Voyevodins' Library _ "International Business: Competing in the Global Marketplace" / Charles W.L. Hill ... Chapter 9 ... gross domestic product (GDP), gross fixed capital formation, gross national product (GNP), group, Heckscher-Ohlin theory, hedge fund, Helms-Burton Act, historic cost principle, home country, horizontal differentiation, horizontal foreign direct investment, host country, human development index, human resource management, import quota, individualism, individualism versus collectivism, inefficient market, infant industry argument, inflows of FDI, initial rate, innovation, integrating mechanisms, intellectual property, internal forward rate, internalization theory, International Accounting Standards Committee (IASC), international business, international division, International Fisher Effect, International Monetary Fund (IMF), international strategy, international trade, ISO 9000, joint venture, just-in-time (JIT), lag strategy, late-mover advantage, law of one price, lead market, lead strategy, lean production systems, learning effects Voevodin's Library: gross domestic product (GDP), gross fixed capital formation, gross national product (GNP), group, Heckscher-Ohlin theory, hedge fund, Helms-Burton Act, historic cost principle, home country, horizontal differentiation, horizontal foreign direct investment, host country, human development index, human resource management, import quota, individualism, individualism versus collectivism, inefficient market, infant industry argument, inflows of FDI, initial rate, innovation, integrating mechanisms, intellectual property, internal forward rate, internalization theory, International Accounting Standards Committee (IASC), international business, international division, International Fisher Effect, International Monetary Fund (IMF), international strategy, international trade, ISO 9000, joint venture, just-in-time (JIT), lag strategy, late-mover advantage, law of one price, lead market, lead strategy, lean production systems, learning effects



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Chapter 9 Outline

Implications for Business

This chapter contains a number of clear implications for business. First, it is critical that international businesses understand the influence of exchange rates on the profitability of trade and investment deals. Adverse changes in exchange rates can make apparently profitable deals unprofitable. The risk introduced into international business transactions by changes in exchange rates is referred to as foreign exchange risk. Means of hedging against foreign exchange risk are available. Forward exchange rates and currency swaps allow companies to insure against this risk.

International businesses must also understand the forces that determine exchange rates. This is particularly true in light of the increasing evidence that forward exchange rates are not unbiased predictors. If a company wants to know how the value of a particular currency is likely to change over the long term on the foreign exchange market, it should look closely at those economic fundamentals that appear to predict long-run exchange rate movements (i.e., the growth in a country's money supply, its inflation rate, and its nominal interest rates). For example, an international business should be very cautious about trading with or investing in a country with a recent history of rapid growth in its domestic money supply. The upsurge in inflation that is likely to follow such rapid monetary growth could lead to a sharp drop in the value of the country's currency on the foreign exchange market, which could transform a profitable deal into an unprofitable one. This is not to say that an international business should not trade with or invest in such a country. Rather, it means an international business should take some precautions before doing so, such as buying currency forward on the foreign exchange market or structuring the deal around a countertrade arrangement.

Complicating this picture is the issue of currency convertibility. The proclivity that many governments seem to have to restrict currency convertibility suggests that the foreign exchange market does not always provide the lubricant necessary to make international trade and investment possible. Given this, international businesses need to explore alternative mechanisms for facilitating international trade and investment that do not involve currency conversion. Countertrade seems the obvious mechanism. We return to the topic of countertrade and discuss it in depth in Chapter 15.

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