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Global Business Today Ninth Edition Chapter 11
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
214
came to a head when investors, who had been pouring money into Mexico, suddenly withdrew
their investments after the Mexican government announced that, despite earlier promises, it would
no longer maintain its pegged exchange rate. The peso quickly dropped in value ending up about
40 percent below what it had been. Some students will probably suggest that one of the biggest
challenges for governments facing a financial crisis is the domino effect it seems to have
throughout the economy. In the case of Mexico, IMF assistance to stabilize the situation meant
that the country had to follow what initially seemed to be unattractive policies.
2. Why did the United States provide assistance to Mexico? Why was it important to the United
States to stabilize Mexico?
Lecture Note: To extend the discussion of this feature and what can be learned from Mexico’s
experiences, consider {http://www.businessweek.com/stories/1999-03-14/why-countries-shouldnt-
break-their-currency-promises}.
E) The causes of the financial crisis that erupted across Southeast Asia during the fall of 1997 were
sown in the previous decade when these countries were experiencing unprecedented growth.
F) Huge increases in exports, and hence the incoming funds, helped fuel a boom in commercial
and residential property, industrial assets, and infrastructure. As the volume of investments
ballooned during the 1990s, often at the bequest of national governments, the quality of many of
these investments declined significantly. Often the investments were made on the basis of
projections about future demand conditions that were unrealistic. The result was the emergence of
significant excess capacity.
G) Investments made on the basis of unrealistic projections about future demand conditions
created significant excess capacity. These investments were often supported by dollar-based debts.
When inflation and increasing imports put pressure on the currencies, the resulting devaluations
led to default on dollar denominated debts. A final complicating factor was that by the mid-1990s
although exports were still expanding across the region, so were imports.
H) The Asian meltdown began in mid-1997 in Thailand when it became clear that several key Thai
financial institutions were on the verge of default. Following the devaluation of the Thai Baht,
wave after wave of speculation hit other Asian countries. These devaluations were largely driven
by similar factors to those that underlay the earlier devaluation of the Thai Baht. A combination of
excess investment, high borrowings - much of it in dollar denominated debt, and a deteriorating
balance of payments position.
Evaluating the IMF’s Policy Prescription
I) By 2013, the IMF was committed to loans to 52 countries that were struggling with economic
and currency crises. All IMF loan packages come with conditions attached, generally a
combination of tight macroeconomic policy and tight monetary policy.
Teaching Tip: To explore current issues at the International Monetary Fund in more depth, go to
{http://www.imf.org/external/}.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) IMF, World Bank Members Mull Third World Aid
explores efforts by the IMF and the World Bank to get developed countries to contribute funds that
could then be distributed to developing countries in need.
Inappropriate Policies
J) The IMF’s policies have recently come under fire. One criticism is that the IMF’s “one-size-
fits-all” approach to macroeconomic policy is inappropriate for many countries.
Lecture Note: To extend this discussion, consider {http://www.businessweek.com/articles/2014-
10-07/imf-explains-why-it-keeps-overestimating-growth},
{http://news.bbc.co.uk/2/hi/business/7647015.stm}, and {http://www.businessweek.com/ap/2012-
09-06/hungarian-prime-minister-unfriends-imf-on-facebook}.
Moral Hazard
K) A second criticism of the IMF is that its rescue efforts are exacerbating a problem known to
economists as moral hazard. Moral hazard arises when people behave recklessly because they
know they will be saved if things go wrong.
Lecture Note: To extend this discussion, consider
{http://www.businessweek.com/magazine/content/11_23/b4231014848770.htm}.
Lack of Accountability
L) The final criticism of the IMF is that it has become too powerful for an institution that lacks any
real mechanism for accountability.
Observations
M) As with many debates about international economics, it is not clear which side has the winning
hand about the appropriateness of IMF polices.
FOCUS ON MANAGERIAL IMPLICATIONS
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) Dollar’s Falling Value Ripples through U.S. Economy
provides an interesting perspective of how the value of the dollar is affecting different companies.
The video fits in well with a discussion of how companies can cope with changing exchange rates.
A) The managerial implications of the material discussed in this chapter fall into three main areas
– currency management, business strategy, and corporate-government relations.
Currency Management
B) An obvious implication with regard to currency management is that companies must recognize
that the foreign exchange market does not work quite as depicted in Chapter 10. The current
system is a managed float system in which government intervention can help drive the foreign
exchange market. Companies need to be aware of this and adjust their foreign exchange
transaction accordingly.
C) A second message contained in this chapter is that under the present system, speculative buying
and selling of currencies can create volatile movements in exchange rates.
Business Strategy
D) The volatility of the present floating exchange rate regime presents a conundrum for
international businesses. Exchange rate movements are difficult to predict, and yet their
movement can have a major impact on the competitive position of businesses. One response to the
uncertainty that arises from a floating exchange rate regime might be to build strategic flexibility
to minimize the economic exposure of the firm.
Management Focus: Airbus and the Euro
Summary
This feature describes how Airbus is protecting itself from exchange rate fluctuations. French
aircraft maker Airbus prices its planes in dollars. However, because over half the company’s costs
are in euros, the company has the potential to see significant fluctuations in its earnings if it does
not hedge its foreign exchange exposure. The following questions can help in the discussion of the
feature:
Suggested Discussion Questions
1. What type of foreign exchange exposure does Airbus face? How can Airbus protect itself from
its exposure to changing exchange rates? How does the company’s switch to more U.S. suppliers
help the company?
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
217
2. Airbus has asked its European based suppliers to start pricing in U.S. dollars. What does Airbus
hope to gain by this request? What does it mean for suppliers?
Discussion Points: Airbus’ decision to ask suppliers to price their components in dollars is an
effort to control exchange rate risk. The company prices its planes in dollars, but was paying for
components in a variety of currencies. By shifting to a strictly dollar run business, the company
not only consolidates all of its transactions and so hedges its exposure more easily and cheaply, it
also increases the proportion of its costs that are in dollars. For American suppliers, the shift to
pricing in dollars is beneficial because it eliminates exchange rate risk. For other suppliers
however, the shift may mean an introduction of exchange rate risk.
Teaching Tip: Students can learn more about Airbus by going to the company’s web site at
{http://www.airbus.com/en/}.
Lecture Note: Fluctuating exchange rates have had both positive and negative implications for
Airbus. To learn more, consider {http://www.businessweek.com/ap/2012-07-01/officials-ala-dot-
airbus-plant-will-employ-1-000}.
Corporate-Government Relations
E) As major players in the international trade and investment environment, businesses can
influence government policy towards the international monetary system. International businesses
should use their influence to promote policy decisions that facilitate the growth of international
trade and investment.
Critical Thinking and Discussion Questions
1. Why did the gold standard collapse? Is there a case for returning to some type of gold standard?
What is it?
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
218
2. What opportunities might current IMF lending policies to developing nations create for
international businesses? What threats might they create?
3. Do you think the standard IMF policy prescriptions of tight monetary policy and reduced
government spending are always appropriate for developing nations experiencing a currency
crisis? How might the IMF change its approach? What would the implications be for international
businesses?
4. Debate the relative merits of fixed and floating exchange rate regimes. From the perspective of
an international business, what are the most important criteria in a choice between the systems?
Which system is the more desirable for an international business?
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
219
5. Imagine that Canada, the United States, and Mexico decide to adopt a fixed exchange rate
system. What would be the likely consequences of such a system for (a) international businesses
and (b) the flow of trade and investment among the three countries?
6. Reread the Country Focus on the U.S. dollar, oil prices, and recycling petrodollars, then answer
the following questions:
a) What will happen to the value of the U.S. dollar if oil producers decide to invest most of their
earnings from oil sales in domestic infrastructure projects?
b) What factors determine the relative attractiveness of dollar, euro, and yen denominated assets to
oil producers flush with petrodollars? What might lead them to direct more funds towards non-
dollar denominated assets?
c) What will happen to the value of the dollar if OPEC members decide to invest more of their
petrodollars towards non-dollar assets, such as euro denominated stocks and bonds?
d) In addition to oil producers, China is also accumulating a large stock of dollars, currently
estimated to total $1.4 trillion. What would happen to the value of the dollar if China and oil
producing nations all shifted out of dollar denominated assets at the same time? What would be
the consequence for the United States economy?
Answer:
Global Business Today Ninth Edition Chapter 11
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
220
rate. So, for example, if the dollar was expected to depreciate relative to the euro or yen, non-
dollar denominated assets might be more attractive all else being equal.
c) Oil producers have significantly increased their holdings of dollars as a result of higher oil
prices. Should OPEC members decide to sell their dollars to invest in non-dollar denominated
assets such as euro denominated stocks or bonds, we would expect to see downward pressure on
the dollar.
d) If China and the oil producers simultaneously decide to sell off their dollars, there would be
significant downward pressure on the dollar. This downward pressure would probably cause
considerable pessimism among investors, and the U.S. economy, and the world economy in
general, would likely suffer.
Closing Case: Currency Trouble in Malawi
Summary
The closing case explores the economic and political turmoil in the East African state of Malawi
from 2004 to 2012. The outlook for Malawi, one of the poorest countries in the world, seemed to
be good in 2004 when former World Bank economist Bingu wa Mutharika was elected president.
Bingu wa Mutharika attracted donor money and subsidized agriculture, helping boost the country’s
economy, but then began to take a more dictatorial approach to governing. Donations and aid to
the country stopped. At the same time, the country’s tobacco exports stalled sending the country
into a foreign currency crisis. Discussion of the case can revolve around the following questions:
QUESTION 1: What were the causes of Malawi’s currency troubles?
QUESTION 2: Why did Mutharika resist IMF calls for currency devaluation? If he had lived and
remained in power, what do you think would have happened to the economy of Malawi assuming
that he did not change his position?
QUESTION 3: Now that Malawi’s currency has been devalued, what do you think the economic
consequences will be? Is this good for the economy?
05-31/malawi-peter-mutharika-sworn-in-as-new-president} and
{http://www.businessweek.com/news/2014-08-06/malawian-president-mutharika-hopes-for-imf-
agreement-by-november}.
Continuous Case Concept
China is currently a hot market for automakers. Companies see the market as being one of the
world’s most significant markets in the next decade and are shifting production to China. Some
companies are even developing cars specifically for the local market. However, pressure on
China to revalue its currency could change the nature of the market.
• In June 2010, the Chinese government indicated that the Yuan would be more flexible and
allowed to appreciate in value relative to other currencies. Ask students to consider the
strategic implications of a stronger Yuan for the auto companies. Do any of the companies
benefit from a stronger Yuan? Do consumers?
• Next, ask students to consider the effects a floating Yuan might have on the industry. Is it
beneficial for companies producing in China? Why or why not?
• Finally, if China moves to a floating regime, should the auto companies move their
production from other locations in the world to China? Why or why not?
This feature can be used at the beginning of the discussion of the international monetary system.
The feature also works well as conclusion to the material presented in the chapter and can help
students understand the opportunities and threats for companies related to exchange rate
movements.
globalEDGE Exercises
The resources for each exercise can be easily located by using the search box at the top of the
globalEDGE website at http://globalEDGE.msu.edu
Global Business Today Ninth Edition Chapter 11
Exercise 1
Search phrase: Global Financial Stability Report
Resource Name: IMF: Global Financial Stability Report
Website: http://www.imf.org/external/pubs/ft/GFSR/index.htm
globalEDGE Category: Finance
Additional Info:
The report is published semi-annually by the Capital Markets Division of the International
Monetary Fund, and examines current risks facing the global financial system and policy actions
that may mitigate these. As a result it provides a great overview of the state of the global financial
system.
Exercise 2
Search phrase: Deutsche Bank Research
Resource Name: Deutsche Bank Research
Website: http://www.dbresearch.com/
globalEDGE Category: Finance
Additional Info:
A research focused website published by the Deutsche Bank, the site provides timely analysis of
the international finance markets. A special section is dedicated to Emerging Markets can be
reached under the “Research” section of the main navigation.
Additional Readings and Sources of Information
Clinton on Africa Trip Visits Malawi
http://www.businessweek.com/ap/2012-08-05/clinton-on-africa-trip-visits-malawi
Iceland Must drop Bank Creditor Program World Bank Advisor Says
http://www.businessweek.com/news/2014-05-01/iceland-must-drop-bank-creditor-program-world-bank-
adviser-says
How Bretton Woods Reshaped the World
http://news.bbc.co.uk/2/hi/business/7725157.stm
Insight: Bretton Woods Two?
http://news.bbc.co.uk/2/hi/7724298.stm
Nigeria Orders Audit for Billions of Petrodollars
http://www.businessweek.com/ap/2014-02-14/nigeria-orders-audit-for-billions-of-petrodollars
OPEC Where All Those Petrodollars Will Go
Global Business Today Ninth Edition Chapter 11
http://www.businessweek.com/stories/2004-10-24/opec-where-all-those-petrodollars-will-go
Petrodollars Turn Aberdeen into Independence Battleground
http://www.businessweek.com/news/2014-06-19/petrodollars-turn-aberdeen-into-independence-
battleground
The Euro as Good and Bad as Gold
http://www.businessweek.com/magazine/the-euro-as-good-and-bad-as-gold-11172011.html
IMF Lays Out the Risks to Global Growth
http://www.businessweek.com/videos/2012-10-09/imf-lays-out-the-risks-to-global-growth
Airbus Plans 1st U.S. Factory
http://www.businessweek.com/ap/2012-07-02/news-summary-airbus-plans-1st-us-factory
OPEC Pouring Petrodollars into U.S. Treasuries
http://www.businessweek.com/videos/2012-03-19/dmd1203190711-scarlet-dot-mpg
