International Business in UK - Essay Example

International Business in UK Table of Contents Answer 1 2 Answer 2 5 a)The World Trade Organization 5 b)The International Monetary Fund 6 c)The Word Bank 6 Answer 3 7 Reference 9 Answer 1 The European Union has 27 member nations, out of which seventeen have formed the “Economic and Monetary Union” (EMU) and have chosen the euro as their one and only currency. These countries are collectively known as the Euro zone. On the basis of gross domestic product (GDP) and proportion of global trade and investment, the Euro zone is as good as that of the United States. Hence, these countries are a crucial participant in the world economy and particularly to the economy of the United Kingdom (Ahearn et al. 2012). The companies based in the United Kingdom have various strategic options available to them in light of the latest developments in the European economies. This segment of the paper would accentuate on the potential costs and opportunities for UK based organizations in outsourcing their operations to nations in the enlarged European Union. The major benefit of outsourcing the operations to the European Union nations would be the opportunity to gain a comprehensive understanding of the European culture and market specifics, in addition to lower costs of manufacture and haulage. The European Union is a large potential market for UK based manufacturers. Thus, the strategy of outsourcing of business operations can gives certain long-term benefits, though it would involve additional production set-up investments, exposure to translation and economic exposure and foreign exchange risks. However, the strategy can be beneficial particularly in the long run and it would keep the UK based organizations in the forefront in terms of cost competition (Gillespie et al. 2010). Formation of strategic alliance with a European supplier or distributor would help an UK based manufacturer to gain from the existing network and the market knowledge of the supplier. Furthermore, carrying out of this strategy would require limited resources and investment from the UK based companies. However, the companies would be open to the elements to foreign exchange exposure together with supply chain hazards. The potential costs could be both internal and external in nature. For example, the brand image of the UK based organization and the smooth business operation in the European markets would depend on the new outsource associates of the company, thus revealing it to internal risks (Dicken, 2003, pp. 247-250). The outsourcing of the operations to the European Union countries would enable the UK based company to have access to skilled workers, superior infrastructure, government subsidies and other technological support. The European market is a huge market and carrying out the production there would give the company cost advantage. However, the political, social, environmental, legal and the economical issues of Europe would have a direct impact on the business of the UK based companies in this case, thus exposing it to further foreign exchange exposure. The UK based manufactures can also outsource their operations to the Central and Eastern European Countries (CEEC). These nations are particularly viable in context of costs as against other European states. Furthermore, the availability of highly skilled workers in addition to the geographical benefits of the region makes the strategy of building up a production base in the CEEC very competitive. Nevertheless, it should be noted that the government incentives to the CEEC have been continuously declining and there is a strong likelihood that the labour charges of these countries would be set as per the European Union norms (Dummler & Kienle, 2008; Bussiere et al. 2005). This would possibly elevate the investment expenditure as well as the overall risk exposure of the UK companies. The present market as well as the economic condition of the European Union is likely to have an influential impact on the business of the UK companies who plan to outsource their operations. The instability associated with the future of the Euro zone started in the beginning of 2010 as a consequent of the commencement of a sovereign debt emergency in Greece. Markets were apprehensive of potential defaults and hence began demanding significantly elevated interest rates for their bonds (European Commission, 2012). The debt issues of the nations constituting the Euro zone represent a severe hazard to the banking system of Europe, the feasibility of the Euro, in addition to the European integration procedure (Ahearn et al. 2012, pp. 8-13). The debt and banking problems of the Euro zone had been amplified owing to the feeble growth in region in addition to a mild recession projection for 2012. As on January, 2012, the credit ratings of many European nations including France, Italy, and seven others were lowered by the Standard & Poor’s. This down-gradation of the credit rankings served as a supplementary factor to the crisis in the region. The inferior enforcement of fiscal discipline over the years, added to the increasing public debts in some of the European nations. Since, the members of the Euro have a single currency; the individual members are not able inflate their way out of huge public debt or undervalue their currency to make their exports more viable (Ahearn et al. 2012, pp. 15-17). Answer 2 a) The World Trade Organization The World Trade Organization (WTO) along with the International Monetary Fund and the Word Bank designs and manages the global economic policy. One of the crucial functions of the WTO is the endorsement of free international trade. The vital function of the WTO is to make available a general institutional framework for the realization of the agreements that were formulated at the Uruguay Round. The membership in the WTO would have a positive impact on the economy of UK in terms of growth and employment. The membership is likely to ensure superior standards of living, higher level of employment in addition to sustainable economic growth. This is because the country is likely to benefit from the open trade as per the WTO framework. However, in addition to the creation of more job opportunities as a result of open trade, the UK economy would have to encounter augmented competition from overseas companies exporting their goods to UK (World Trade Organization, 2012). b) The International Monetary Fund The main role of the International Monetary Fund (IMF) is to keep the exchange rates steady and administer the functioning of the global payment system. The main functions of the IMF include lending to the low-income nations and those facing balance of payments problems, providing technical assistance as well as surveillance to its member nations. Surveillance consists of overseeing the financial and economic developments in addition to formulating policies with the objective of crisis avoidance. The membership in IMF assists the economy of UK by assisting it deal with foreign exchange deficiencies owing to issues related to balance of payments. The IMF had advised the Bank of England to provide financial easing to boost the ailing economy of UK. Moreover as a member nation, UK has access to the details of the economic regulations of the other member nations. Another important impact of IMF membership is the technical support in banking, economic and exchange issues in addition to monetary support in difficult times as well as amplified trade and investment avenues. c) The Word Bank The World Bank functions as a development institution and endorses the objective of poverty reduction, as well as social and economic up gradation of the countries. One of the major roles of the bank is to act as a financial intermediary and transfer monetary resources from the better-off nations to the poorer ones. The United Kingdom is a chief shareholder of the World Bank endowing significant amount of resources to trust funds that are handled by the Bank. The bank’s ability to act in response across the majority of the sectors and to offer a extensive range of assistance to partner nations, together with a broad assortment of fiscal support instruments and widespread policy and technical guidance, makes it a crucial associate for UK. Consequently, the World Bank presents considerable outcomes for the UK, counting the capability to support nations, regions and policy areas where UK does not have mutual competence (Department of International Development, 2012). Answer 3 The currency risk facing UK companies in terms of currency exchange rates include transaction risk, economic risk and the translation risk (Ajami & et al, 2006). Translation Risk: This risk is also referred to as accounting risk, which a company encounters once it has subordinate operations in other countries outside its home country. This risk would not impact the UK based exporters and importers if they do not have any foreign subsidiaries. Due to the foreign exchange alterations, the translated value of assets as well as liabilities of the subordinate operations can be negatively impacted; as a result it becomes an unnecessary hazard for the parent organization’s consolidated accounting statements. Translation exposure comes into action as a result of the fact that the parent company, has to amalgamate the whole of the operations of its subsidiaries as well as its affiliates into its individual financial statements. As the assets of the operations in the in the foreign country would be carried on the accounting books in their own domestic currencies, it is crucial to translate those currency values of the assets into the domicile currency values for amalgamating with the parent organization’s assets. The fluctuating rates of foreign currency lead to the generation of profits or losses during the period when the translation procedure takes place. Transaction Risk: This risk is associated to the upcoming payments as well as receipts in overseas currency. For instance, in August 2012, a UK based exporter agreed to sell goods to the United States for $100,000, payable in 3 months time. If the exchange rate during August, i.e. at the time of contract was $/ £1.60, the company would look forward to get £62,500. Nevertheless, if the dollar value depreciates during the interim three months and the present rate is $/ £1.90, the actual amount received by the exporter would reduce to £52631.57. Alternatively, if the dollar value appreciated during the interim three month period, the exporter would receive more than £62,500. In a similar scenario, an importer would benefit when the dollar value depreciates and vice versa (Garrett, 2010) Exporters and importers are open to transaction risk as they associate in current business dealings that consist of foreign currencies. The transaction risk of such type of organizations can be controlled by employing forward contracts, futures, options and currency swaps along with other money market hedges (Sullivan, 2009). One more way to lessen this risk is netting out the risk exposure by using a number of different currencies or by using only one currency (Jacque, 1997). This is generally performed by large business firms with considerable extent of worldwide operations. Other techniques for easing short-term currency risks are currency forwards, currency futures, options, money market hedge, and cross hedging (Kelley, 2001; Miller, 1992). Economic Risk: Exporters or importers involve in a number of transactions in foreign currencies, and therefore it is highly possible that there would exist an economic exposure to business operations of such companies. For instance, if a UK exporter deals with a European Union nation, and the value of Euro depreciates from suppose €/£1 to €/£1.2. In such a scenario, exported products from the United Kingdom would be pricier when valued in Euros. As a result, the products would become less competitive in the Euro Zone. In an identical scenario, an UK based importer sourcing goods from the European Union nations, would gain because those goods would be more economical in the UK. Thus, the movement of foreign exchange currency rates affect the exporters and importers in the reverse manner (Garret, 2010). Reference Ahearn, R. J., et al. 2012. The future of the Eurozone and US Interests. Congressional Research Service. Ajami, R. A. et al., 2006. International business: theory and practice. USA: M.E. Sharpe. Bussiere, M., et al. 2005. Trade Integration of Central and Eastern European Countries. [Pdf] Available at: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp545.pdf [Accessed on November 22, 2012]. Department of International Development, 2012. UK engagement with the World Bank Group. [Pdf] Available at: [Accessed on November 23, 2012]. Dicken, P., 2003. Global shift: reshaping the global economic map in the 21st century. USA: SAGE. Dummler, T., & Kienle, S., 2008. How Much Are the Central and Eastern European Countries (CEEC) Aligned with the Euro Area? Germany: GRIN Verlag. European Commission, 2012. Interim Forecast. [Pdf] Available at: http://ec.europa.eu/economy_finance/articles/eu_economic_situation/pdf/2012/2012-02-23-interim-forecast_en.pdf [Accessed on November 22, 2012]. Garret, K. 2010. Foreign Risk. [Online] Available at: [Accessed on November 23, 2012]. Gillespie, K., et al. 2010. Global Marketing. USA: Cengage Learning. Jacque, L.L., 1997. Management and Control of Foreign Exchange Risk. Springer.. Kelley, M.P., 2001. Foreign Currency Risk: Minimizing Transaction Exposure . [Pdf] Available at: [Accessed on November 22, 2012]. Miller, K. D., 1992. A Framework for Integrated Risk Management in International Business. Journal of International Business Studies, Vol. 23, No. 2. pp. 311-331. Sullivan, D., 2009 International Business. India: Pearson Education. World Trade Organization, 2012. The WTO can ... stimulate economic growth and employment. [Online] Available at: [Accessed on November 23, 2012]. Read More