International Trading and Financial Systems - Essay Example

International Trading and Financial Systems xxxxxx xxxxxxx of xxxxxx The international trading and financial system refers to a hierarchy of organizations that operates at the international level as opposed to the national or regional level. The chief financial institutions associated with it are the IMF (International Monetary Fund), World Bank and the WTO (World Trade Organization). Below this top level are the individual governments that formulate policies for financial market regulation and central banks. Private participants in the financial system include commercial banks, pension funds, hedge funds and private equity (Wikipedia 2007). Long term finance may include long term loans from banks at fixed interest rates which are repayable over a period of time. Investments can be made in debt instruments like bonds. A mixture of debt and equity may also be used for middle to long term investment. Depending on the type of organization, available funds may need to be analyzed and distributed through different channels and a suitable portfolio of loans and investments (Sharpe 2006). Specific case studies can be used to analyze the suitability of long term financing for different types of organizations. The large public UK based company, Marks and Spencer, is one such organization. The UK based multinational, Tesco, which has expanded its chain of supermarket stores around the world to Asia and Central Europe can be studied as another type of financial model. The UK Government is a third entity which requires yet another kind of long term financial scheme for its continuing growth and development. Marks and Spencer is a good example of a large public UK based company that did well and then fell on fairly hard times, necessitating a thorough review of its financial strategy and leadership. Founded in 1884 in Leeds, England, it is the largest British clothing and food retailer in the UK with 520 stores. With its motto of providing good quality British made products which were fair value for money, it soon became an iconic presence in the UK. In 1998, it became the first British retailer to reach a pre-tax profit of over one billion pounds. After peaking in 1997-98, a slump in profits began to take place around 1999 which started while Sir Richard Greenbury was the Chairman. Profit margins were pushed to untenable levels and customer loyalty was seriously eroded. In an increasingly competitive and more globally outsourced retail business, the aging and bureaucratic Marks and Spencer which had based its image on being a traditional British retailer, was no longer able to compete with its business rivals. There was a belated switch to overseas suppliers as rival retailers increasingly imported their goods from low cost countries. This undermined a core part of its appeal to the British public. Its refusal to accept credit cards in its stores apart from the company's own charge card played a part in falling profits. It failed to analyze the market needs of the younger customer and cater to a more diverse section of the public. As a result of these shortsighted policies, its profits fell from 1 billion pounds to 145 million pounds by 31st March 2001. The share price fell by more than two-thirds. In 2004, the Arcadia Group tried to take over Marks and Spencer (Wikipedia 2008). A major corporate restructuring plan was announced on 29th March, 2001. This included a total focus on UK retail, expansion of home, food and beauty products, recovery plan for clothing, modernization of stores, improving pricing for value and longer store hours. Financial measures were implemented to bring about sustained growth and enhanced profitability in the company's future. These included renting store space instead of owning the property in the sale and lease back type of financing thus releasing almost half of the property value in the company's portfolio. Using fewer suppliers and more from overseas would cut costs on manufacturing products. An improved capital structure was devised for reducing working capital and investment in inventories by 10 %. The direct catalogue retail business in the UK was sold off along with the financial services division. European subsidiaries were closed down and the US store chains sold. The workforce was streamlined with downsizing of jobs. An e-commerce website was used for online sales. These measures together with effective management under the new Chairman Luc Vandevelde paid off eventually. In 2007, Marks and Spencer staged a recovery which put the company back on track with a healthy share price of 766 pence a share in May 2007. Its programme of sustainable long term financial growth with a more streamlined and focused approach enabled it to become less hugely profitable but more stable and steady than it had been before.(Karaliopoulos and Amat, 2002) In contrast to Marks and Spencer, which eventually decided to focus on UK based retail, Tesco, another UK retail giant decided on an ambitious overseas expansion programme which was successful enough for it to be considered a multinational for the purpose of this study. Founded in London in 1932, TESCO has some 2,000 supermarkets, supercenters, and convenience shops in the UK (where it is #1 in retail), 1,200 stores in Ireland, Central Europe, Asia and now the US. By 1976, Tesco operated nearly 900 supermarkets and superstores on the "pile it high, sell it cheap" formula that it had imported from America. The firm's management found that the effectiveness of this strategy had deteriorated over time, however, leaving the company with uncomfortably slim margins and a serious image problem among consumers. The company had missed important signs that its market had come to value merchandise quality over quantity. The task of turning the company around fell on the shoulders of Ian MacLaurin. In the first phase of his rescue plan Tesco discontinued the use of Green Shield trading stamps. This was followed in 1977 by a controversial tactic dubbed Operation Checkout, in which Tesco cut prices across the board in an attempt to increase sales and market share during a period when consumers were spending less money on food purchases. Next, in order to reposition itself, Tesco embarked upon a massive modernization program intended in part to take the chain upmarket. It closed 500 unprofitable stores and extensively upgraded and enlarged others. Superstores were also seen as a way to generate a higher volume of business at increased margins while reducing overhead. By late 1981, food sales also appeared to be settling into another slump, placing additional pressure on Tesco's bottom line. In an effort to rekindle activity, MacLaurin initiated Checkout '82, cutting prices between three and 26 percent on approximately 1,500 food items. Perhaps more important for Tesco in the long term, however, was the company's aggressive 1990s push outside of Great Britain. Its first foray into France proved ill- founded as it struggled to compete with larger chains like Carrefour. Other Tesco expansion moves in the 1990s were more successful. In 1994, Tesco moved into the burgeoning central European market for the first time starting with northwest Hungary, Poland, the Czech Republic and Slovakia. In 1997, Tesco acquired a presence in Ireland. Under Leahy, MacLaurin's successor, Tesco expanded its overseas operations in Asia and in 2000 launched a highly successful e-commerce site that fuelled its financial growth in the 21st century. By expanding its core U.K. business, retailing services, international operations, and nonfood businesses, Tesco emerged as a genuine retail giant with a formidable presence both in the UK and overseas. Tesco remains a model of how diversification and effective management of financial resources can be used to produce sustained long term growth on a global scale (Tesco, 2007). The third case study is the long term financing of the UK Government which is the main backbone on which rests all British industry. Government funding and financing is different from private and public corporate financing because it involves much larger quantities of funds. These are allocated for different purposes such as domestic development projects within the country as well as for defense spending and overseas operations. A stable government with farsighted financial planning and trade policies is important for British industry. Since the UK is a developed economy, it does not need to rely on heavy borrowing from international financial institutions nor does it need to rely much on foreign direct investment which fuels much of emerging economies. The UK Government needs to work out an effective long term financial and trade strategy which will enable it to do better business within the European Union as well as with the USA, Asia and other countries. On the domestic front, an effective taxation and budget policy will enable the UK Government to raise and manage its public funds. Allocation of funds to important areas like education, healthcare, housing and the workforce will be more popular than excessive spending on welfare schemes for example. A major move towards a more ethical and socially conscious return on financial investment needs to be incorporated in the UK government, in corporates and in individual consumers. This involves focusing on issues of maintaining product quality rather than quantity when making profits and the overall quality of the consumer experience. For returns on long term finance investments to be optimized in the future, the prevention of social injustices, the preserving of the environment, conserving energy and sensible distribution of funds need to be taken into account. The UK Government can play an important role in raising awareness of SRI (Socially Responsible Investment) practices instead of merely encouraging CR (Corporate Responsibility) schemes in companies. The UK Government can also educate the individual consumer about personal and public finance issues, thereby producing more financially capable individuals who can then play a more informed role in the financial future of the UK (Triodos Bank, 2006). In conclusion, the general economic factors that affect the market from which finance will be drawn also need to be considered. There has been an increased trend among economists to favour a finance system based model of macroeconomics. A strong financial system leads to overall growth of the economy, via domestic markets as well as international. Governments should have an effective monetary policy regarding exchange rates which affect international trade, as well as judicious policies regarding interest rates, taxation and the budget which will affect the investment and credit activities of banks and corporates. These will in turn affect the primary and secondary financial markets from which finance is being drawn. The government needs to monitor the economy, not through excessive deregulation or liberalization, but by exercising caution and some restraint, if needed. International capital flows via multinationals and foreign direct investment will benefit the international market. Short term loans and capital flows should not be used as a trade-off for long term financing which will bring about a stronger economy in the long run (Stiglitz, 1998). References Karaliopoulos, G. and Amat, O. The Marks and Spencer Case. Dept. of Economics and Business, Universitat Pompeu Fabra. 2002. Website: http://www.econ.upf.edu/docs/case_studies/16.doc Sharpe,W. (2006). Investors and Markets: Portfolio Choices, Asset Prices and Investment Advice. New Jersey: Princeton University Press. Stiglitz, J. (1998). The Role of the Financial System in Development Presentation at the Fourth Annual Bank Conference on Development in Latin America and the Caribbean. Website: http://www.econ.worldbank.org. Permanent URL: http://go.worldbank.org/5W8HF7YQB0 Tesco plc. (2007). Website: http://www.answers.com/topic/tesco-plc-adr cat=biz-fin Triodos Bank. (2006). The Future of Finance. Website: http://www.triodos.co.uk/uk/static/pdf/uken_future_of_finance.pdf Wikipedia (2007). Global financial system. Website: http://en.wikipedia.org/wiki/Global_financial_system#International_institutions Wikipedia (2008). Marks & Spencer. Website: http://en.wikipedia.org/wiki/Marks_&_Spencer Read More