Chapter 8 - International Finance Flashcards
Idea by Lessard and Lightstone
Recommendations on how MNEs should deal with economic pressure
What is economic pressure
The impact of changes in real exchange rates relative to the MNE’s competitors
What should MNEs do to reduce economic pressure?
Should strive to have flexible sourcing structure
Be able to shift production from one country to another quickly
Attain the capability to engage in exchange rate pass through
Why is economic pressure an issue?
Because it may result in negative effects on the MNE’s income compared to rivals
Adds uncertainty to the value of a firm’s location advantages
What does Professor Rugman argue about economic exposure?
Economic exposure affects the strategic decision to locate in a certain country
However it must never drive or determine strategy
Lessard and Lightstone’s observations
EE should be viewed as a parameter that adds certainty to the value of the firm’s location advantages. Geographic location advantages might not hold up to the exchange rate disadvantages
The concept also implies that the location advantages benefiting an MNE should be considered on a country to country basis and as a portfolio of potential risks for cash flows
MNEs chan choose to develop specific FSAs allowing risk mitigation in foreign currency areas by ‘immunising’ their products to economic exposure, thereby allowing full ‘exchange rate passthorugh’
Pass through
Pass price changes due to exchange fluctuations on to its customers
Exposure absorption
How easily you can adjust your cost position relative to rivals
Exchange rate pass
How easily you can pass your exchange rate price over to your customer
3 Non Financial Strategies
Separate business unit model
Company wide portfolio model
Flexible operational planning model
Separate business unit model
Each unit configures its own operations in such ways as to reduce economic pressure
This strategy entails a trade off between increased production costs and reduced risks
Company wide portfolio model
A portfolio of businesses and operational structures is selected with offsetting exposures, which balance each other
The result: a lower total rate of exposure, even though individuals might be higher
Flexible operational planning model
Switching production between factories
Increased costs of excess capacity versus reduction of economic exposure
