Stabilizing Weak Currency - Case Study Example

Running head: international finance 12th May Question Stabilizing weak currency such as Vietnamese Dong A currency that is not stable is bad for a country based on its ability to deplete resources. As the result of the 2008 economic downturn, many countries have continued to experience weak currency an aspect that has affected other sectors of the economy. The devaluation of Vietnamese Dong is one of the major strategies that the state bank has adopted in order to maintain a stable economy. Based on the importance of local currencies for example in undertaking local transactions and paying taxes, it is vital for the governments experiencing weak currencies to stabilize their currencies. One of the ways through which persistently weak currencies can be stabilized is by use of the preexisting currency. This implies that the government can employ microeconomic policies in order to ensure that the currency regains its value. For example, central banks should ensure that money supply is closely monitored to avoid inflation. Other instruments that can be used to regulate money supply include open market operations, discount rate and reserve requirements among others. Most importantly, the interest rates should be controlled to ensure that the public do not excessively borrow an aspect that can result to increase of the money in circulation and inflation. Another way of solving the problem of persistent currency is introducing a new currency. This implies that the central banks should hire experienced economic analysts in order to study the implication of generating new currency. It is vital to note that due to dire causes of making new uncontrolled currencies including hyperinflation, it is essential that government should first use all the available microeconomic policies before embarking on introducing a new currency. Vietnamese Dong among other weaker currencies can also be stabilized by borrowing foreign currencies (Ellen, 2012). Most of the countries with weak currencies usually borrow US dollars in order to ensure that the value of their currencies is maintained at an appropriate rate. While all the three ways are important, the best approach that a government can use depends on political situation. Most importantly, the three approaches should be able create a domestic market, increase reserves and strengthen the existing institutions. Question 2 Advantages Blades could gain from importing from and/or exporting to a foreign country By importing or exporting to a foreign country such as Thailand, Blades is able to benefit in various ways. First, the company is able to import the products that it is facing difficulties in producing. Based on the high costs of production that Blades is facing in the US market, its customers may not be in a position to acquire its products due to high prices. This may result to lack of customer loyalty an aspect that my lead to reduced sales for blades. Thus, the company can create strong relationship with its customers by selling its product at low prices a strategy that can only be adopted it Blades import its products from Thailand. The second advantage is that Blades will be able to utilize its resources maximally. By exporting to Thailand, it implies that Blades will have a bigger market for its products thus making it to use its resources in a better way leading to higher profitability. The third advantage is that the company will be in a position to sell its surplus products to foreign countries (Fujimoto and Shiozawa, 2012). As the result of reduction in demand for blades in US market, the company revenue has decreased meaning that if the company can export some of its products in foreign countries it will experience high revenue while at the same time creating strong positive relationship with foreign consumers. Fourthly, Blades will benefit from reduction in trade fluctuations. By increasing the size of its market, the company will experience higher demand for its brand an aspect that will reduce trade fluctuations as well as retain price stability. The fifth advantage is that the company will benefit its consumers as the result of consuming quality products from other countries. For example based on the low costs of inputs from Thailand, Blades may establish a production facility in the country thus ensuring that it produce large quantity of quality products. By involving itself in foreign trade, the company will also be creating strong customer awareness in other countries. Through the use of extensive marketing strategies, Blades will be able to increase its sales in other countries thus ensuring that it effectively addresses the problems it is facing in US market. Disadvantages Blades could face as a result of foreign trade In its effort to address current challenges, Blades may face some problems as the result of foreign trade. First, it may import inputs that are not standard thus leading to poor quality products that will cause huge losses for the company. As a result, Blades may lose large number of customers to the competitors. Secondly, the company may exhaust its resources due to the extensive in its effort to meet the foreign demand. Thirdly, consumers can opt for imported products rather than domestic ones leading to reduction in revenue for the company in the local market an issue that may affect the economy of a country. Fourthly, Blades may be forced to compete with global companies instead of domestic firms. This may not only increase the company costs of operations, but also it may result to reduction in customer awareness in the domestic market (Wild et al, 2006). The fifth disadvantage that Blades may face is that it may import products that are not in line with the needs of its customers thus losing their trust leading to low sales and reduced profit. Theories of international business applied by Blades Blades Company is applying new trade theory. According to this theory of international trade, a company can increase the quantity of products that are available to the consumers and decrease the cost of production by importing from other countries thus benefiting from economies of scale. One of the notable aspects of this theory is that it stresses that firms should understand the challenges they face in this era of globalization (Shiozawa, 2007). As the competition becomes stiff in the local and international markets, firms such as Blades should establish different production sites in foreign countries according to this theory. Additionally, the theory stipulates that if a company imports superior products, its consumers may be unable to purchase them but eventually when a local industry is established the prices will reduce thus the purchasing power of the consumers increase. Another theory that is being adopted by Blades is the product life-cycle theory. According to this theory that discusses global trade patterns, once new products are introduced in a country for example US, they are highly demanded (Daniels et al, 2007). Other countries will also start to demand the products and thus resulting to production of similar brands. On its effort to reduce cost of production, Blades a US based firm, may make other companies in Thailand to start producing similar products. As a result, there will emerge two competing firms in the two countries. Long-range plans that Blades may emulate other than establishment of a subsidiary in Thailand Other than establishing a subsidiary in Thailand, Blades can adopt other plans. For instance, the company can expand its operations by acquiring other firms in the local market. As the result of acquisition, the company will be able to expand its market thus increasing its sales. This can be followed by expanding in other regions in US. Based on the increased revenue as the result of the expansive operations, Blades can also establish new subsidiaries in the African region. Based on the unexploited resources and potential customers in a country like South Africa, the company will significantly benefit from high sales. Blades may also increase its number of shareholders by selling some of its shares to the public. In this way, the company will be in a position to expand its capital base thus having the ability to open more production facilities in the local market. Another strategy that Blades may adopt is to diversify its product portfolio. It is important to note that some of the most successful companies such as Coca-Cola and Toyota, brand diversification has been the major policy. Thus, Blades should consider producing more products in order to use the market opportunities that exist in the global market. In this way, the company will not only be able to effectively compete in the international market but also it will be able to increase its revenue. References Daniels, J., Radebaugh, L., Sullivan, D. (2007). International Business: environment and operations. New York: Prentice Hall. Ellen, B. (2012). Web of Debt: The Shocking Truth about Our Money System. London: Third Millennium Press. Fujimoto, T and Shiozawa, Y. (2012). Inter and Intra Company Competition in the Age of Global Competition: A Micro and Macro Interpretation of Ricardian Trade Theory, Evolutionary and Institutional Economics Review, 8(2): 13–23. Shiozawa, Y. (2007). A New Construction of Ricardian Trade Theory: A Many-country, Many-commodity with Intermediate Goods and Choice of Techniques, Evolutionary and Institutional Economics Review, 3(2): 41–83. Wild, et al. (2006). International business: the challenges of globalization. New Jersey. Prentice Hall. Read More