International business management презентация

ECONOMIC RISK ANALYSIS
Question : Is my money safe in that country?
Answer : Evaluate the Macro economic health of the country
Some factors to consider :
Exchange rates
Growth of domestic credit
bank rates
prices, WPI and CPI
industrial production
unemployment
trade , exports imports invisibles, CAD
government consumption
GDP, current and constant prices
population

ECONOMIC RISK ANALYSIS (ERA)
IMF uses quantitative analysis for evaluating economies
Economic risk is present in all countries, but most significant in developing and emerging economies
Guidelines devised at Greenwich evaluate the security of doing business in the country
Developing and emerging countries tend to trade in a narrow range of products and depend on cash flow
The three main measures of a country’s financial standing:
GDP – how much is it producing?
Inflation – how well controlled?
Current Account – are the imports affordable?
The first part of compulsory Exam Question 1 uses simple IMF-style quantitative formulas to measure economic performance against a standard
The second part of the question identifies and evaluates the main economic factors in order to make a qualitative investment decision in the country

ERA EXAM QUESTION PART I: QUANTITATIVE DATA
The first part of the question asks you to use 3 simple formulas to evaluate the economic performance of the country [10 marks]
The guidelines devised at the University of Greenwich are useful in evaluating emerging economies

FINDING THE DATA
Most of the data is available from the World Bank
The data is for all countries, not just developing economy clients of The Bank
One piece of data, for the current account/GDP, comes from the IMF World Economic Outlook (WEO)
In the exam the data will comprise the World Bank figures + CAD/GDP
The data sheet will be a Word file

1. GDP GROWTH
Question: is the economy growing at a sustainable rate?
Answer: target 2.0-3.0% developed, 6.0-10.0% emerging and 7.0-11.0% developing economies
Gross domestic product (GDP) measures everything produced in the country regardless of nationality
Real (constant prices) GDP increases show genuine growth in the economy
Positive, steady growth is always good but the gains may be unevenly distributed
Undesirable GDP conditions:
High growth – rising wages, inflation, imports and interest rates
Low growth – poor exploitation of resources, poor competitiveness, low wealth creation
Recession – wealth destruction, hysteresis effects

GDP GROWTH AROUND THE WORLD
As more resources are brought into use the sustainable rate of growth falls

GDP GROWTH TARGETS
Need to find a balance between a booming economy and recession
An overheating economy with high inflation is usually treated with high interest rates
A recessionary economy with low inflation is usually treated with low interest rates
Stagflation (low growth, high inflation) is a challenging paradox!
Sustainable GDP growth target depends on the economy
Developed – slow and steady at 2.0-3.0%
Emerging – relatively high rate 6.0-10%
Developing – relatively very high growth 7.0-11.0%
Rate of return should match the risk

GDP RISK AND RETURN FOR EMERGING ECONOMIES
Sustainable high rates of growth as unemployed resources are brought into the economy – e.g. migration from countryside to cities

GDP RISK AND RETURN FOR OTHER ECONOMIES
Developing
Developed

2: INFLATION – % CONSUMER PRICES

INFLATION
Question: Are prices under control?
Answer: compare the inflation with the 2.0% target
Various measures of inflation (RPI, CPI). World Bank use GDP deflator accounting for the nominal change in GDP i.e. reveals real GDP change
The GDP deflator is inflation for all output, not a basket of goods
High inflation
High inflation means constant adjustment to prices
Usually necessitates high interest rates.
Debt values are eroded over time
Low inflation/Deflation
Low inflation is too narrow a target, can slip into deflation
Deflation may require negative interest rates – tricky!
Some consumers may wait for further price reductions
Debts values increase over time

INFLATION AND RISK/RETURN
Most central banks are targeting 2.0% CPI inflation
Some central banks will accept overshoots and undershoots for short periods, others (e.g. ECB) will accept only an undershoot
On balance, 0.0-2.0% inflation is probably considered low risk
World Bank data shows inflation as GDP deflator

3. CURRENT ACCOUNT DEFICIT – CAD
Developing countries are often dominated by one or two industries
It can become highly volatile as trade fluctuates

CURRENT ACCOUNT DEFICIT – CAD
Question: how great is the short-term trade burden?
Answer: compare the current account deficit (CAD) and the gross domestic product (GDP)
CAD itself is not a worry:
It is funded from the capital account
It may be small compared to the total assets and liabilities
It may be a sign of strong domestic growth
The capital account could be showing good foreign investment
CAD/GDP percentage
It should be relatively stable over the years
It should be greater than -2% (i.e. -2.1% is high risk, -1.9% is low risk)

CURRENT ACCOUNT DEFICIT – CAD
For developing economies CAD can be a cause for concern
Fall in investment means imports cannot be afforded
A fall in exports creates a higher dependency on foreign funds
A high surplus can also be cause for concern
Economic growth is dependent on demand in other countries
Domestic consumers have less access to desirable imports
The government needs to counter pressure on the currency to rise in value
Risk Values

DEVELOPED COUNTRY COMPARISON: USA
Our analysis shows that GDP growth and inflation are both low risk
However, CAD/GDP is over the line, meaning it is high risk. Indeed, it is never expected to be within guidelines!
Is it realistic to say the USA is “high risk” compared to emerging economies?

CRITICISM OF THE IMF QUANTITATIVE APPROACH
Many feel that the IMF style of analysis does more harm than good
Criticisms:
It is a creature of the US and Europe
It has a neo-liberal agenda for low government spending, privatisation and debt repayment
It treats all countries the same
IMF’s defence
It is invited by the host government
It is the last resort – everything else has failed
The worse the taste the better the medicine

ERA EXAM QUESTION PART II:
FDI INVESTMENT DECISION
The second half of Exam Question 1 concerns the best target for foreign direct investment (FDI) [15 marks]
The decision of which sector of the economy to invest in can only be based on the information in the datasheet.
There are three sectors to choose from:
Agriculture
Industry
Services
The FDI decision should identify and analyse the most appropriate economic factors

FACTORS INFLUENCING FDI
The economic factors that are appropriate to the FDI decision depend upon the nature of the investment – it is therefore an opportunity for creative thinking by entrepreneurs
FDI entrepreneurs need to analyse trends in the data to uncover any new opportunities
It is also important to identify specific data that indicates new opportunities
To help you remember the most important factors, we have a Greenwich mnemonic:
GLIFTS

GREENWICH MNEMONIC - GLIFTS
GLIFTS is only there to help you remember – it should not be referenced!
It will point you towards the most basic information, but you can use any factor you think is important
GLIFTS will give you up to 6 economic factors – at least 5 are needed for the exam

USING GLIFTS
G – GDP per capita growth rate (the trend). May indicate a growing productivity, higher spending.
L - Life expectancy. Gives you an idea of the general well being of the population and the degree to which the government is looking after everyone
I – Inflation (GDP deflator): is the trend steady or out of control? Indicates the economic competency of the government
F – FDI, measure of how well the country is attracting foreign investors, particularly the trend
T – Technology
S – School

OTHER INTERESTING DATA…
An entrepreneur will browse data looking for items of interest
This is when your creativity reaches its peak!
Some data that might catch your eye and deserve further consideration:
Poverty Headcount
Malnutrition
Immunisation
Boy/girl ratio in education
Water access
Agriculture, industry, services added value
Gross capital formation
Time to start a business
Net migration
Total debt service

SEMINAR TASK
Come prepared with your calculators.
We will be doing two sets of exercises
Working out the ERA for an emerging country – data sheets available in the tutorial folder
Considering the country as a candidate for investment