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Chapter 7 Serial Lines
CONTENTS
1.0 Introduction 2.0 Objectives 3.0 Main Content
3.1 Financial Forces
3.2 Fluctuating Currency Values 3.3 Foreign Exchange Quotation 3.4 Currency Exchange Control 3.5 Balance of Payment
3.6 Tariffs and Duties 3.7 Taxation
3.8 Inflation
3.9 Household Savings 4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment 7.0 References/Further Reading
1.0 INTRODUCTION
Financial influence on an international business is an uncontrollable factor and this include foreign currency exchange risks, national balance of payment, taxation, tariffs, national monetary and fiscal policies inflation and national business accounting rules.
Though all these are controllable variables looking like disadvantages to a business concern, if well studied and applied accordingly, they could turn out to be an advantage to a business concern. This unit examines financial influence on international business.
2.0 OBJECTIVES
At the end of this unit you, should be able to:
explain factors that affect international business finance
describe the implications of foreign currency on international business
explain balance of payment
explain tariff, taxation and government regulatory policy on international business activities
explain international accounting practice.
3.0 MAIN CONTENT
3.1 Financial Force
These are some financial factors that a business man, who goes international, struggles with in order to be successful in an international business.
These factors are uncontrollable, because as a businessman, you do not have control over them; however, you could critically study them and take advantage of the opportunity being created by them.
3.2 Fluctuating Currency Value
One of the major currencies Nigeria depends on in terms of exchange is the dollar. In the 1990s, to be precise, during Abacha�s Regime, the naira was about 70 to 75 per dollar. From 1999 to 2006, Nigerian
currency has been fluctuating between N160 and N180 per dollar.
Today, it is about N120 per dollar.
The essence of this account is to examine the effect of this on an international businessman who operates in Nigeria at this period. The cost of goods that are brought in from outside Nigeria will continue to rise and fall thereby affecting business activities either positively or negatively depending on the situation at hand and the policies of the government.
In a situation where the currency fluctuation is higher, the Central Bank may intervene in selling and buying the dollar. You must be conversant with the exchange rate if you want to go into international business. It is very easy to get the currency value of the naira against major currencies in the world. You must bear it in mind that the rates are not always stable.
SELF ASSESSMENT EXERCISE 1
List the current values of the dollar, pound, and euro against the naira.
3.3 Foreign Exchange Quotations
Foreign Exchange Quotations is the price of one currency expressed in terms of another. Ball et al (2002), in the world�s currency exchange markets, the US dollar (US $) is the common unit being used for
exchange for other currencies. This means, a Japanese businessman who wants to buy goods in the US will have to convert his Yen to dollars to buy his goods.
3.4 Currency Exchange Controls
Ball et al (2002), describe currency exchange control as currency exchange control limit or the legal limit allowed of a currency in international transaction. Typically, the value of the currency is arbitrarily fixed at a rate higher than its value in the free market and it is decided that all purchases or sales of other currencies be made through a government agency. As a result of this control, black markets inevitably spring up, as the official channel, most times, cannot cope with the volume of demand from business. However, the black market is rarely able to accommodate transactions of a large size and which may involve multinational organisations.
In Nigeria, the currency exchange was highly controlled with two different exchange rates- Inter banks rate and FEM rate. FEM rate is determined at fortnightly auctions. Borrowing from abroad is subject to the Federal Ministry of Finance approval. For incoming direct investment, approval is needed from Finance Ministry and Ministry of Internal Affairs which control foreign equity. A hundred percent
international ownership is not allowed. In coming portfolio market requires Finance Ministry�s approval. Remittance of dividends and profits is also controlled by the Finance Ministry. In conclusion, the Federal Ministry of Finance also controls the remittance of principal capital, interest, sales fees and pre-tax profit, reparation of capital and documentation of transfer of business or sale. The Federal Ministry of Finance is the gate-keeper for international business.
SELF ASSESSMENT EXERCISE 2
How has the Nigerian government been able to control foreign exchange in the country?
3.5 Balance Of Payments
Balance of payments is described as a situation where a country�s export and import are equal. If the balance of payment is slipping into deficit, government may probably consider one or more market or non market measures to correct or suppress that deficit.
A government can do the following.
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Currency devaluation
Restrictive monetary or fiscal policies Currency or trade controls.
In terms of export, government will encourage export incentives, tax holidays, lower cost financing, or other advantages government may give to international businesses to encourage them to export, buy goods and services. All these affect international business either positively or negatively.
SELF ASSESSMENT EXERCISE 3
List five export incentives Nigeria granted foreign investors in the last three years.
3.6 Tariffs or Duties
The words tariffs or duties are used interchangeably. They are taxes usually imposed on imported goods. Tariffs and duties are imposed on some goods for the following reasons.
i.
ii.
Natural defense
Protecting infant industry
iii. Protecting domestic jobs from cheap foreign labour iv. Scientific tariff or fair competition
v. Retaliation
vi. Other reasons for tariff imposition are that it -
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permits diversification of the domestic economy improves balance of trade.
3.7 Taxation
Taxes are collected from corporations by government so as to provide social services to its citizens. So many people believe that customers pay taxes through high price of goods and the appropriate authorities remit them to the government. It means a company with a lower tax rate would charge its customers less for its products. This may sound good, but in practice, that is not the case especially in Nigeria.
International companies pay more taxes because they operate in many countries; this entails a lot of documentation and paying large fees.
There are different taxes in different countries. If you look at some countries, you will discover that the income tax is the biggest revenue
earner for them, especially the US. There are other taxes like value- added tax, capital gain tax, property taxes and social security.
3.8 Inflation
Increase in prices of goods and services over a period of time is known as inflation. Reasons for inflation may be because of:
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rise in demand
increase in money supply
Since 2006, there has been increase in prices of goods and services worldwide; it is believed that it is because of invasion of Iraq by America. Iraq has ended up selling crude oil per barrel at $117 for the first time in the history of energy sector in the world.
Inflation has a lot of effects on interest rates because companies borrow;
and the cost of borrowing is dependent on the rate of inflation. Once inflation sets in, the lender loses because the value of money is reduced and the borrower, gains, because the value of the money has gone down.
Inflation equally has an effect on a country�s monetary and fiscal policies. (Monetary policy is the amount of money in circulation, while fiscal policy is the collecting and spending of money by the government). Inflation has both positive and negative effects on a business especially the international business. To businessmen, high inflation encourages borrowing because, on repayment, it will be cheaper. High inflation rate brings about high interest rate and this may discourage lending to business organisations.
SELF ASSESSMENT EXERCISE 4
Why is it important for an international business to critically study inflation and how it affects business?
3.9 Household Savings
Ball et al (2002) stated that it is a percentage of disposable income which has a good measure of the saving rate in a country. The USA has a low saving rate while Japan has a high saving rate. Japan�s economy is based on her saving rate which is better than that of the US in terms of
investment and having good infrastructure. In Nigeria, during Babangida�s regime, we had no savings as a country but when Abacha took over and before he died we had a savings of $7 billion. Before Obasanjo handed over power in 2007, it was close to $50 billion. Today we are close to $70billion. It is expected that the money would be used
in investing in infrastructural development and this would attract more international businesses.
4.0 CONCLUSION
Taxation, household savings, inflation, balance of payment, currency exchange control, tariffs and duties, foreign exchange quotation etc, are all financial forces that an international business man must look into while contemplating doing international business. They could have both negative and positive effects on a business, depending on how they are handled. For instance, inflation could be advantageous to a borrower while on the other side, the cost of borrowing could be high.
5.0 SUMMARY
In this unit you have learnt about:
Factors that affect international business finance.
Importance of foreign exchange currency on international business activities.
Tariff, taxation and other government regulatory policies.
6.0 TUTOR-MARKED ASSIGNMENT
Discuss how taxation and inflation can have an effect on international business.
7.0 REFERENCES/FURTHER READING
Ball, A. D. et al (2002). International Business the Challenge of Global Competition, (8th ed.). Irwin: McGraw Hill.