Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

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Members are quite diverse in their characteristics,

ranging from China, the most populous, to Vanuatu,

which has population of slightly more than 100,000,

and from the United Arab Emirates, with a per

capita GNP of more than $30,000,to Bhutan, which

has a $180 per capita GNP.

The IBRD obtains most of its funds through bor-

rowing in the capital markets of the USA, Europe,

Japan, and the Middle East. The process is not

unlike a private ﬁrm’s seeking debt ﬁnancing

through the sale of securities. Such funds, in turn,

are made available only to creditworthy borrowers,

mainly for those projects that have high real rates of

economic return. The Bank’s decisions are based

on economic considerations only, and the political

character of a member country is irrelevant. As a

result, the World Bank does not make loans in

support of military or political goals. Financial assis-

tance is otherwise restricted in the sense that it may

be used to purchase goods and services from any

member country as well as from Switzerland, which

is not a member.

IBRD loans are usually repayable over ﬁfteen to

twenty years, with a grace period of three to ﬁve

years. Each loan must be made to, or be guaranteed

by, the government concerned. The interest rate

that IBRD loans carry depends on the cost at which

the Bank raises funds in capital markets.

In order not to expose the World Bank to exces-

sive interest rate risk, a pool-based variable rate

lending system was initiated in 1982. Interest

charges applicable to the outstanding balance on all

loans are uniformly adjusted every six months,

up or down, in accord with the average cost of the

pool of IBRD borrowings. A spread of ﬁfty basis

points is added to the World Bank’s own cost of bor-

rowings. Because the new lending system has added

a potential element of volatility to borrowers’ costs,

the Bank strives to ﬁnd a point at which there is

a balance between the susceptibility of the lending

rate to change and the pursuit of the Bank’s other

important objectives. In any case, a degree of

volatility is inevitable, though the World Bank

attempts to reduce the impact of these variations

through its policies.

International Development Association

(IDA)

Because very poor countries may have difﬁculty in

borrowing on IBRD terms, the IDA was established

speciﬁcally to assist such countries.The IDA has 164

nations as members. By deﬁnition, a very poor

country is generally one with an annual per capita

GNP of $696 or less (in 1993 dollars), and approx-

imately ﬁfty countries fall under this classiﬁcation.

In practice, most of the IDA loans go to those coun-

tries that barely exceed half of the speciﬁed annual

per capita GNP, and most of these countries are

located in Africa south of the Sahara and in South

Asia. These countries, though very poor, must still

have sufﬁcient economic, ﬁnancial, and political

stability to qualify for IDA loans.

Whereas the World Bank makes “loans,” the IDA

provides “credits.” These credits are made only to

governments, even though these governments rou-

tinely relend funds to their private and public enter-

prises. The credits must be repaid over ﬁfty years,

and there is a ten-year grace period before the

beginning of the repayment of the principal. IDA

credits carry no interest, but there is an annual com-

mitment charge of 0.5 percent on the undisbursed

portion and a service charge of 0.75 percent on the

disbursed amount of each credit. These charges

are intended to cover the administrative costs of

running the IDA program.

International Finance Corporation (IFC)

Although the IDA shares the World Bank’s staff, the

IFC has its own operating and legal staff. Unlike

the Bank and the IDA, which have many operating

aspects in common, the IFC works closely with

private investors. In addition to providing convert-

ible debentures, underwriting, and standby com-

mitments, the IFC invests in commercial enter-

prises within developing countries and is able to

take equity positions. By functioning in this area,

the IFC complements the work of the World Bank

by providing assistance in business areas that are

impractical for the bank to operate.The IFC’s total

membership has become 175 countries.

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The IFC’s main function is to assist in the eco-

nomic advancement of developing countries by

promoting growth in the private sector of their

economies, and by helping to mobilize domestic

and foreign capital for this purpose. The IFC pro-

vides ﬁnancial, legal, and technical advice, and

contributes an element of conﬁdence to the venture

of the parties. Its special role is to mobilize

resources on commercial terms for business ven-

tures and ﬁnancial institutions where a market-ori-

ented approach is both applicable and preferable. It

will not, however, provide ﬁnancing if sufﬁcient

capital can be obtained on reasonable terms from

other sources. Its lending criteria include foreign

exchange earnings, increased employment skill

improvement and acquisition, higher productivity,

and development of a country’s natural resources on

reasonable terms.The IFC has become more active

in helping companies in developing countries raise

ﬁnancing through international offerings of invest-

ment funds and individual corporate securities.

Multilateral Investment Guarantee Agency

(MIGA)

The activities of the World Bank, IDA, and IFC are

supplemented by those of a new afﬁliated inter-

national organization – the Multilateral Investment

Guarantee Agency (MIGA). Established in 1988,

MIGA has a specialized mandate: to encourage

equity investment and other direct investment ﬂows

to developing countries through the mitigation of

noncommercial investment barriers. To encourage

international corporate investment so that develop-

ing countries can attract qualiﬁed investors, MIGA

offers investors guarantees against noncommercial

risks (especially risk of war or repatriation); advises

developing member governments on the design and

implementation of policies, programs, and proce-

dures related to foreign investments; and sponsors

a dialog between the international business com-

munity and host governments on investment issues.

Industrialized countries should also beneﬁt from

MIGA’s augmentation of the existing capacity to

insure their overseas investors, from its innovative

types of guarantees, and from the efﬁciency derived

from the free ﬂow of investment resources. MIGA

has 163 members.

International Centre for Settlement of

Investment Disputes (ICSID)

ICSID has 139 members. It encourages foreign

investment by providing international facilities for

conciliation and arbitration of investment disputes.

Many international agreements concerning invest-

ment refer to ICSID’s arbitration facilities.

INTERNATIONAL MONETARY FUND

(IMF)

During the Great Depression of the 1930s, many

countries resorted to competitive currency devalu-

ation and trade restrictions to maintain domestic

income, resulting in lower trade and employment

for everyone. Concern over these “beggar-thy-

neighbor” policies led to a conference at Bretton

Woods, New Hampshire, in July 1944, attended by

delegates from forty-four countries. The IMF was

born there on December 27, 1945, to institute an

open and stable monetary system.Through consul-

tation, collaboration, and ﬁnancing members with

balance-of-payments problems, the IMF facilitates

the growth of international trade, raises levels of

income and employment, and develops the produc-

tive resources of all its members.

The IMF is a cooperative apolitical intergovern-

mental monetary and ﬁnancial institution. It began

ﬁnancial operations on March 1, 1947.The IMF has

184 countries as members. There are 2650 staff

from 140 countries. Its total resources are SDR

21.7 billion.

As a “pluralist” international monetary organiza-

tion, its multiple activities encompass ﬁnancing,

regulatory, and promotional purposes. It acts as

a source of balance-of-payments assistance-cum-

adjustment to members, as a source and creator of

international liquidity, as a reserve depository and

intermediary for members, as a trustee, and as a

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catalyst. The use of the IMF’s resources is based

on balance-of-payments need, on equal and on dis-

criminatory treatment of members, and on due

regard for members’ domestic, social, and political

systems and policies.

Guided by its charter (Articles of Agreement),

the IMF has six prescribed objectives:

1 To promote international cooperation among

members on international monetary issues.

2 To facilitate the balanced growth of inter-

national trade and to contribute to high levels

of employment, real incentive, and productive

capacity.

3 To promote exchange stability and orderly

exchange arrangements while avoiding com-

petitive currency devaluation.

4 To foster a multilateral system of payments and

transfers while eliminating exchange restric-

tions.

5 To make ﬁnancial resources available to

members.

6 To seek reduction of payment imbalances.

Membership in the IMF is open to any nation

that controls its own foreign relations and is willing

and able to fulﬁll the obligations of membership.

Each member has a quota based on its subscrip-

tion contribution to the fund.This quota determines

the member’s voting power and access to the

IMF’s ﬁnancial resources. The IMF employs a

system of weighted voting power that combines a

basic allotment with a variable allotment.To recog-

nize the sovereign equality of nations, each member

has a basic allotment of 250 votes. To protect the

interest of members with a greater magnitude of

international trade and ﬁnancial transactions as

well as to account for the differences in subscrip-

tions, variable allotment is used as well, resulting in

one vote for each part of the member’s quota that

is equivalent to a special drawing right (SDR) of

100,000. The USA accounts for some 19 percent

of the total.

Special drawing right (SDR)

In former times, gold and foreign exchange were

the major reserve assets, and there was some

concern that an increase in the rate of such assets

might not be adequate to sustain trade and maintain

full employment. Furthermore, deﬁcits in the

balance of payments of reserve-currency countries

could interfere with the conﬁdence in the reserve

currencies. In response to this apprehension, the

First Amendment to the Articles of Agreement was

created and took effect on July 28, 1969, and the

special drawing right (SDR) was established.

Created by the IMF as a new asset, SDR is a com-

posite ﬁduciary reserve asset to supplement exist-

ing reserve assets (see Exhibit 18.1). It is the unit

of account in which the fund expresses the value

of its assets (see Table 18.1). The value of the

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SOURCES OF FINANCING

Table 18.1 SDR valuation

Currency Currency amount Exchange rate

US dollar equivalent

Euro 0.4260 0.98060 0.417736

Japanese yen 21.0000 118.67000 0.176961

Pound sterling 0.0984 1.53800 0.151339

US dollar 0.5770 1.00000 0.577000

Total 1.323036

Notes

SDR 1 = US$1.32304

US$1 = SDR 0.755837

1 Exchange rates in terms of US dollars per currency unit, except for the yen, which is expressed as currency unit per US dollar.

Source:

“What Is the SDR?”

IMF Survey

, September 2002, 28.

SDR is generally more stable than that of any single

currency in the basket because movement in the

exchange rate of one of the component currencies

tends to be partly or fully offset by movements in

the exchange rates of the other currencies.The SDR

basket comprises the ﬁve members with the largest

exports.

The term “special drawing rights” partly empha-

sizes the similarity with members’ drawing rights on

the General Resources Account, whereas special

conveys the notion of SDR’s uniqueness and differ-

ence from other existing drawing rights in the IMF.

From a historical perspective, SDR is the ﬁrst kind

of an interest-bearing reserve asset created by inter-

national consensus. Unlike commodity money, the

value of SDR as an asset is derived from the com-

mitments of voluntary participants to hold and

accept SDRs rather than from any intrinsic proper-

ties. SDR has been allocated to its members since

1970 in proportion to their respective quotas.

Functions

Among intergovernmental organizations, the IMF is

unique in its combination of regulatory, consulta-

tive, and ﬁnancial functions.

Regulatory function

Reﬂecting its objective of avoiding disruptive ﬂuc-

tuations and the rigidity of rates, the IMF adminis-

ters a code of conduct with respect to exchange rate

policies and restrictions on payments. Having the

authority to inﬂuence some of its members’ prac-

tices, the IMF must exercise ﬁrm surveillance over

their policies.Toward this end,the Fund has adopted

three principles, spelled out in the document enti-

tled Surveillance Over Exchange Rate Policies, to guide

members in their conduct and to specify their rights

and obligations. First, members are obligated to

refrain from manipulating exchange rates to gain

an unfair competitive advantage. Second, members

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SOURCES OF FINANCING

In 1969, the IMF created the SDR as an international

reserve asset to supplement members’ existing reserve

assets. It is the unit of account of the IMF and some

international and regional organizations. The SDR is

a purely ofﬁcial asset, held by member countries, the

IMF, and certain other international institutions. It

is used primarily in transactions with the IMF, either

by members settling obligations to the IMF, some

of which must be paid in SDRs, or by the IMF

making interest payments and loan disbursements

to members.

The IMF allocates SDRs to its members in pro-

portion to their IMF quotas. SDR allocations are not

loans; members may use them to meet a balance of

payments ﬁnancing need without undertaking eco-

nomic policy measures or repayment obligations.

The SDR’s value is based on the value of a basket

of currencies. Movements in the exchange rate of any

one component currency will tend to be partly or fully

offset by movements in the exchange rates of the other

currencies.Thus the value of the SDR tends to be more

stable than that of any single currency in the basket,

which makes the SDR a useful unit of account.

The basket is reviewed every ﬁve years to ensure

that the currencies included in it are representative of

those used in international transactions, and that the

weights assigned to the currencies reﬂect their rela-

tive importance in the world’s trading and ﬁnancial

system.

The latest change in the valuation basket was in

2001 and took account of the introduction of the

euro.The new valuation basket includes the US dollar,

the euro, the Japanese yen, and the pound sterling. Its

value is determined daily based on exchange rates

quoted at noon in the London market.

Source:

Abridged from “What Is the SDR?”

IMF Survey

September 2002, 28.

EXHIBIT 18.1 SDR

must intervene if necessary to counter disorderly

conditions that disrupt short-term movements in

the exchange rates of their currencies. Last but not

least, members should consider the interests of

other members in their intervention policies.

Consultative function

A number of countries are handicapped in the effort

to design suitable foreign exchange programs by the

scarcity of reliable statistical data and of personnel

with suitable skills in economic analysis and man-

agement. This is the area in which the IMF can be

of assistance to such members. Due to the nature of

the work, the IMF has built up a body of practical

knowledge of balance-of-payments statistics, analy-

sis, and policy, and of associated ﬁelds. The IMF’s

research in these topics makes it well qualiﬁed to

offer advice.

Financial function

The IMF’s primary ﬁnancial purpose, as set out in

Article I, sections v and vi, is “to give conﬁdence to

members by making the general resources of the

Fund temporarily available to them under adequate

safeguards, thus providing them with opportunity to

correct maladjustments in their balance of payments

without resorting to measures destructive of

national or international prosperity,” and “to shorten

the duration and lessen the degree of disequilibrium

in the international balances of payments of

members.”

The IMF’s ﬁnancial resources are made available

under a spectrum of policies and facilities that

differ mainly in the type of balance-of-payments

need and in the degree of conditionality. Access to

resources is open to members in amounts related

to their quotas, and the rules governing access

apply uniformly to all members. Based on guide-

lines related to the economic indicators of the

external position of a country, the Fund assesses

both a member’s balance-of-payments need (the

magnitude of ﬁnancing) and the adequacy of mea-

sures to correct the underlying balance-of-payments

disequilibrium (adjustment program). “Need” is a

function of the member’s balance-of-payments

position, its foreign reserve position, and the devel-

opments in its reserve position. Even though the

three elements are considered distinct and separate

and each one alone can represent the member’s

need, it is the IMF’s judgmental consideration of

all three in combination with which it justiﬁes

that need.

FINANCIAL CENTERS

MNCs have made it an increasingly common

practice to raise capital offshore. There are four

broad types of offshore ﬁnancial centers: primary,

booking, funding, and collection. A primary

center (e.g., London, New York) is an international

ﬁnancial center located in a highly developed indus-

trial country. With ﬁnancial systems highly devel-

oped, these centers serve worldwide clients by

offering all kinds of ﬁnancial services.

A primary center is at one extreme; a booking

center (e.g., Nassau) is at the other. International

banks may wish to take advantage of a country’s

highly favorable tax regulatory system by opening a

“shell branch” there which may be nothing more

than one small room or a post ofﬁce box. The

purpose is to serve the ﬁnancial needs of those

outside the country by booking Eurocurrency

deposits and international loans. The OECD has

accused thirty-ﬁve jurisdictions of engaging in

“harmful tax practices” by encouraging foreign com-

panies to set up tax shelters in their territories (see

It’s the Law 18.1). Tyco International Ltd., for

example, has set up 150 subsidiaries abroad and has

reduced its tax obligations by $600 million a year

(see Marketing Ethics 18.1).

A funding center (e.g., Singapore) collects

funds from outside a region for that region’s inter-

nal use.A funding center may thus be characterized

by inward intermediation of offshore funds. In con-

trast, outward ﬁnancial intermediation is a charac-

teristic of a collection center (e.g., Bahrain).

This type of center has low absorptive capacity of

the region’s economies, resulting in excess savings

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SOURCES OF FINANCING

accumulated in the collection center for inter-

national banks to invest.

The globalization of ﬁnance has been driven by:

(1) advances in information and computer technolo-

gies, (2) the globalization of national economies, (3)

the liberalization of national ﬁnancial and capital

markets, and (4) competition among the providers

of intermediary services. Global capital ﬂows in

2000 totaled $7.5 trillion, a fourfold increase over

1990. Because of this growth in cross-border capital

movements, net capital ﬂows rose from $500 billion

in 1990 to nearly $1.2 trillion in 2000.

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Tourism accounts for 40 percent of the $4.5 billion

economy of the Bahamas. Financial services, account-

ing for almost 20 percent of the economic activity, are

an increasingly important factor. More than 400

banks and trust companies and 600 mutual funds

have ofﬁces there.These entities manage nearly $600

billion in assets.

Nassau, the tiny capital of the Bahamas, has

liberal trust laws and no income tax to go with its

balmy weather. There are no taxes on corporate

proﬁts, retail sales, capital gains, or income from

inheritances. Another attraction is that Nassau

promises inviolable secrecy because only signatories

on an account can access bank records.

In 2000, OECD accused thirty-ﬁve jurisdictions of

engaging in “harmful tax practices.” These jurisdic-

tions include the Bahamas, Barbados, the US Virgin

Islands, and twelve other Caribbean regimes. The

Bahamas fought back by stating that OECD’s action

was a retribution against the smaller countries’ com-

petitive tax regimes.

It is an irony that the US tax laws are so compli-

cated and inefﬁcient to the point that the US Treasury

may be better off by simply exempting overseas

income from taxes. This will encourage American

companies to bring their proﬁts home, and the USA

may end up collecting $7 billion more. The nation’s

500 biggest companies are forced to spend more than

$1 billion a year in their effort to comply with tax

laws. Half of these costs are probably linked to inter-

national tax rules.

Source:

“Taxing Times for Tax Havens,”

Business Week

October 30, 2000, 96ff; “Taxing Multinationals: The

Donnybrook Ahead,”

Business Week

, September 9, 2002,

86–7.

IT’S THE LAW 18.1 TAX HAVENS

Companies will go anywhere in their pursuit of proﬁts

(or avoidance of taxes). They are not bashful in

exploiting low tax rates abroad. The idea is to maxi-

mize income in low-tax countries while shifting

expenses to high-tax nations. Perhaps the most

aggressive scheme is to incorporate in a country that

is a tax haven. While the tactic usually creates an

uproar in the home country, these companies feel that

it does not pay to be nationalistic.

As in the case of Tyco International Ltd., it fol-

lowed the moves of Cooper Industries, Ingersoll-Rand

Co., and others. By moving to Bermuda, it has

managed to cut its effective tax rate from 36 percent

to 23 percent. The company is now saving $600

million a year. Tyco has since set up 150 subsidiaries

in Barbados, the Cayman Islands, and Jersey.

Source:

“Taxing Multinationals: The Donnybrook Ahead,”

Business Week

, September 9, 2002, 86–7; “The Corporate

Tax Game,”

Business Week

, March 31, 2003, 79–83.

MARKETING ETHICS 18.1 BEING UNAMERICAN

Euromarket

One place where governments and businesses can

go to borrow money of a desired currency at a com-

petitive rate is the Euromarket. This international

market of foreign currency deposits in Europe has

no ﬁxed physical boundary, though London, as a

hub, is its main location. Actually, the Euromarket

is simply a telephone and telex network run by a

few dozen international giant banks. Citicorp, for

example, operates through its foreign branches

in dozens of countries to provide global banking

services to MNCs in any type of currency.

Unlike American banks, which accept nothing

but US dollars for deposit, European banks are

relatively liberal and routinely accept all types of

money, which do not have to be converted into any

speciﬁc local currency. When a depositor needs

funds and must withdraw them, no conversion is

required, and the depositor will get back the same

currency as deposited earlier.

Traded on the Euromarket are Eurocurrencies,

which the world’s major banks bid for and employ.

Eurocurrencies are monies traded outside of

the country of their origin. A Swiss franc becomes

a Eurocurrency (i.e., Euro-Swiss franc) when it

is traded anywhere outside Switzerland. Despite

the Euro preﬁx, a Eurocurrency is not necessarily

restricted to denominations of European and

American currencies. Representing a claim against

North American, Asian, and Caribbean banks, the

currency can be a Euroyen, for example, held by a

Hong Kong bank in the Caribbean.

The Eurodollar, just one of many Eurocurren-

cies, is simply US dollars deposited in banks outside

of the USA (e.g., in Europe, Canada, and Japan).

When Hong Kong or Singapore banks accept

deposits and make loans in US dollars, such dollars

become Asian dollars. The Eurodollar once com-

manded more than 90 percent of the Euromarket,

with the German mark in second place, holding

about 10 percent of the Euromarket.

Eurocurrency deposits have continued to grow

rapidly. Because it is easier and cheaper than issuing

corporate bonds in Japan, the Japanese are the

biggest issuers of Eurobonds.

One unique feature of the Euromarket is its

stateless ﬁnancial system. Although governments

place restrictions on the operations of their national

money markets, such restrictive measures do not

apply to the Euromarket in spite of the fact that it

shares the same locations and facilities as do the

national markets. There is no central bank or

control, and the Euromarket has no international

authority to which it must answer. As an indepen-

dent market of its own, it has its own interest rate

structure, and anyone can invest or trade in it.

Because it has no reserve requirements, it is able to

offer high rates on deposits and also to make loans

at lower rates.

Asian Dollar Market

Since its inception in 1968, the Asian Dollar Market

has grown at a rapid rate.The need for this offshore

ﬁnancial market in Asia is the result of the time

zone differences among East Asia, Europe, and the

USA, making it difﬁcult for Asian bankers to com-

plete transactions within the same day.The growth

was aided by the liberalization of regulations in

Singapore.

The Asian Dollar Market is a group of banks in

Singapore and Hong Kong that accept deposits and

make loans in US dollars. Their deposits are time,

rather than checking accounts. The two major

centers, though different, complement each other.

Hong Kong serves as the major center for syndi-

cated loans in the Far East, whereas Singapore dom-

inates the funding side of the market. Put simply,

Singapore gathers deposits from various sources

while Hong Kong deploys them.

CONCLUSION

Any businessperson can surely appreciate the neces-

sity of having adequate ﬁnancing and cash ﬂow. It is

not uncommon for an importer to turn to its sup-

plier for ﬁnancial assistance. For the exporter to

insist on cash in advance or the equivalent (such as

a letter of credit), the sale may be jeopardized.

To ﬁnance operations, a company, in addition

to selling securities, can turn to middlemen and

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SOURCES OF FINANCING

various ﬁnancial institutions for loans. Over and

above the US market, there are other important

capital markets, such as the Euromarket and the

Asian Dollar Market, in which ﬁnancial resources

can be secured. For a ﬁnancial arrangement of

signiﬁcant value, government assistance can be

requested from the US Export-Import Bank, which

has a variety of programs ranging from direct

loans to participation arrangements with private

lenders. It is unfortunate that the US government

is not as aggressive in this respect as are other

governments.

As for the government itself, borrowing can

occur with the IMF to support its currency and to

ﬁnance temporary trade deﬁcits, or borrowing can

be initiated with the World Bank and its afﬁliates

(IDA and IFC) to ﬁnance development projects.

Private enterprises can beneﬁt indirectly from the

funds made available by the World Bank and IDA,

as they can contact the IFC directly.

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CASE 18.1 TOO CLOSE FOR COMFORT

Because of the technology that allows international trading hookups and because of the existence of multinational

investment banks, it is quite easy to trade stocks, bonds, currencies, futures, and options on a twenty-four-hour

basis and move money across the world in minutes. Because of the industrialized world’s

laissez-faire

approach,

there is virtually no authority to control the ﬂow of capital. As a result, for better or worse, some $2 trillion move

around among securities markets every day. Although some people applaud the liberalization of world capital

markets, just as many people would like to have more government supervision and control.

Bad news travels fast. In the case of ﬁnancial markets, it may be a matter of seconds. The speed of informa-

tion transmission was most evident on Black Monday of October 19, 1987. It was a day of ﬁnancial meltdown.

In two sessions during the week preceding Black Monday, the Dow Jones Industrial Average (DJIA) stock index

dropped 95 points and 108 points. When world trading resumed on Monday, Hong Kong recorded a 420-point

drop. When the New York market opened, waves of selling began. At the end of the day, the DJIA had a record

one-day decline of 508 points, which wiped out 23 percent of the index’s value or the equivalent of $1.1 trillion.

The plunge, when compared to the 1929 stock market crash, was worse in terms of percentage and speed.

Other markets soon followed the New York Stock Exchange – down.There were sell signals everywhere.Tokyo,

the world’s largest capitalized market, saw a drop in stock value of 14 percent of $400 billion in capital. The

decline there of 3836 points was four times the previous single-day drop of 831 points. Sydney lost 25 percent,

or $39 billion of the value of Australian stocks. London followed suit, with a plunge of 250 points, or 12 percent

of the Financial Times Index of 100 stocks, bringing the two-day loss to 500 points, or 22 percent. Sharp declines

were recorded on exchanges in Taiwan, South Korea, Malaysia,Thailand, and Singapore.The same thing happened

in Frankfurt and Dusseldorf, Amsterdam, Toronto, and Mexico City. The Hong Kong market was closed for the

rest of the week.

The panic repeated itself the following week. On October 26, the Hong Kong market reopened and promptly

lost 33 percent of the stock value. The losses elsewhere were as follows: Tokyo (5 percent), London (6 percent),

and Frankfurt (6 percent). Then it was New York’s turn – a loss of 8 percent. The problem seemed to go round

and round like an echo. In all, the world witnessed a loss of $1.6 trillion in global stock market value within days.

There is no question of the chain reaction, akin to knocking over domino pieces. Not so clear, however,

were the causes of the panic. The various explanations were the Reagan administration’s apparent willingness to

allow the dollar to fall, the US trade deﬁcits, fear of global economic recession, mutual funds’ massive selling,

and computerized program trading.

Also unclear was whether the ﬁnancial markets in the USA led the declines of the others or whether it

was the other way around. Did New York lead Hong Kong, or did Asian markets inﬂuence European markets

before affecting the New York and Chicago markets that would open later on the same day? At one time, the

dominance of the USA was obvious. When the USA sneezed, others caught the cold. However, today, Japan dom-

inates the list of the world’s ten leading banks, and its own ﬁnancial force allows it to act on its own. What is

obvious is the interrelatedness of the various markets. They can all quickly act and react to the developments in

other markets.

Another piece of the puzzle is the reactions of consumers and investors in the short and long run. Consumers

who lost their wealth on the stock markets may decide to curb their spending. The decline in consumption may

then lead to a cut in production and employee layoffs. The group that took the immediate brunt, ironically, were

the people employed in the securities industry.

In some ways, the Asian economic crisis of 1997 was a repeat of Black Monday. It all started with the Thai

baht.Thailand’s central bank spent tens of billions of dollars to defend its ﬂawed exchange rate system and insisted

that the baht would not be devalued.Then, without any warning, the baht was allowed to ﬂoat in July, essentially

being devalued. The loss of conﬁdence immediately spread to the other ﬁnancial and asset markets throughout

the region. The values of the currencies of Thailand, Indonesia, the Philippines, and South Korea fell sharply,

accompanied by the huge losses in the regional stock and property markets. The crisis culminated in the collapse

of the Korean won and the Indonesian rupiah in late 1997. The economies that were adversely affected included

Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore,Taiwan, and Thailand.These economies

saw their output drop by more than 6 percent the following year.The declines of real GDP were: Indonesia (15.3

percent), Thailand (8 percent), Malaysia (7.5 percent), and South Korea (7.0 percent).

Some experts believe that the globalization of ﬁnancial markets is inevitable due to the common denominator

– money.The global economy has already been closely linked with the aid of technology. Consequently, each ﬁnan-

cial market is not and cannot be independent. In reality, it is more like a single, global securities exchange with

branches in other countries. This reality provides investors and MNCs with more ﬂexibility – so much ﬂexibility

that any individual country will ﬁnd it exceedingly difﬁcult to impose capital controls. The price of this ﬂexibility

is a greater degree of market volatility and perhaps chaos in global equities.

Points to consider

1 Black Monday and the Asian economic crisis were about ten years apart. Can an event like that of Black

Monday happen again – perhaps in three to ﬁve years’ time?

2 At the time of those difﬁcult weeks in October 1987, Germany was in better economic shape than the USA,

which had record trade deﬁcits and budget deﬁcits. Germany planned just before Black Monday to sell its

16-percent stake in Volkswagen. Should the crash of the US markets have had any impact on West Germany’s

plan?

3 Because of the globalization of the ﬁnancial market, some ﬁnancial experts predict that the international

stock indices (based on stock prices of companies worldwide) may eventually replace such national indices

as the DJIA and S&P 500 in representing the equity investment sentiment. The Salomon-Russell Global

Equity Index and the Salomon-Russell Non-US Equity Index are examples of this development (see Figure

18.7). Do you agree with the prediction? Why or why not?

4 Stock indices are like brand names, with the world’s most well-known stock index being the Dow Jones

Industrial Average (DJIA). All stock indices have one thing in common: they are supposed to gauge the inter-

ests of investors in their respective markets. Unlike the S&P 500 index used by serious investors to deter-

mine the strength of the US stock market, S&P Japan and S&P Europe represent the investors’ sentiments

in Japan and Europe respectively (see Figures 18.8 and 18.9). Do you feel that these national and regional

indices serve a useful function in helping investors analyze their international investment opportunities?

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QUESTIONS

1 Name some of the ﬁnancing sources for exporters.

2 Is it possible to raise capital by issuing stocks in a foreign country?

3 What are the functions (or services) of a factor?

4 What is mixed or blended credit?

5 What are the goals and functions of the World Bank, IDA, and IFC?

6 What are the role and functions of the IMF?

7 What is SDR?

8 What are the Euromarket and Eurocurrencies?

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SOURCES OF FINANCING

Figure 18.7 Global

equity indices

Source:

Reprinted with permission

of Salomon Brothers, Inc.