Assignment 1 International Finance
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Question 1: What factors cause some firms to become more international than others?
While there may be plenty of factors forcing firms to open up to the international flows of money, products and services, they may be narrowed down to several primary stems. It is commonly acknowledged that every firm as a reasonable participant of economic activities is aimed at minimizing production costs and fiscal liabilities and maximizing profits. It would not be an exaggeration to say that due to the increasingly international manner of the contemporary economic system, the barriers and borders are gradually becoming obsolete, therefore making it possible for economic entities to expand their activities, entirely or partially, overseas. The fact that some companies do so more often may be contributed to one or several of the following factors:
- Need for cheaper labor force and manufacturing infrastructure, as well as optimization of supply chain;
- Greater sales opportunities apart from the home area, which may be a result of general expansion or a loss in competition with other local businesses;
- Considerable gap in purchasing power among regions – same goods and services may be transferred to locations with higher prices, and therefore increased added value;
- Urge to optimize, minimize or avoid excessive taxation and attentions from fiscal or other governmental institutions. Such method, although not always ethical, has been getting increasingly popular worldwide throughout the past decades;
- Finally, although it is not very common, certain firms may be expanding overseas for no real monetary value, but in order to gain additional prestige and recognition in their homeland. Such approach may be observed in various underdeveloped countries with geopolitical ambitions.
Question 2: Explain why a strong dollar could enlarge the US balance of trade deficit?
It is obvious that the exchange rate of the national currency may be a fair predictor of not only the overall well-being of the economy, but also of the trade balance and it’s possible disruption. A strong US dollar means that its cost in units of foreign currencies (Euro, Yuan, GBP and others) is increased. Due to this factor, it is more expensive for the local manufacturers in the US to acquire raw materials, hire labor force and arrange assembly of goods on the American soil. It is logical to assume that the volume of exports in this situation may decrease, as it is more profitable to procure cheaper goods elsewhere. On the opposite, foreign manufacturers are making goods cheaper and export them to the United States, receiving payment in solid and heavy-weighted American currency. According to these transformations, the balance in foreign trade of the US loses the point of financial equilibrium and starts to shift towards trade deficit, as more dollars flow outside of the country as a monetary mean of exchange for goods procured outside of the US borders. This situation tends to be a common problem for most economically developed countries in North America, European Union and Asia Pacific. Developing countries with cheap currencies and strictly regulated exchange rate (China, for example) may profit a lot by selling to the first world. While there is no common remedy known for this problem, certain measures of financial relief may be used in order to provide exempts for the local US manufacturers.
Bibliography:
Johnson, S. (2012). Why Go Global? Six Benefits of International Expansion. Lief International.
Madura, J. (2012). International financial management, 11th ed. Mason, Ohio.
United States Balance of Trade (2014). Web. Retrieved from: http://www.tradingeconomics.com/united-states/balance-of-trade
