In economics, inflation can be explained as a persistent increase in the general price level of goods and services over a period of time. Inflation results in a reduction in the purchasing power per unit of money which means money losses it’s real value over period of time. The inflation rate is measured by inflation index . Inflation index shows the change in percents of general price index also called consumer price index over the period of time. (Mankiw, 2002).
There are described three types of inflation:
1. Demand-pull inflation which is caused by increases in aggregate demand due to increased private and government spending;
2. Cost-push inflation which is caused by a decrease in aggregate supply. Cost-push inflation causes costs risen (prices for oil prices, or wages) and the only alternative for sellers is to put increase prices in order to compensate this process;
3. Built-in inflation is caused by adaptive expectations. In the situation where built-in inflation takes place usually companies are trying to keep the salaries of their employees with the average price levels (in accordance with the present inflation rate). Built-in inflation reflects events in the past.
Inflation affects many economic indexes such as the demand for money, exchange rates, prices of goods and services. Inflation causes the reduction in the value of domestic currency and alters the composition of a local currency (Madura, 2005). Reduced value of domestic currency affects the country’s ability to present in the international market. It implies investing much in a foreign state, but low levels of returns. Higher prices of goods mean that other countries will find it less attractive to purchase the domestic goods. This will lead to a decline in exports and lower production and higher unemployment in the domestic country.
Inflation leads to the situation when a country’s exports become less attractive to international customers for the high prices on it. This situation creates low income due to low sales and it can end in trade deficit for the domestic country. Trade deficit is an economic measure of a negative balance of trade in which a country's imports exceeds its exports (Bouman, 2013). In the situation of trade deficit domestic currency is outflown to foreign markets. Imports becomes more expensive than the value of exports (Madura, 2005). Investing in an economy with high rates of inflation represent trade deficits created by the expensive imports and cheap exports .A country’s competitive position is usually weakened by the inflation in the international market. High inflation rates also affect the value of local currency with the price of items being higher than their worth (Madura, 2005). This leads to the depreciation of the exchange rates accompanied by capital outflow and trade surpluses, which may lead to the crumple of an investment.
Inflation also leads to increases in taxes. International companies usually take away their capitals to the countries with lower taxes and prices.
Some say inflation has both negative and positive effect on the economy. In most ways in has negative effect for international business operating in the country with high inflation rates for the following reasons: the decreased consumers ability, high taxes and prices, increasing in wages (in some cases) , cheap exports to other countries. High inflation rate shows that it’s undesirable to have a business in such country. There can be more losses than revenue.
Do countries with high GNI and GDP are attractive for foreign investment?
GDP refers to the measure of the value of products and services that an economy produces within a given period. It is among the closely and comprehensively watched economic statistic by foreign investors. GNI, on the other hand, refers to the value of GDP added to income received from overseas (Cherunilam, 2006).
GDP and GNI portray the manner in which an economy earns and spends its national income on a regular basis. They have a direct relationship to foreign exchange rate. High GDP and GNI levels imply a stable foreign exchange rate and a proper investment environment for both local and foreign investors (Cherunilam, 2006). Low levels of GDP and GNI may indicate low levels of investment potentiality or low levels of returns.
An economy with high levels of GDP and GNI indicates a strong currency as well as high levels of production and revenue. Foreign investors are mostly attracted to such economies. These economies promise growth in business with minimal interferences such as those caused by economical instabilities, and high inflation levels. GNI and GDP reflect the economic status in an economy (Cherunilam, 2006). Economies with high levels of GDP and GNI reflect market stability, growth, value, and quality. They indicate proper investment environments that attract foreign investors.
One of the investing forms in foreign direct investment which shows the capital flow from one country to another in exchange for the possibility to have ownership in the domestic companies. It’ s becomes a common thing for many companies that foreign investors take part in managing the companies as it is the part of the investing agreement between both parties. Foreign investment result both economies- domestic and foreign, the results are more profitable in the countries have relatively equal economic stature. (Ott)
Nowadays. there is a tendency in multinational companies towards investing in great majority of countries, mostly there is a tendency towards investing in developing countries Some countries estimate foreign investing as positive sign for it is the source for future economic growth of the country.
Foreign investment makes tangible contribution in the countries development as there is the increasing the amount of capital which means the domestic country’s company can buy better equipment, new buildings and land, patents, copyrights, trademarks etc. Due to such changes there is increasing in the quantity and quality of tools which automatically increases the competitiveness of the goods, which in it’s turn leads to increasing sales and getting more profit. The index of GPD becomes higher. All these positively affect the domestic economy. First of all the wages are increased and the consumer possibility of the population rises. Also there are rises in employment and as a result the unemployment rate becomes lower. It all shows positive effect of foreign investment on domestic economy.(Ott)
That’s why foreign direct investment becomes one of the prior goals for most of developing countries all over the. Such tendency is explained by the growing expectation of FDI’s positive effect on the domestic the economy (Akulava, 2011)
As for the foreign investors . their tendency towards investing in developing countries can be explained by the low wages at the host country which gives more profit than in developed countries. That’s why still there are negative consequences of foreign capital attraction as well. One of the negative aspect of FDI is international labor cost differential. The foreign investor can even increase the wages only for the qualified workers and decrease for all the others . Also the foreign investor can try to grab the main part of the market so that the domestic firms which can result in increasing in prices due to competitive advantage over the domestic companies.
Which stakeholders must companies satisfy? Why is this process more difficult for companies operating abroad?
Stakeholders are parties that are impacted by or have an impact on the operations of a business. There are described three groups of stakeholders: internal, connected and external stakeholders.
Internal stakeholders are presented by the managers and employees of the company, they are situated within the company. The second group -connected stakeholders are presented by shareholders itself, suppliers of the materials for the company and customers of the goods and services. And the last group, known as external stakeholders, is presented by those who are not directly linked to the company but who can be influenced or influence the company’s activity indirectly, via various means. Such group of stakeholders include the Government, councils, political parties and community, of course. (Worthington, 2009)
Stakeholders’ interests are varied and many depending on the needs of an economy. Such needs vary according to economic status, social interest, environment, safety and security needs, environment, and time, amongst others. For companies operating abroad, satisfying all the stakeholders is difficult as a result of differences in expectations of the different stakeholders. The stakeholders may also create a cultural shock, which may affect the running and operations of an international investor (Lawrence and Weber, 2014). Every stakeholder has an interest in the business, and meeting all these interests poses a challenge to international traders.
There is also conflict between the stakeholders for they have different interest in the company’s activity, so there is also a question which stakeholders should the company satisfy. The ideal model of company’s management requires equal satisfaction of all the stakeholders expectations, unfortunately in real it’s uneasy task for most companies. That why the great majority of companies creates it’s own corporate management style which aims at the major company’s goals and stakeholders have nothing else but to agree to the chosen company’s strategy.
However very often stakeholders have completely conflicting measurements of success which go contrary to the company’s goals. At some company’s stakeholder’s decisions have the advantage of the manager’s decisions, this situation can lead to negative results for the whole company and public opinion.(Wothington, 2009)
Very often there are contrary ethical dilemmas between stakeholders and management, which can seriously affect public image on a company. There are stakeholders who are for unethical employment practices such using children labor in developing countries, cases of discrimination, providing employees with bad working conditions, which can affect the employee’s health. Such unethical employment practices can lead to loss of company’s reputation, low productivity, heavy financial costs resulting from tribunals and compensation pay-outs. Companies seeking for unethical unemployment are risking alienating both governments in their home and host countries.( Wothington, 2009)
As it was said before there is always the conflict between the stakeholders and managers of the company. Satisfaction of all the stakeholders expectations can lead to dramatic changes for the company in some cases. That’s why it’s necessary for companies to have their own strategies of future development of the company, have their own rules restrictions towards managing the company, only managers who are responsible for the company’s management can make right decisions.
Conclusion
Inflation has a negative affect both on domestic and foreign business. Inflation causes increasing in exchanging rates between countries, prices, taxes which leads to uncomfortable terms for development of foreign businesses. Moreover for a domestic country imports become more expensive and exports cheaper. Inflation decreases the consumption ability of domestic country population which leads to the low income flow for the foreign business operating in the country. Investing in countries with high inflation rates is nonprofitable that’s why many investors take away their capitals from the countries with high inflation rates.
Still economies with high levels of GDP and GNI are more invested in. The reasons for that are market stability, growth, value, and quality. Nowadays not only countries with high GDP are invested in, but there is a tendency to direct invest in developing countries. Such investing has positive effect on developing country - it increases the amount of capital, equipment, buildings, land, patents, copyrights, trademarks, and goodwill in the host economy.
Stakeholder is anyone interested in business. They are managers, employees, suppliers, customers, government etc. Each stakeholder has it’s own interest in company’s activity. The owners of the company tend to get big profit, managers – big salary, customers – reasonable prices for goods, suppliers – long term relationship with the company etc. All these interest usually conflict each other. That’s why each company should have it’s own stakeholder strategy aiming to meet all the interest in the most comfortable and reasonable way. Also the strategy shouldn’t involve unethical issues.
References
Cherunilam, F. (2006). International economics. New York: Tata McGraw-Hill.
Lawrence, A. T., & Weber, J. (2014). Business and society: Stakeholders, ethics, public policy.
Madura, J. (2005). International financial management. Mason, Ohio: Thomson.
Blanchard, Olivier (2000). Macroeconomics (2nd ed.). Englewood Cliffs, N.J: Prentice Hal
Mankiw, N. Gregory (2002). Macroeconomics (5th ed).
Gordon, J. Robert (1988), Macroeconomics: Theory and Policy, 2nd ed.
Bouman, J (2013) Principles of Macroeconomics.
Ott, M. Foreign Investment in the United States. Retrieved from http://www.econlib.org/
Akulava, M (2011). The impact of Foreign Direct Investment on Industrial Economic Growth of Belarus. Retrieved from http://www.beroc.by/
Worthington, I (2009, February 6). Stakeholders and how they affect your business. Retrieved from http://www.articlesbase.com/
