Managing resources in the current or international business environment is quite essential for the growth of the economy. Resource management is the effective and efficient development for an organization whenever they needed and this resources are financial resources, inventory and human skills etc. The report main aim is to understand the financial and economic environment and its impact upon the current business situation. The chosen company for this report is BMW which is one of the leading automobile German company that produces Luxury automobiles and motorcycles.
Report critically describe the impact of globalisation in the entire world from last 30 years by using some theoretical models. Further it also highlight some challenges and opportunities which may face by globalisation in their future that further focus i its political and economic situation. Beside this, report also shows that in which country BMW should invest by using some calculation. The present study also analysis the change in exchange rate and also show how to mitigate the possible exchange rate fluctuations.
Impact of globalisation on the global economy over the past 30 years
Globalisation refers to the integration of UK market in global economy which leads to increased interconnectedness towards national economies. Markets in which globalisation which is particularly common that includes financial markets that includes capital market, money market, credit markets, etc. In these types of market, different commodity has been placed that helps to take important role in 20th and 21st centuries. Furthermore, development of ICT also accelerated with the pace of globalisation over the past 30 years. Internet enabled with 24*7 hours that make fast so that BMW Company globally expanded easily. In this regard, rise of social media means national boundaries consider many ways that create successful procedure with use of new forms of communication and marketing (Baillie and Han, 2019).
In addition to this, rise of electronic systems also consider economy which develop e-wallets, pre pay and mobile pay. These tools help to facilitate and increase global trade in effective manner. Therefore, it assists to stimulate with globalisation and capital can move freely from country to country. It is relatively worked to focus on the business which also straightforward for firms to locate and invest in broad. Hence, profitability also grows and develop in systematic manner. As a result, it contains more effectiveness to attain more flexibility. Development of complex financial products such as derivatives has enabled with global credit markets to increase creative advantages at workplace. Moreover, globalisation brings number of potential benefits that assists to show more international producers and national economies. Providing incentives for countries with specialise and benefits from application of the principle of comparative advantages. Access with larger market also helps to increase firm experience with higher demand for particular products. It creates benefits from economies of scale that leads to reduction in average production costs.
Globalisation also enable with the worldwide access to sources at cheap price so that cost competitive in their own market will be successfully established. In own market with overseas products and services, it can be stated that seeking with the cheapest material from around the world is known as global sourcing. Because of cost reduction and increase revenue it can be stated that profitability will be successfully develops for shareholders. Regulations by locating production in the country with less strict regulatory regimes so that in less developed countries it assists to focus on desired results.
Globalisation has led to increase flows of inward investment between different nations, that create several benefits is one of the important advantage and way that helps to focus on the targets and goals. These benefits include sharing of knowledge and technology between different countries. In long term outcomes, increased trade is likely lead to creation of more employment in all countries that involved. As a result, it can be stated that more effective functioning can be successfully develop with using advance technology at workplace (Sun and De, 2019). In this regard, it can be stated that there are many firms who get more loss with using globalisation activities in the business. As a result, there are several disadvantages also seen in the company. For instance, over standardisation of products with global branding is common criticism of this system. Majority og world computers and windows operating systems creates considerable profits. Lack of products diversity and presenting barriers to entry in small and local producers not get such kinds of benefits.
Increased power and influence of multinational also seen by many that create more disadvantages of globalisation. Large multinational companies can easily switch their investment between territories with more favourable regulatory regimes (Baillie and Han, 2019). Monopolies of labour and push wages lower than the free market equilibrium is one of the major disadvantage in front of globalised business. Critics of globalisation also highlights potential loss of particular job in domestic market that caused by increased and it create several threats such as unfair, free trade, etc.
Theoretical models and trends in international trade and foreign direct investment
Nowadays, foreign direct investment considers more attention that is being paid more results at national and international level. There are different theoretical papers examine that show main research regarding international trade. First theory that consider by Ricardo which is based on comparative advantages. However, foreign direct investment cannot be easily explained in this term of theory which is based on two countries and nation. In addition to this, it is not applicable on two products that can be successfully reached to attain different models. Therefore, it is essential to use other morel that exactly and easily applicable in the theory. It consider portfolio theory that is established and attempt to design and explained more investment. According to this theory, there are no any barriers in particular way so that it is one of the successful ways for capital movement (Sun and De, 2019). Capital will also go from countries with low interest rates in particular nation that can be successfully established in the global industry. Although it is more realistic so that new theories of international trade still cannot easily capture entire complexity of FDI. In addition to this, in other forms of international production, new theories later on explained. Robert Mundell has also tried to explain FDI with model of international trade which includes two countries, two products and two production factors as well (Denisia, 2018). Therefore, there is higher production of factor needed than the other elements. In addition to this, it can be stated that investment incorporates for short term investment that also helps to focus on more effectiveness. International theory also provides explanation of the growth of the multinational businesses that can be successfully gained more profits and revenue with using more creative consideration. According to the theory of production cycle theory of Vernon, there are four stages of any products that assist to gain more profits and revenue in global market. For example, it includes innovation, growth, maturity and decline. Hence, it helps to create more effective international business that ascertained with more growth and outcomes.
Challenges and opportunities that globalisation may face in the future
Extent of globalisation assists to create more growth and effectiveness in the international market. In this regard, several opportunities can be gained successfully that helps to focus on the national economy of India and China. There are different opportunities will be discussed that accomplish with globalisation in future. For instance, faster economy growth of the country that helps to focus on new employment and increase standard of living among people. It will assist to focus on the more significant advantages and reduce democracy in the country. Greatest benefit of the globalisation activity can be successfully will be produced to face global competition so that choice can be expanded that assists to increase product quality and exert downward pressure on price. Global competition helps to understand exact business position of the company among several businesses. It also transfers wealth from formerly that protected producers to newly liberated consumers. In this aspect, it can be stated that consumers exceeding loss to producers through efficiency gain. Furthermore, engage with global economy also helps to access mush larger market that assists to encourage import and export. Domestic producers gain successful results that enjoy by industry in under developed market such as India. International trade and investment gain access mush higher that the technology because it incorporate with new triswold, 2018).
However, globalisation also creates disadvantages and challenges in the business when they are consider international trade. This is because, different language and money create issue and problem in front of people who are belonging to particular business. Cultural issues are also one of the biggest element which create impact on results and outcomes of the company because of global changes. Furthermore, it can be stated that in global environment, every business face several problems and issues so that it is essential to reduce these issues to increase more effective advantages. Moreover, political system is also different from country to country so that it is also important and biggest challenge in front of the enterprise to regulate their effectiveness.
a. Investment done by BMW using calculation
From the given cash flow it has been analysed that BMW should invest in India because as the country has strong economic condition with better exchange rates as compared to China. Therefore, it is more beneficial for a firm to invest into India. The following calculation also shows that in which country BMW should invest and this is as mentioned below:
|CF||PVF @ 8 %||NCF|
|Year||CF||PVF @ 8 %||NCF|
Thus the calculation clearly states that as per the discounted rates the rates of exchange rates in preceding five years will be increases in the case of India while on the side in China is slower i.e. 0.17 which is low as compared to 2.13. Therefore, it clearly shows that even after discounting the rate, BMW should have to invest in India because it will be more beneficial for a quoted firm to gain higher amount of price as compared to other country. Even in the net cash flow statement of 5 years, it clearly shows that the amount of India is increases as compared to China and having a strong exchange rate, it will be more beneficial for a firm to invest in such country for gain higher amount of profit. Thus, from the net cash flow and above calculation of discounted rate, it is clear for BMW to invest their amount in BMW because it helps to gain high competitive advantage as well as profitability by raising its current sales in automobile sector.
b. Presenting the mitigation strategy which creates impact of exchange rate fluctuation
By considering the current exchange rate, it has been analysed that the future exchange rate of Euro to Rupee is decreases or increases i.e. uncertain. But as per the forecasting, it is considered that it will be helpful for BMW to invest into such because as the exchange rates are decreases year by year, it provide an opportunity for the foreign firm to invest their amount into a company which assist them to raise the profitability by increasing the sales (Blanchard and Adler, 2015). In the case of China, the exchange rate is quite higher as compared to India, therefore, it will not beneficial for a firm to invest into China because its exchange rates are not certain and even more higher than India.
Analysing the Change in exchange rate:
In order to determine the exchange rate of currency, it is quite necessary to determine it through demand and supply. For foregoing analysis, it is only the changes in some exchange rates which may also cause the quantity which is supplied and demanded and bring it back about the equilibrium for demand as well as supply of the exchange rates. In addition to this, the equilibrium in the current foreign exchange market will also be disturbed only if there is changes which are find in order to determine the demand or supply of foreign exchange rates. For example, if there is increases in income in Foreign people in UK because of the boom condition in the UK economy then, it will directly affect the equilibrium rate of exchange (Change in exchange rates, 2018).
Therefore, the increases in income of the people in UK will further lead to increase in the demand for imported the goods which also includes India as well. In this situation, because of increase in demand for imported Indian goods, then it will also spend more dollars on it. Thus, it shows the fluctuation in the exchange rates. Thus, it will also increases the supply of dollars in order to buy Indian goods in foreign market of exchange. On the other hand, the increase in the supply of dollars or Euro in the market then it will lower down the price of dollar which is in the terms of rupees (Candian, 2019). The same is in the case of BMW as well as such that if the currency rate of the India is lower as compared to China then it clearly shows that the quoted firm also invest in that country which have low exchange rate. Therefore, it is quite beneficial for a firm to invest in India.
Proposal for Mitigate the impact of possible exchange rate
Exchange rate risk and foreign exchange risk is an avoidable risk or all foreign investing but there are some mitigation strategy that help to avoid such kind of risk and BMW also uses this in order to not creates any negative impact upon the firm i.e.
Hedge the Risk: it means that if the investor is purchased an asset which is in Europe and the currency is Euro then rupees versus Euro affect the overall return (Ghosh, Ostry and Chamon, 2016). It is further be solved by using many instrument such as :
- Currency Forward: This method is effectively used in order to hedge the risk such as when a US investor has a some bond that is related to Euro and it is concerned for the risk of Euro that is declining against US dollar. At that time the investor is also enter into the forward contract which force them to sell euro and purchase dollars at the forward rate (Baillie and Han, 2019). The biggest advantage of forwards contract is such that it can be for a specified amount and on the other side it is not for readily accessible to individual. Therefore, in this way the amount will be hedge.
- Currency Futures: it is another alternative which is used to hedge exchange rate risk because in this situation, the investor only needs some small amount of money for an upfront margin in their trade of exchange (Sekhar, 2019). The another disadvantage of currency future is such that they cannot be customized and also available for some fixed rates. In addition to this, when the exchange rates are fluctuate, then using this instrument, the business will easily protect itself.
- Currency ETFs: the availability of it also have a specific currency which means that it can be used for hedge exchange rate risk. Therefore, it is not as much effective way for hedge exchange risk for the larger amount. But on the other side, for the investor and they have an ability to used for large amount and which is also help them to generate more revenue and also provide major benefits. In this situation this option or instrument is helpful for the firm or an investor (Sun and De, 2019).
- Currency Options: It is another hedging option for hedging exchange rate risk. Therefore, this option provide an alternative instrument which gives an opportunity to a trader to buy or sell some specific currency for a specific amount before expiration date. Beside this, it also help to protect some exchange rate and also makes investor able to participate even if the market rates are fluctuates.
By summing up above report it has been concluded that foreign exchange rates are fluctuate then it disturb the entire system in adverse way. As report concluded that globalisation is leading to an increases connection with national economies and it also increases from last 30 years because of development of information communication technology and transport facility. Further the present study also concluded that it also faces many challenged and to overcome it, country must take steps by coping up advance technology etc. As due to fluctuation in exchange rate, BMW also invest in India in order to get high profit and due to demand and supply, the change in exchange rates can be easily analysed. Beside this, report also concluded that using Hedge mitigation strategy, BMW also mitigate the impact of some possible exchange rate fluctuation.
Books and Journals
Baillie, R. T. and Han, Y. W., 2019. Long Memory Volatility, Central Bank Intervention and Uncovered Interest Rate Parity in the 1920s Exchange Markets. Korean Economic Review. 35. pp.183-203.
Blanchard, O. and Adler, G., 2015. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? (No. w21427). National Bureau of Economic Research.
Candian, G., 2019. Information frictions and real exchange rate dynamics. Journal of International Economics. 116. pp.189-205.
Ghosh, A. R., Ostry, J. D. and Chamon, M., 2016. Two targets, two instruments: monetary and exchange rate policies in emerging market economies. Journal of International Money and Finance. 60. pp.172-196.
Sekhar, G. S., 2019. Currency Risk Management: Selected Research Papers. Vernon Press.
Sun, W. and De, K., 2019. Real Exchange Rate, Monetary Policy, And The US Economy: Evidence From A Favar Model. Economic Inquiry. 57(1). pp.552-568.
Change in exchange rates. 2018. [Online] Available through: http://www.economicsdiscussion.net/foreign-exchange-rate-2/foreign-exchange-rate-determination-changes-and-analysis-of-its-concepts/10845
Griswold, D., 2018. The Blessings and Challenges of Globalization. [Online] Available through: < https://www.cato.org/publications/commentary/blessings-challenges-globalization>.
Denisia, V., 2018. Foreign Direct Investment Theories: An Overview of the Main FDI Theories. [Online] Available through: <http://www.ejist.ro/files/pdf/357.pdf>.