International Financial Management
You are required to write a report that critically evaluates each concern individually.
- Mr Amiable has heard of the large balance of payments deficit of the United States economy. He argues: “Surely this means that there is a larger supply of dollars for imports than demand for dollars for US exports, so the value of the dollar is bound to fall.” Mr Happy adds: ”No, the dollar will not necessarily devalue” to which Mrs Supreme says: “Even if it did, the balance of payments would not necessarily improve, it could even get worse”
- Mr Henny makes the following point: “I am more concerned about the how the Australian government might make it more difficult for us to operate should we decide to move our smelting operation to Frustralia.
- Mrs Pomona remarks: “You are wandering off the point. Our choice does not depend on the US balance of payments or whether we produce in Australia but on how we generally manage our currencies. Only against that background can we make a choice.
Executive SummaryThis report decimates the financial management constituents of Smelts Plc which propagates factors that are to be paid whether in US dollar or Australian Dollars. For Mr. Amiable to consider deficit in their balance of payment with the United States economy it is surely to contradict with demand and supply aspect for importing and exporting US dollars. While considering this scenario, Mr. Henry will need to make necessary sacrifices in order to understand how Australian Government needs to take its current operations from the US to Australia. As a result of which Mrs. Pomona needs to ascertain whether the impact on managing currency is necessary for depicting the background history of Australian Government.
IntroductionInternational financial management mainly refers to financial economics which mainly deals with monetary interactions taken place between various countries. The report undertaken on International financial management focuses on critically analysing the impact of deficit of balance of payment and the ways they can be probably rectified. This follows a discussion on the way Australian government might make it difficult for economy of US to carry on its operations effectively. This also includes a discussion of ways or means that can be adopted to manage its currencies in an efficient manner.
Findings and analysis
- Evaluate critically the impact of deficit on balance of payments with the economy of United States
- Analyzing the decision for moving smelting operation to Australia
- Decision on making choice that does not depend on US balance of payment instead should depend on management of currencies
“Mr Amiable has heard of the large balance of payments deficit of the United States economy. He argues: “Surely this means that there is a larger supply of dollars for imports than demand for dollars for US exports, so the value of the dollar is bound to fall.” Mr Happy adds: ”No, the dollar will not necessarily devalue” to which Mrs Supreme says: “Even if it did, the balance of payments would not necessarily improve, it could even get worse”
As stated by Mr. Amiable that the situation of deficit in balance of payment situation faced within the economy of US is a result of incidence of greater supply of dollars for the purpose of imports than amount available for that of export cannot be contradicted fully. This statement might be backed by the sole fact that depreciation can also be a result of decrease in external purchasing power of the economy concerned. As mentioned by Yahaya et al. (2015), the concept of depreciation often tends to exist in free market mechanism in which foreign exchange demand out ways the level of foreign exchange supply within the market for foreign exchange. Exchange value of dollar can be visualised as summary statistics that tends to incorporate in it a number of factors and forces. The factors might include potential long-term growth in GDP, monetary policy stance and relative productive level within US in comparison to other countries. Increment in demand for foreign goods usually tends to use up a huge amount of financial resources which usually tends to play a major role on part of the business organisations associated with the economy concerned to carry out all their business or production related activities smoothly and efficiently. As mentioned by Marti & Scherer (2016), efficient level of production is largely required for purpose of maintaining a sustainable position within economy. Maintenance of sustainability tends to play a prime role in case of effective survival within the world filled with immense competition. As opined by Avdjiev et al. (2016), an attempt on part of the economy concerned to utilise the resources available in an optimum manner can be highly beneficial in this case for purpose of correction of such a situation of deficit. This might be backed by the fact that it is the financial resources that tends to play a vital role in case of involvement in process of production thereby carrying out production as per the level of comparative advantage can contribute to this.
The concept of balance of payments mainly shows an overall summary of all financial transactions taken place within structure of an economy by government bodies, companies or individuals residing within the economy at large. As opined by Petty et al. (2015), the transactions mainly consist of export and import of goods, remittances as well as transfer of payments.
From the point of view of Mr. Happy, it is clear that he suspects the incidence of BoP deficit in US might not result in a fall in dollar value. This can be reasonable from a laissez-faire perspective, that argues that BoP deficit do not matter in long run. This implies that this school of thought is expecting that although BoP can be prevalent at times in any economy, it itself will erase its existence over a course of time. If the argument of BoP as a macroeconomic element with no severe significance is considered to be true, it can be understood that BoP deficit will not hold the power to affect dollar value. Understanding this laissez-faire perspective requires laying deeper attention to understanding the economic structure associated with it. This economic structure makes private parties free from government obligations. Therefore, these entities can make rules and strategies that favour them yet in time of BoP deficit. However, this structure for an economy can be highly dangerous as it supports capitalism without paying any regard to ethics and other values essential for running an economy. This way, while it makes the powerful entities of an economy powerful, it suppresses any scope of progression that weaker agencies can avail. However, in US, the economic structure supports and controls trade and business performance. Therefore, it is obvious that in prevalence of BoP deficit, there has to be some effort on part of US government in controlling the deficit. However, as Mr. Happy mentions, this does not necessarily indicates a fall in US dollar value. Deficit in balance of payment within the economy might be a result of prevalence of high inflation rate. Existence of high rate of inflation might have led to making the foreign goods cheaper in relation to those domestically produced ones. As stated by Wild et al. (2014), this might led to outflow of greater amount of financial resources that might have resulted in occurrence of deficit in its balance of payment situation. Such a situation might be guided by the sole fact that high level of inflation might have made the people dwelling within the economy of US desire for goods or services that are foreign to it since these people found them to be relatively cheaper when compared to domestic ones. On other hand, sudden change in taste or preferences of customers might also contribute to this. Such excessive outflow of financial resources might result in degradation of productivity level of the economy which might often lead to contraction.
Besides this, such a deficit might be the impact of cyclical fluctuations. It might be the case that the economy might be in a booming phase. This, often prevents the concerned economy satisfy the demand domestically prevalent within the economy (Richards & Van Staden, 2015). Such incapability on part of the economy concerned might have resulted in creation of the situation of balance of payments. As suggested by Martínez-Ferrero & Frías-Aceituno (2015), existence of an unstable political situation within the economy concerned often leads to arousal of some level disequilibrium in balance of payments position as a result of lower inflow of foreign funds than outflow. This might be owing to inadequate support from government of the economy concerned.
On other side, it is Mr. Happy who is found to state that devaluation of dollar would not necessarily improve as a result of devaluation of dollar would not lead to any kind of improvement in the deficit in balance of payment situation faced by the economy of US. Such an opinion might be guided by the sole fact that devaluation of dollar mainly refers to weakening of dollar value of US in comparison to currency value of various other economies largely prevalent all over the world. As stated by Yahaya et al. (2015), it can be the case that devaluation of US dollar might lead to enhancement in level of demand for goods or services manufactured by the economy to a great extent. However, this might not be effective enough in case the economy fails to involve itself in manufacture of goods or services taking into consideration the taste or preferences of its targeted customers. As mentioned by Barrell et al. (2017), failure to do might make it unable to earn profit as per its level of expectation. Such incapability on part of the economy concerned might tend to make the economy come out of its deficit in balance of payment in the long term. Taking this fact into account, it can be stated that good quality production backed by the type of goods or services tends to play an essential role on part of the economy concerned to benefit from devaluation of its currency value. This might be guided by the fact that taking into consideration both the concept of comparative advantage and taste or preferences of customers targeted could have helped it attract a greater number of customers worldwide. As cited by Marti & Scherer (2016), such attraction might be owing to the fact that the customers concerned might find it cheaper to import goods or services from the economy of US as a result of such devaluation. In opinion of Avdjiev et al. (2016), the economy facing such an increased demand level is likely to act on part of the economy concerned to come out of its deficit in balance of payment since this would lead to increment in level of export in comparison to that of import level. The level of import is likely to remain at a low level in such a situation as a result of the fact that the impact of devaluation is unlikely to be enjoyed by the people dwelling within the economy of US itself owing to the fact that the currency value of other economies of the world have not shown a tendency to show any kind of devaluation in their currency value. Thereby, no such profitable position can be enjoyed by the people of US willing to import goods or services from abroad.
“Mr. Henny makes the following point: “I am more concerned about the how the Australian government might make it more difficult for us to operate should we decide to move our smelting operation to Australia.”
In order for Mr. Henry to understand how the Australian Governmental plans have made it difficult for them to operate on whether to move their smelting procedure towards Australia. There is certain consequence that lacks sophistication research system so as to conduct research into internationalization of business firm into other territories. The primary first three consequences that relates to three dimensions have more impactful situation in relation to big MNE theories. If on the other hand Mr. Henry proposes to move his smelting business to Australia, then he has to firstly identify the three clusters for internationalization. For this motivation in order to drive forces that will initiate goal oriented behavior of the concern will distinguish each types of motivation like intrinsic, extrinsic and mixed motives.
Intrinsic motivation:This is referred to as the efficiency gaining proposition while considering internationalization across different domestic borders. This involves different exploration of necessary resources which are to locate and transfer coordinating assets or firm based advantages in that particular location. This will benefit Mr. Henry to gain efficiency while proposing integration possibilities in a closed market structure. Due to the BoP deficit that the US economy is facing, it is reasonable for any performers of US economy to export their good and earn good return. A B.O.P deficit is expected to discourage export in US economy. Therefore, organizations thinking of exporting products in international market can get affected due to this falling value of US dollar.
Extrinsic motivation:This refers to a particular home point or host country location that is considered to recreate motivation in abroad states. One can possibly find relevant resources for conducting neutrality approach under this motive. However most of these approaches are based upon narrowing the sets of neo-institutional idea formation and are consecutively difficult in order to translate such motivation factor among managers.
Mixed motives of Australian Government:This motive refers to be using a structural format so as to synthesize both of the other motives like Intrinsic as well as extrinsic motive at the same time. In real world practice such motives are used by governmental regulations for referring sector dynamics prior to internationalization. These processes are quite different from one sector to another and might not involve resource base planning.
In order for Mr. Henry to fully understand how much impact does Australian Government has over them so as to create obstacles for operating their smelting business in Australia he needs to identify the first line of defense for economical importance that got initiated during IMF crisis. As ascertained by Cremers et al. (2016), for this IMF (International Monetary Fund) will necessarily provide forecast advice on how to overcome such crisis through proper management of their financial transactions according to Australian Government.
As per policy reformist is concerned Titman et al. (2017) stated that there are financial management principles and their application in relation to policy reforms will help Mr. Henry to focus upon providing advice to developing countries like Australia in correlation to achieve macroeconomic stability and to continue accessing world finance markets. If such considerations are not covered by the Australian Government during transferring process then attainment of rapid economic growth are also considered to be farfetched from reality.
"Mrs. Pomona remarks: “You are wandering off the point. Our choice does not depend on the US balance of payments or whether we produce in Australia but on how we generally manage our currencies. Only against that background can we make a choice.”
For Smelts Ltd it does not depend on the Balance of Payment structure that operates in US or to even produce in Australia instead of how to manage their current currency norms. In contrast to this its implications are based upon international monetary format (Brooke, 2016). This turbulence began during the time of former Soviet Union through passing of Tequila crisis in Mexico. As a result of which Mrs. Pomona contradicted that wandering off from a certain point while depending on US balance of payments are not to be considered as the primary cause for such deferment, instead management of general currency contingencies are highly debatable for taking such contingencies before Smelts Ltd opts for moving their operation in Australia.
Understanding the purchasing power of parity (P.P.P) has been considered as one of the primary arbitrage laws for pricing of assets on an international basis (Altman et al. 2017). For this reason building block of P.P.P as per Australian Government will contend in absence of laws such that identical goods can be sold at a same price in the domestic territories of the country. It is thus provident to ascertain equilibrium relationship for real exchange rate (R.E.R) that will be nominal while propagating exchange rates. If for some reason the purchasing power parity holds equivalent to the relative pricing level then the nominal exchange rate for that period needs to adjust in such a manner so that real exchange rate will remain constant. In words of Cavusgil et al. (2014), conducting international business has to have propensity between different continents and their currency depiction. While considering such factor it is crucial for Mrs. Pomona to give prior importance to their P.P.P structure while conducting international finance. This will eventually eradicate limited understanding approach on the behavior of real exchange rate. For this Mrs. Pomona needs to extensively research upon the root cause of change in R.E.R. By proposing different R.E.R behavior upon different states it has become relevant so as to emerge for understanding the potential of different speeds that are to be adjusted while considering positive as well as negative deviation from R.E.R towards P.P.P equilibrium.
In recent years questions have started to initiate U.S dollars preeminence with respect to international currency presence. The emergence of euro currency has proposed changes in the dollar value, as a result of which its financial market caused drastic decreasing trend in views of facing many challenges along with currency standing position in different economies. Factors like inertia in currency usage, large size economic stability among U.S economy has caused oil prices to perpetuate the role of dollar as a medium for conducting international based transactions. A simple change in the dollar valuation for a particular time period would have created consequences for the currency transaction and the status will help to insulate the economy of U.S from foreign stocks of Nigeria, thus reducing the transaction cost while trading and financing. Utilization of dollar in reserves will typically result in greater sensitivity of trade along with inflation and asset valuation while conducting exchange rate. In words of Deresky (2017), conduction international management across borders will necessarily help Mrs. Pomona to better implement international management regulations of Nigeria.
Figure 1: Exchange rate of US Dollar in the year, 2002
In contrary to this it was first identified that depreciation of dollar value was observed in the year 2002 which focused upon euro, yen’s currency stability. Such exchange value of each dollar valuation can necessarily be viewed as a summary for incorporating different factors like implications of monetary policies, domestic term savings and long term GDP growth possibility. This is the primary reason as to why it has become difficult for Mrs. Pomona stating that the Smelts Plc business import notion of bauxite from Australia has drastically impacted due to monetary changes with US balance of payments and their managing propensity of home currency. For U.S government to account for considering deficit in Gross Domestic Product its ratio helps to assess overall danger zone for a two year time span just prior to starting of depreciating of dollar value. This is significantly relevant for conducting net cash flow sustainability along with global investor proposition for purchasing of asset at a current price which will necessarily become lower than what the U.S economy has proposed. Such deficit under foreign investment will create higher demand in return to sell investments in US economy.
Recommendation and conclusionIn order for Smelts Plc to conduct import of bauxite from Australia there are certain implications that are necessary so as to consider whether payment is to be made in US dollars or in Australian Dollars. Such creates concerning factor for Mr. Amiable in order to comply for deficit in the overall balance of payment structure of the US economy. Following of International Monetary Fund policies along with equilibrium stages between R.E.R and P.P.P will promote greater returns to them and will necessarily not create any form of contingencies during currency transaction. Likewise, for Mr. Henry the situation is a bit different as he is more concerned towards how Australian Government will react to a more difficult change so as to decide upon moving their smelting business into Australian territories. Such implication creates identification of first three consequences which can impact the three dimensions of motivational theories that are related to big multinational enterprises. On the contrary for choosing what factors have created dependence between US balances of payment structure, whether it is related to produces in Australia or based upon managing other forms of currency implications, Mrs. Pomona needs to conduct background research as to when depreciation on dollar value cased European and Japanese currency to fluctuate.
BooksBrooke, M. Z. (2016). Handbook of international financial management. US Springer.
Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business. Australia Pearson
Deresky, H. (2017). International management: Managing across borders and cultures. London: Pearson Education
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Australia Pearson Higher Education
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and applications. Australia Pearson.
Wild, J. J., Wild, K. L., & Han, J. C. (2014). International business. London Pearson Education Limited.
JournalsAltman, E. I., Iwanicz?Drozdowska, M., Laitinen, E. K., & Suvas, A. (2017). Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman's Z?Score Model. Journal of International Financial Management & Accounting, 28(2), 131-171.
Avdjiev, S., McCauley, R. N., & Shin, H. S. (2016). Breaking free of the triple coincidence in international finance. Economic Policy, 31(87), 409-451.
Barrell, R., Karim, D., & Ventouri, A. (2017). Interest rate liberalization and capital adequacy in models of financial crises. Journal of Financial Stability, 33, 261-272.
Cremers, M., Ferreira, M. A., Matos, P., & Starks, L. (2016). Indexing and active fund management: International evidence. Journal of Financial Economics, 120(3), 539-560.
Marti, E., & Scherer, A. G. (2016). Financial regulation and social welfare: The critical contribution of management theory. Academy of Management Review, 41(2), 298-323.
Martínez?Ferrero, J., & Frías?Aceituno, J. V. (2015). Relationship between sustainable development and financial performance: international empirical research. Business Strategy and the Environment, 24(1), 20-39.
Richards, G., & van Staden, C. (2015). The readability impact of international financial reporting standards. Pacific Accounting Review, 27(3), 282-303.
Yahaya, O. A., Kutigi, U. M., & Mohammed, A. (2015). International financial reporting standards and earnings management behaviour of listed deposit money banks in Nigeria. European Journal of Business and Management, 7(18), 70-82.