Lecture no. 19 & 20 why currency fall fdi and mn cs
- 3. Supply Demand Currency Stability Low Value Overvalued Devaluation Theory of Collective Goods a) Hegemony (dominance principle) b) Small Group (Reciprocity Principle)
- 4. Supply is determined by the amount of money a government prints, printing money is a quick way to generate revenue for the government, but more money that is printed, the lower its price. Domestically, printing too much money creates inflation because of the number of goods in the economy unchanged, but more money is circulating to buy them with.
- 5. Demand for a currency depends on the state’s economic health and political stability. People don’t want to own the currency of an unstable country because political instability leads to the breakdown of economic efficiency and of trust in the currency. Conversely, political instability boosts a currency’s value.
- 6. Currency Stability is hard to achieve. Between 2010 and 2015, the US dollar dropped from over 90 Japanese yen to under 80, then rose to 120. This kind of instability in exchange rate disrupts business in trade-oriented sectors because companies face sudden unpredictable changes in their plans for income and expenses.
- 7. States often prefer a low value for their own currency relative to others because a low value promotes export and help turn a trade deficit into surpluses-as mercantilist especially favor.
- 8. An overvalued currency, whose exchange rate is too high, creates a chronic trade deficit. The deficit can be covered by printing more money, which waters down the currency’s value and brings down the exchange rate.
- 9. A unilateral move to reduce the value of a currency by changing a fixed or official exchange rate is called a devaluation. It causes losses to foreigners who hold one’s currency (which suddenly losses value) such losses reduce the trust people place in the currency. Investors become wary of future devaluations, and indeed such devaluations often follow one after another in unstable economies
- 10. Hegemony (dominance principle) To maintain hegemony, the world currency is backed for stability by using influence over the other great power states, or some other states. Small Group (Reciprocity Principle) Under an arrangement among a small group of key states international exchange rate stability can be achieved. When states reduce trade barriers on other states.
- 12. A company based in one state with affiliated branches or subsidiaries operating in other states (Johsua.p.329) MNCs operates on a worldwide basis in many countries simultaneously, with fixed facilities and employees in each. These are in the tens of thousands worldwide.
- 13. Industrial Corporation make goods in factories in various countries and sell them to businesses and consumers in various countries, the automobile, oil, and electronics industries have the largest MNCs. Almost all of the largest MNCs are based in G8 states.
- 14. Financial Corporations also operate multinational-although oftern with more restrictions than industrial MNCs. Among the largest commercial banks worldwide, the United States doesn’t hold a leading position. It reflects the US antitrust policy that limits banks’ geographic expansion.
- 15. Services (MNCs) Some MNCs sell services. The McDonald’s fast food chain and American Telephone and Telegraph are good examples.
- 17. “The acquisition by residents of one country of control over a new or existing business in another country” (Joshua.p.331)
- 18. Foreign direct investments can be made in a variety of ways, including The opening of a subsidiary or associate company in a foreign country Acquiring a controlling interest in an existing foreign company By means of a merger or joint venture with a foreign company
- 19. Horizontal Vertical Conglomerate
- 20. A horizontal direct investment refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone provider based in the United States opening stores in China.
- 21. A vertical investment is one in which different (type of business) but related business activities from the investor's main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company to make its products.
- 22. A conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Since this type of investment involves entering an industry in which the investor has no previous experience, it often takes the form of a joint venture with a foreign company already operating in the
- 23. Services (MNCs) Some MNCs sell services. The McDonald’s fast food chain and American Telephone and Telegraph are good examples.
- 24. Economic Growth. Countries receiving foreign direct investment often experience higher economic growth by opening it up to new markets, as seen in many emerging economies. Job Creation & Employment. Most foreign direct investment is designed to create new businesses in the host country, which usually translates to job creation and higher wages. Technology Transfer. Foreign direct investment often introduces world-class technologies and technical expertise to developing countries. Host-Home Govt. FDI plays crucial role in the uplifting the relations among the host and home governments.
- 25. Strategic Industries. Many countries protect certain strategic industries, like defense, from foreign direct investment to maintain control from foreign entities. Long-term Capital Movement. Some critics argue that once a foreign investment becomes profitable, capital really begins to flow out of the host country and to the investor's country. Disruption of Local Industry. There is some concern that foreign direct investment may disrupt local industry and economies by attracting the best workers and creating income disparity. Mercantilists tend to view foreign direct investment in their own country suspiciously. In developing countries, FDI often evokes concerns about a loss of sovereignty because governments may be less powerful or less wealthy.
- 26. The End