Jamaica Agreement countries selected and maintained their own exchange rate arrangements
The IMF monitors the exchange rate policies of countries to see if they are acting openly and responsibly
Exchange Rate Arrangements
Exchange Rate Arrangements and Anchors
Three Choices: Hard Peg, Soft Peg, or Floating The IMF classifies currencies into three categories Hard peg
12.2% of total
value is locked into something and does not change
dollarization
currency boards
Soft peg 45.7% of total
more flexible than hard peg
Floating 42.1% of total
floating or freely floating
The Euro
The European Monetary System (EMS) (1992)established to create exchange rate stability
within the European Community
European Monetary Union (EMU)outlined the criteria for euro applicants (17/27)
the U.K., Sweden, and Denmark opted not to adopt the euro
The European Central Bank (ECB) sets monetary policy for the adopters of the euro
Determining Exchange Rates
Currency in a floating rate worlddemand for a country’s currency is a
function of the demand for that country’s goods and services and financial assets
Determining Exchange Rates
The Equilibrium Exchange Rate and How it Moves
Determining Exchange Rates
Currency in a fixed rate or managed floating rate world
Role of central banks
reserve assets
intervening in the market
attitudes toward intervention The Bank for International Settlements (BIS)
the central banks’ bank
coordinates central bank intervention
Black Markets
A black market closely approximates a price based on supply and demand for a currency instead of a government controlled price
Foreign Exchange Convertibility and Controls
Hard currencies U.S. dollar, euro, British pound, Japanese yen
Soft currencies developing countries
Countries can control convertibility throughlicensesmultiple exchange rate systemsadvance import depositsquantity controls
Exchange Rates and Purchasing Power Parity
Purchasing power parity (PPP) a change in relative inflation between two
countries must cause a change in exchange rates to keep the prices of goods in the countries fairly similar
The Big Mac Index
Exchange Rates and Interest Rates
The Fisher Effect links inflation and interest rates
The International Fisher Effect (IFE)links interest rates interest rates and exchange rates
Other Factors in Exchange Rate DeterminationConfidence (Confidence (speculationspeculation))
information(information(speculationspeculation))
trade flowstrade flows
Fundamental and Technical Forecasting
Forecasting exchange rates
Fundamental forecasting
uses trends in economic variables to predict future rates
Technical forecasting
uses past trends in exchange rates to spot future trends
Biases can skew forecasts
Timing, direction, and magnitude of exchange rate movements are important to consider
Fundamental Factors to Monitor Monitor
The institutional setting
Fundamental analyses
Confidence factors
Events
Technical analyses
Business Implications of Exchange Rate Changes
Marketing Decisions when the value of a country’s currency rises, exporting
becomes more difficult as the product becomes more expensive in foreign markets
Production Decisions might locate production in a weak currency country because
the initial investment is cheap and it will make a good base for exports
Financial Decisions currency rates influence sourcing, cross-border remittance of
funds, and the reporting of financial results
Foreign Exchange Risk Management Types of foreign exchange exposure
Translation
exposed accounts either gain or lose value in dollars when the exchange rate changes
Transaction
when a transaction is denominated in a foreign currency and the settlement results in a cash flow gain or loss
Economic or operating
the potential for change in expected cash flows that arises from the pricing of products, the sourcing and cost of inputs, and the location of investments
Foreign Exchange Risk Management
Exposure Management Strategy Defining and measuring exposure
Creating a reporting system
Adopt a policy assigning responsibility for minimizing or hedging exposure
Formulating hedging strategies
Operational
leads and lags strategyFinancial
forward contracts and currency options
The Future: The Dollar, The Euro, The Yen, The Yuan
Europethe euro should take market share away from the
dollar as the prime reserve asset assuming the problems in PIIGS, ie Greece and other countries are controlled ???
AsiaChina is moving forward to establish the yuan as a
major world currency ???
Latin Americaemerging market currencies should strengthen as
commodity prices recover ???
ConclusionConclusion
““A monetary system that functions A monetary system that functions poorly may … subject economies to poorly may … subject economies to disruptive shocks.” disruptive shocks.”
Robert Solomon
Casestudy : IKEACasestudy : IKEA
1.1. Read and prepare the Read and prepare the Casestudy on IKEA Casestudy on IKEA (Johnson, Whittington & (Johnson, Whittington & Scholes (2011)) for Scholes (2011)) for discussion and discussion and presentation next week. presentation next week.
2.2. Identify and evaluate the Identify and evaluate the challenges facing IKEA challenges facing IKEA during the global recession, during the global recession, by conducting External by conducting External Environment, Industry, Environment, Industry, Competitor analysis and Competitor analysis and SWOT.SWOT.
Core ReadingCore Reading
Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global Environment, Napier University EdinburghGlobal Environment, Napier University Edinburgh
Daniels, J.D., Radebaugh, L.H. and Sullivan, Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International Business: D.P. (2012) International Business: Environments and Operations. 14Environments and Operations. 14thth edition, edition, Pearson Pearson
Questions?Questions?