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Our world today has become more connected. Soccer fans in Nigeria are able to watch live matches from leagues across the globe with high definition pictures and good sound quality. The live matches can even be watched on handheld smartphones. This is the phenomenon called globalization. 20 years ago, few would have believed that such a scenario would be possible. Globalization and the quest for increased productivity have been the major catalysts for changes in world business today. The world has seen an increased global trade in recent years. This paper seeks to analyse new emerging trends that are likely to influence the global economic scene as well as the forms of financial risk that are associated with doing business internationally.
Key words: Globalization, catalysts.
Critical Analyses of International Marketing
Emerging Global Trends that are Likely to Influence the Global Economic Scene
As the early 21st century began, the information revolution transitioned into what we now call globalization. Many businesses shifted their operations from a dependency on local supply chains and markets to global supply chains and markets. Globalization has put the world in a much better place today. In the developing world, billions have moved out of abject poverty while in the developed world it has enabled people to enjoy connectivity and productivity more than could have been imagined before. Globalization can be said to have increased prosperity and reduced the inequality between various nations. The future of business in the world seems bright. It is generally agreed that it is challenging to accurately predict what the future of global business will be. However, since we are active in the global business field, we are aware of the trends that are happening and can use them to predict the future to some degree of accuracy (O’Neil et al, 2017 pp.173).
In contemporary settings, the impact of advancing technology is growing rapidly across the globe. Technological advancements in information technology enable us to have computer systems that can change employment patterns and productivity more easily. The expanded global communication and transport systems that have resulted from technological advancements are in a position to speed up global business operations far better than trade pacts have done. The totality of technological advancements produced by the nations of the world will in future surpass the technologies developed by single nations. Therefore, an individual entity such as an engineer, scientist or even a nation may discover, invent, or develop a process with the aim of gaining a competitive advantage in a particular area. Such an entity will possess the initial competitive advantage on that particular area and exceed the sum of the world expertise in that area. If the technological advancement is regarded as valuable, then it will appear almost immediately in many other places across the globe and the sum of the contributions from other players will soon exceed the source of the technological advancement (Awate, Larsen & Mudambi, 2015, pp.65).
Because of the clear potential of technological advancements, the rapidly growing difference between the total output of technology from all nations and the contribution of a sole nation means that in future, no country will be able to solely depend on its own resources as a way of gaining competitive advantage. In future we are likely to see that the cost of ignoring technological advancements will be high and technological advancements will become widespread.
The use of technological advancements to spur innovation and improve the lives of people in the world is an opportunity that is available in almost all area of the world economy. The first wave of globalization occurred mainly as a way of accessing the markets of other nations and accessing low-cost supply chains in those foreign nations. The next wave may follow a different path by being less centralized and digitally more connected. Businesses can utilize these trends to optimize their global business operations (Oneil et al, 2017, pp.172).
Financial Risks Involved In Doing Business Internationally
In all businesses, risks are inevitable and sound risk management practices are an essential element of running businesses successfully. The era of technology has tremendously improved communication and transportation and hence the development of global business. With the onset of globalization, the distinction between foreign and domestic investment has become increasingly blurry. Business investments in foreign nations come with many opportunities but also come with additional risks. The primary financial risks in international businesses are foreign exchange changes. Every country uses its own currency and various factors may influence the foreign exchange rates which in worst scenario cases may increase the cost of operating those foreign businesses (Lasserre, 2017, p.102).
Exchange Rate Risk. The exchange rates of currencies fluctuate over time and this poses a financial risk to firms if those fluctuations are not anticipated. Currency risks arise from the relative changes in the valuation of currencies. These currency fluctuations can develop into gains or losses especially when the profits or investments are converted into the U.S dollar. Currency exchange risks may be in the form of transaction exposure, economic exposure, or translational exposure.
Transaction exposure occurs when a business has contractual cash flows that have values denominated in foreign currencies. Because exchange rates fluctuate with time, this poses a financial risk to businesses operating internationally. For example if the current exchange rate between the U.S dollar and the Chinese Yuan is 1$= ¥100 and a company borrows ¥100 million for a period of 1 year with an annual interest of 3%, and then converts the ¥100 million to $1million at the end of the year the company will be required to pay ¥103 million. However, if the exchange rate changed to say $1=¥95, then the company will have to use $1, 084, 210 to buy ¥103 million which is an effective increase of about $84, 210 and the real effective interest rate rises to 8.4% (Cavugsil et al, 2014, pp.309)
Translation exposure refers to the extent to which a company’s financial reporting is influenced by changes in exchange rates. Translation risk occurs when assets held in foreign currencies have to be re-evaluated. This risk may also lead to gains or losses (Cavusgil et al, 2014, pp.282).
Risk Management Techniques
The first step to better managing financial risks is by identifying the risks. International businesses have several ways of managing financial risks. As has been described, currency risks may involve a current transaction, future transactions or even translations in financial reports. Companies seeking to manage currency risks may use financial derivatives to reduce the risks associated with currency through hedging. Currency hedging can be done through, currency forwards, currency futures, and money market hedging (Cavusgil et al, 2014, pp.306).
Currency forwards provide a business a way to minimize foreign exchange risk especially when a business is scheduled to make a foreign currency payment in future. This method involves the selling or buying of currency at a rate specified to be paid in the future. In this way, currency fluctuation is eliminated because the price quoted is locked. Currency futures are commitments by companies to provide a specified amount of currency at an agreed upon price that is stipulated within a contract. The futures have similarities with the forwards however their major differences is that forwards have to be run to maturity while futures can be traded or liquidated before maturity. Money market hedging involves a loan agreement in which a business borrows money in one currency and exchanges it to another. In this scenario, a company borrows money and immediately converts the loan into the business’ operating currency and then repays the foreign currency loan within a particular date (Lassere, 2014, pp.336).
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Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business. Pearson Australia. http://b-ok.xyz/dl/1192028/479bf9
Lasserre, P. (2017). Global strategic management. Macmillan International Higher Education. http://b-ok.xyz/dl/876044/16b24a
O’Neill, B. C., Kriegler, E., Ebi, K. L., Kemp-Benedict, E., Riahi, K., Rothman, D. S., & Levy, M. (2017). The roads ahead: narratives for shared socioeconomic pathways describing world futures in the 21st century. Global Environmental Change, 42, 169-180. http://booksc.org/book/44678351/7e5843
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