2 management - School of International Business and ...

169 The Puzzle of Globalization
financial capital from domestic and foreign savers. The inflow of financial capital will increase
and the outflow decline. In case of foreign direct investment the potential return on investment is
more important than the interest rate. This also holds for investment in real estates and equities.
A capital account surplus can suddenly turn into a deficit if the risks in fast developing countries,
especially the volatility of the stock market, are underestimated.
As mentioned before, the relative price of two currencies is determined by supply and demand
of these currencies on the foreign exchange market. Assuming the conditions of the perfect mar-
ket model, the exchange rate is determined by the current account (when neglecting the capital
account). An excess supply of the currency of the domestic economy will cause its value to fall
relative to the foreign currency. The domestic currency depreciates. An excess demand will lead
to an appreciation. The excess supply of the domestic currency may result from the relative
higher growth of the domestic economy which leads to increasing imports as described before.
After the depreciation the purchasing power of one unit of the domestic currency falls. The do-
mestic consumers can buy a lower quantity of foreign goods with one unit of their own currency.
The exporters benefit because the price of their goods expressed in foreign currency has de-
creased. Depending on the relation between changes in price and quantities of the domestic
consumers and exporters as well as the foreign exports and consumers (measured by supply
and demand elasticity), the current account deficit will disappear. This mechanism also works in
case of differences in the financial market. If the central bank in the domestic economy increases
the interest rate, foreign savers will buy domestic assets which leads to an increased demand
for the domestic currency. Its appreciation reduces the attractiveness for foreign savers to buy
domestic assets. The capital account surplus will disappear. The general policy lesson is that
fl e x ib le e x c h a n g e r a t e s a llo w c e n t r a l b a n k s t o c a r r y o u t a n a u t o n o m o u s m o n e t a r y p o lic y s t r a t e g y.
Empirical studies suggest that the effects of exchange rate changes on goods and capital mar-
kets occur with different time lags. In case of financial markets even time leads can be observed.
4 MANAGING GLOBALIZATION
A global manager is set apart by more than a worn suitcase and a dog-eared pass-
port. – Thomas A. Stewart, Editor, Harvard Business Review
As illustrated in figure 4 managers in MNCs have to combine natural, human, technological, and
financial resources, guarantee global intra- and extra-firm logistics and communication networks,
actively participate in the design of industry related policies and/or adapt to implemented measures
in ways that create growing value for stakeholders. This complex and competitive environment is
often far beyond their knowledge and expertise. The challenges resulting from differences among
customers in terms of their nationality, culture, income, dynamic changes in general purpose tech-