Foreign Trade And Foreign Investment

What impact will the prospect of deprivatization have on investment by managers of privatized firms?

The change in the exchange rate policy to move to a more flexible floating exchange rate system will inevitably compromise China’s current advantageous position in trading especially the export which takes a heavy weight in China’s GDP. The appreciation of RMB will deprive the Chinese enterprises of the advantage to leverage the cheap materials and labor to compete in the international market. This might be a positive indication for China’s importers who has a focus on the domestic markets rather than the international market, where the importers’ purchasing power gets enhanced if the domestic currency appreciate. However, China is still heavily relying on export to grow their GDP at this point and a revaluation of RMB would be very dangerous for the country. Thousands of factories counting on exports might be closed and millions of workers would lose their jobs. As pointed out by Morgan Stanley Economist Andy Xie in the case, “China’s priority is stability and currency flexibility should not be allowed to conflict with this goal”. On the flip side though, a revaluation of the RMB would not necessarily change the current situation of US and EU who had a large trade deficit with China. The reduced imports from China are unlikely to stimulate the growth of the domestic productions of those

China, the largest growing market in the world, currently has a policy regarding monetary regulation that allows the Yuan to “float”. This has seen the Yuan appreciate by approximately 24% over the past few years. Today, the exchange rate between the Chinese Yuan and the American Dollar is approximately 6.3 Yuan to 1 Dollar. Some argue that China should revalue the Yuan again the dollar, establishing a more fixed exchange rate. Others believe that current should allow

The renminbi currency has experienced a fixed exchange rate. The renminbi is seen as undervalued because the value of its currency has been scrutinized to be artificially low, which gives Chinese companies an unfair advantage over floating exchange rate countries such as the US. China has purchased more than $2.2 trillion in foreign exchange reserves in order to maintain an undervalued currency (Scott 2010). China buying US reserves increases the demand for dollars and increases the value of the dollar. Primarily, this makes Chinese goods cheaper in the US and US goods more expensive in China. Keeping a weak currency helps China to boost international exports because other countries purchase China’s goods at a relatively lower price. This helps to maintain growth in China’s economy and provide more manufacturing jobs, a staple to their economy.

In the past years, the economy in China has grown at a considerably high rate averaged at nearly 10% annually. Due to this enormous growth, China now influences the economy of virtually every country all over the world. This is more apparent and frightening, considering the United States economic relationship with China. Until 2005, China pegged its currency to the U.S. dollar, but as from July 2005, it linked its currency to other currencies rather than dollars and let its currency appreciate by 2.1%. The central bank of China did this by buying and selling the dollar dominated assets in exchange of printed Yuan in order to eliminate excess supply or demand for the Yuan. Due to this, the exchange rate between the dollar and the Yuan, basically, remained constant irrespective of changes in economic factors which could have otherwise destabilized the Yuan relative to the dollar.

The main benefit of maintaining a low fixed exchange rate for the Chinese economy comes from the low price of Chinese exports. This means that the demand for Chinese exports will increase, enhancing China’s trade surplus. Figure 1 shows that exports income accounts for almost 30% of the China’s GDP. This high dependency on exports of the Chinese economy is also the reason why the Yuan level is kept at a very low level. If the exchange rate is allowed to float, relative price of some Chinese-produced goods will increase and its competitiveness in the foreign market will decrease. As a result, exports will fall while domestic residents will start shifting for cheaper imports, resulting in a worsening current account.

For quite sometime the Yuan exchange rate has drawn massive criticism from developed countries, especially the US. This is because critics believe the Yuan is undervalued and therefore gives China’s exporters undue advantage. True to that, China has positioned itself as an export destination. Immediately in 1994 after it deliberately engaged in measures to undervalue its currency by adopting a pegged exchange rate regime, China transformed itself from trade deficit to trade surplus country. Even after dropping its fixed exchange rate regime in 2005, China has been accused severally of continuing to deliberately undervaluing its currency. However, an article reported on 16th November 2011 by Wall Street Journal indicated that the recent

China’s economic policy is based on managing the yuan’s rate of exchange as to benefit exports from China. The yuan’s exchange rate is fixed and it does not float freely on the monetary exchange market. The Chinese government keeps the yuan at artificially low levels making their exports more competitive. They also allow only a partial free flow of capital, and they have capital controls that make it easy for investment to come into China but not very easy to go out. These conditions have resulted in cheap credit and greater investment in the Chinese domestic economy, but this has resulted in added inflation.

Theoretically speaking there are three main types of exchange rates. The first type of exchange rate is the floating exchange rate. According to Sloman (2015, p. 457) a floating exchange rate system can be defined as “When the government does not intervene in the foreign exchange markets, but simply allows the exchange rate to be freely determined by demand and supply”. The second type of exchange rate is the fixed exchange rate whereby the government fixes its currency to that of another currency. Most countries which have a fixed exchange rate system usually fix their currency to the US dollar. The Chinese currency can be said to be a “managed floating exchange rate regime” (Spence.,2015) which

Goods - Eliminating tariff barriers promote intra-EU trade, creates new job and aids business. Thus, it develops a superior global position. Intra-EU trade is now greater external trade from the EU. For instance, some countries in North Europe do 70 % of their exports to the EU (See appendix 2). Around 54% of private sector companies in manufacturing experienced a positive impact on their total sales, mainly on the back of higher intra-EU exports. Benefits were created by the lower costs and removal trade barriers. Furthermore, exports to non-EU countries also rose. For instance, companies within Netherland, Spain and Italy experienced increased business

To summarize the whole process of the China’s foreign exchange reform, it can be divided into 3 main stages. In 1994-1996, that was the first stage of foreign exchange reform, which is called “stable development stage”. China started to prepare for its regaining of membership in WTO and GATT by reducing substantially tariffs and import licenses. In order to enlarge Chinese markets, China started to implement socialism and market-orient policy and reformed the foreign exchange system in 1994. It launched a new exchange rate policy which based on the market’s supply and demand, and managed floating exchange rate regime. China adjusted the exchange rate from 1 USD= less than 6 RMB to 1 USD= 8.7 RMB (see figure 1). The competitive advantage of China’s product kept increasing in the international markets because of the depreciation of RMB, which can benefit the exportation and attract foreign investments. In general, China’s economy, foreign reserve account, capital, and

As we discuss in the second chapter, inward foreign investment is believed to boost the economic growth of host countries directly through employment creation and capital formation, and indirectly through knowledge, technology, and information spillovers. Multinationals have superior technologies, technical know-how, and managerial and marketing experiences than domestic firms. Similarly, exporting firms, domestic or foreign, have advantages over non-exporting firms regarding access to advanced technologies that are more productive and efficient. However, multinationals and exporters may not fully internalize the benefits of these assets. The benefits may spillover to domestic and non-exporting firms through market interactions,

Brazil can be seen as country that is open and inviting foreign investments. Brazil remains the top destination for FDI in the Latin American region and according the A.T. Kearney Foreign Direct Investment Confidence Index for 2015, Brazil is ranked #6 as a global FDI destination. FDI inflows into Brazil stood at USD 60.5 billion as on Feb 2015, (Central bank of Brazil). The US Department of State’s report on Brazil states that Brazil is a foreign investment friendly country however complex tax, local content and regulatory requirements must be looked out for. The Brazilian economy’s GDP growth has been erratic, but is showing signs of stability and is expected to hit 2.1 % during the year

First of all, the foreign direct investment is an international movement of capital made by a company or by other entity to establish a subsidiary or to affiliate abroad, by acquiring an interest in a foreign company, by merging with a company foreign, or by establishing a joint venture in another country (O 'Neill, 2004). The FDI will allow Wal-Mart to expand their operations into the Moroccan market, to increase its productivity, and to increase its turnover. By merging with Marjane Corporation in Morocco, Wal-Mart will benefit from the proximity of consumers, from the key markets, from certain benefits comparative like a cheaper labor or a more skilled work, transport and communication, other infrastructure, and from a competitive tax and regulatory framework. Moreover, Wal-Mart Corporation can also invest in Morocco to better manage their global supply networks of the production and distribution to ensure its access to essential resources. Furthermore, the FDI can also be an important catalyst for economic development and prosperity of Morocco. Finally, the FDI has the dual benefit of creating jobs and new sources of tax revenue in both developed economies and in developing economies. In addition, there will be effects such as increased demand for local services and the transmission of knowledge of expatriate managers to local workers. Nevertheless, for businesses that invest and operate in a foreign environment can be confronted to significant challenges, especially if

Recently India’s Home Minister Mr. P. Chidambaram pointed out that surge in foreign capital inflow can be a cause of the rise inflation rate in the economy. This is true! With opening up of the economy, foreign capital has become one of the important factors affecting our economy. The country’s economic policies have changed. We are now an open economy affected by the economic and political happenings of the world. We therefore need to broaden our handling of domestic economic problems like inflation. Inflation is no more only due to supply constraints caused by domestic supply constraint caused by poor monsoon or floods. It is affected by global demand and supply of goods and capital.