International Marketing, 5th Edition

U.S. firms can remain competitive by adopting a number of tactics to counter the concessionary financing offered by the governments of their competitors. To begin with, the U.S. government should be urged to continue what it has been doing — filing complaints about the use of cheap credit as an unfair trade practice.

American firms can also counteract competitors' below-market financing by adjusting the terms of sales and financing. For example, they can offer to finance a larger amount, or they can lengthen the loan period. Finally, they can offer additional services and parts for free or at less than regular prices.

As stated by the company, Hawley is now a global security. The company's strategy of having its stock listed in a number of markets is geocentric in nature, and it is consistent with the company's goal of being multinational.

By having the security listed in all major markets, Hawley is able to raise capital quickly and efficiently. In addition, the practice allows investors in these markets to buy and sell the Hawley stock more easily. Another benefit is that the company can enjoy a local identity because it fits into the existing markets. To have the stock listed only in one market is to ignore overseas investors' interests in the company.

The international stock indices may supplement national indices but are unlikely to replace them in representing the equity investment sentiment. As a matter of fact, the national stock indices themselves are inadequate in representing market sentiment. The DJIA, for example, has often been criticized of merely representing a small number of blue-chip companies. Other national indices have the same problem.

The problem mentioned above is amplified in the case of international indices. The construction of such indices is even more complicated due to the difficulties in selecting and weighting securities. There are too many possibilities, and there is no uniform agreement on how to construct the index. It is doubtful that a particular composite can adequately represent all the securities worldwide.

Although some investors may want to know world trends, it is debatable whether they are going to invest on a global stock index. Actually, even on a more limited scale, the number of investors which buy individual stocks far exceeds the number of those who are involved with such national indices as S&P 500 and Major Market Index. Understandably, there are some who will find the national indices (or international indices) to be of interest. But the truth of the matter is that the interest in securities of individual companies is much greater.

It must be pointed out that even the owners of national indices understand that their indices are not suitable for everyone and that some kind of market segmentation is necessary. Dow Jones, for example, has one index for stocks, another for transportation companies, and yet another for utilities firms. The same logic applies to the international indices as well. There is a need for some type of international index, but there is also a need for national indices and definitely individual stocks.

The instructor may want to compare the international stock indices to a global currency, international newspapers, and standardized advertising. It is exceedingly difficult to create a global currency based on a basket of national currencies. Likewise, it is unlikely that there can be an international newspaper or a standardized advertisement that can be equally appealing everywhere. Just like a global currency, an international newspaper, and a standardized advertisement, an international stock index has a little bit of something for everyone — but probably not much of anything for anyone.

It should be noted also that, even in the same national market, there are numerous mutual funds that focus on specific sectors or industries (e.g., electronics, health care, energy, etc.). Such industry-specific funds, based on the principle of market segmentation, should make it clear that investment needs can be international/global, continental, national, or segment-specific. So investment products should match investors' needs. In all likelihood, a global index is going to be too broad to effectively serve investors.

Of all the stock indices, such U.S. indices as the Dow Jones Industrial Averages and S&P 500 are the most well known. But other national indices such as those for the Japanese and European securities markets are gaining in importance.

A stock index is merely a composite of a number of stocks or an average of these securities. As such, the average does not necessarily or adequately reflect the market sentiment. The DJIA, although being the most widely quoted, has been criticized that its composite represents only a small number of large, well-known companies. It is thus debatable whether the DJIA indeed represents the movement of the U.S. investment market.

Theoretically, this kind of world product is possible. Practically, it is easier said than done. If a certain index has difficulty in representing a single local market, it would be much more difficult to create a world index based on the combination of certain stocks worldwide to measure the investment sentiment of the world, especially in light of different inflation rates, varying economics, and cultural values. Therefore, some kind of market segmentation is needed in the sense that national indices are required. It is thus doubtful that a world stock index, if there ever were one, will replace the national stock indices.

It is not practical to abolish all local currencies except the U.S. dollar. It is virtually impossible for the U.S. dollar to function as the global currency. Just like the American public's resistance to embrace other currencies (and the metric system), other nations also resist replacing their national currencies with the U.S. dollar.

In addition to the problem of national pride, inflation presents another insurmountable obstacle to the creation of a world currency. Nations do not have an identical inflation rate, resulting in an uneven effect on the purchasing power of local citizens. It is thus extremely unlikely for any single currency to be used on a worldwide basis while maintaining constant value in all countries.

The assignment is similar to the previous one. The main difference of the two assignments is that, instead of having one national currency to be used as a global currency, there is a new currency designed specifically for this purpose based on a basket of several leading currencies. This may solve some of the problems mentioned above by increasing flexibility. Still those problems are not completely eliminated. There is also a problem of agreeing on the currencies to be used for this purpose. In addition, by trying to construct something intended for everyone, a compromise will have to be reached, resulting in something that does not fit the need of all countries exactly.

As commented by Sir Kit McMahon, Chairman and Group Chief Executive of Midland Bank, “we will never have one dominant currency or country; we will have an oligopolistic situation forever.” He felt that there would be two major currency blocs (led by Japan and the United States) around which countries would cluster. Furthermore, baskets of commodities and SDRs may develop into useful reference points, but nothing more. Commenting on whether the EU might develop into a currency bloc having its own external reserve currency and central bank, Sir Kit believed that it would not because no country would yield sovereignty to the required degree and because the markets would not allow it. “I don't think a finance minister will be able to convince the markets for many decades that his national currency cannot be dislodged from the general currency.”

It is neither sound nor practical for European firms to insist on the euro for all buying and selling transactions. To do so would make it convenient for European companies — at the expense of their customers/suppliers. To use the euro for invoicing purpose means shifting the foreign exchange risk to their customers/suppliers, something which they are not likely to appreciate. This in turn will eliminate many foreign firms from wanting to do business with their European counterparts.

The action has two sides that must be addressed. Whether the lower yen value is good for Japan depends on the nation's particular objective. If Japan elects to pursue the goal of full employment, the lower yen rate is preferred because this rate makes it easier for foreign firms to buy from Japan. The other side of the balance, however, is also important. If Japan's goal is to maximize consumer welfare, this strategy is harmful. The devalued yen makes imported goods more expensive, resulting in Japanese consumers having to pay more just to maintain the same level of purchase and consumption.

In mid-2007, the yen was quite weak in value against the U.S. dollar. Soon after that, the yen skyrocketed. By March 2008, the yen was at a 12-year high against the U.S. dollar. The stronger yen certainly made life more difficult for those Japanese companies that export to the U.S. market.

It is probably not a good idea for the United States to abandon the float in favor of the gold standard or other similar systems. The gold standard is simply too simplistic. Other problems include the inability to:

1. link money supply to gold volume
2. keep gold price stable
3. keep rates of inflation uniform among the industrial countries.

As concluded by the Group of 10, “a return to a generalized system of fixed parities is unrealistic at the present time.” The floating system has proven itself through several periods of raging inflation, deep recession, and massive money movements from oil-consuming countries to oil producers. Many observers continue to find fault with it; yet other systems have just as much, if not more, of the same flaws. At present, there does not appear to be a superior alternative that can be used.

It is not logical for both fixed and floating rates to be able to promote exchange-rate stability while controlling inflation because the two systems are so divergent. Fixed rates might have been able to partially accomplish these goals at one time when conditions were favorable. But fixed rates are no longer effective because such conditions as high levels of employment and low and fairly uniform rates of inflation no longer exist today.

There are several financial strategies which can be used to minimize exchange risks. An MNC can hedge its foreign exchange exposure in a number of ways. One method involves the interbank market which offers spot and forward transactions. These contracts specify the purchase and sale of currencies at a certain price, either for immediate or future delivery. If the company wants a standardized contract, it may choose to buy (sell) either a futures contract or an options contract. The standardization feature provides market liquidity, making it easy to enter and exit the market at anytime.

For an MNC with a network of subsidiaries, subsidiaries with strong currencies should delay or lag the remittances of dividends, royalties, and fees to other subsidiaries. Those in weak currency countries should try to lead, or promptly pay their liabilities and reduce their asset exposure.

Finally, for invoicing purpose, the invoice should use the seller's currency when the buyer is in a soft currency but the seller in a hard currency. But the buyer's currency should be used for invoicing when the buyer is in a hard currency but the seller is in a soft currency. When both the buyer and the seller are in soft currencies, they should consider a third currency as an alternative.

The purpose of this assignment is to emphasize the political and financial phpects of international business.

There are several benefits for manufacturing Japanese cars in the United States for U.S consumption. First, this method enables Japanese companies to overcome quotas and other protectionist measures and sentiment. Second, it minimizes the foreign exchange risks. When the yen is strong, as was the case in 1987, early 1988, 1992, and early 1995, the cost advantage of manufacturing in Japan declined. The prices of Japanese cars imported from Japan must be drastically increased to offset the eroding profits, thus making these cars less affordable to American consumers. By manufacturing these cars in the United States, the prices can be significantly divorced from the value of the yen. Furthermore, it allows Japanese firms to take advantage of local sourcing.

Exporting Japanese cars from the United States to Japan also makes some sense. Once again, it is a gesture of goodwill, and it should lower the protectionist sentiment in the United States. In addition, the strategy allows Japanese firms to benefit from, instead of being hurt by, the strong yen. Japanese car buyers can benefit from the favorable exchange rate which makes the imported cars affordable.

As the minicase states, Robert Mundell has organized conferences that brought economists and experts together to discuss the creation of a world currency. (See ‘World Money at the Palazzo Mundell’ The Asian Wall Street Journal, 2 July 2003.)

Technology and globalization have increasingly blurred the distinctions between national and international uses of money. Credit cards and electronic banking have replaced traditional money to some extent. As such, it can be argued that VISA and MasterCard are a form of international money that is accepted worldwide.

In spite of the significant advantages of having a world currency, it is exceedingly difficult to persuade countries to abolish their national currency. After all, a national currency is a symbol of national sovereignty, not to mention an emotional sentiment attached to it. (Because of national pride, most countries do not want to abandon their national but unprofitable airlines.) It is unlikely that globalization can replace nationalism any time soon. As a matter of fact, globalization protests seem to be gathering strength. (See Despite Trend toward Fewer Currencies, a Single World Currency Seems Unlikely in Near Future IMF Survey, 11 December 2000, 391.)