Blade Inc Case

Ch11. What are the advantages Blades could gain from importing from and/or exporting to a foreign country such as Thailand? ANSWER: The advantages Blades, Inc. could gain from importing from Thailand include potentially lowering Blades’ cost of goods sold. If the inputs (rubber and plastic) are cheaper when imported from a foreign country such as Thailand, this would increase Blades’ net income. Since numerous competitors of Blades are already importing components from Thailand, importing would increase Blades’ competitiveness in the U.S., especially since its prices are among the highest in the roller blade industry. Furthermore, since Blades is considering longer range plans in Thailand, importing from and exporting to Thailand may present it with an opportunity to establish initial relationships with some Thai suppliers. As far as exporting is concerned, Blades, Inc. could be one of the first firms to sell roller blades in Thailand. Considering that Blades is contemplating to eventually shift its sales to Thailand, this could be a major competitive advantage. 2. What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In the long run? ANSWER: There are several potential disadvantages Blades, Inc. should consider. First of all, Blades would be exposed to currency fluctuations in the Thai baht. For example, the dollar cost of imported inputs may become more expensive over time if the baht appreciates even if Thai suppliers do not adjust their prices. However, Blades’ sales in Thailand would also increase in dollar terms if the baht appreciates, even if Blades does not increase its prices. Blades, Inc. would also be exposed to the economic conditions in Thailand. For example, if there is a recession, Blades would suffer from decreased sales to Thailand. In the long run, Blades should be aware of any regulatory and environmental constraints the Thai government may impose on it (such as pollution controls). Furthermore, the company should be aware of the political risk involved in operating in Thailand. For example, the likelihood of expropriation by the Thai government should be assessed. Another important issue involved in Blades’ long-run plans is how the foreign subsidiary would be monitored. Geographical distance may make monitoring very difficult. This is an especially important point since Thai managers may conform to goals other than the maximization of shareholder wealth. 3. Which theories of international business described in this chapter apply to Blades, Inc. in the short run? In the long run? ANSWER: There are at least three theories of international business: the theory of comparative advantage, the imperfect markets theory, and the product cycle theory. In the short run, Blades would like to import from Thailand because inputs such as rubber and plastic are cheaper in Thailand. Also, it would like to export to Thailand to take advantage of the fact that few roller blades are currently sold in Thailand. Both of these factors suggest that the imperfect markets theory applies to Blades in the short run. In the long run, the goal is to possibly establish a subsidiary in Thailand and to be one of the first roller blade manufacturers in Thailand. The superiority of its production process suggests that the theory of comparative advantage would apply to Blades in the Of course. establishment of a subsidiary in Thailand is probably not the best way for Blades. However. and an established market. and since Blades has never operated outside the United States. since its U. . since Blades’ production process is unique. to gain a foothold in Thailand in the long run. which it may duplicate after the joint venture terminates. the product cycle theory also applies to Blades. a joint venture would provide the Thai subsidiary with knowledge of the production purposes. familiarity of the Thai firm with customs and ethics in Thailand. Inc.long run. The advantage would be access to Thai distribution channels. sales are declining and Blades feels that it must eventually establish a subsidiary in Thailand in order to preserve its competitive advantage over Thai competitors.S. What long-range plans other than the establishment of a subsidiary in Thailand are an option for Blades and may be more suitable for the company? ANSWER: Since Ben Holt is very unfamiliar with international business. Blades should initially consider a joint venture with Thai firms that manufacture roller blades. 4. Blades also has some expenses in baht. How could a higher level of inflation in Thailand affect Blades (assume U. 3. especially because the firm invoices its roller blades in baht. competitors exporting to .Ch2 1.S.S.S firms conducting business in Thailand affect Blades? ANSWER: Blades would be favorably affected relative to Thai roller blade manufacturers and relative to other U. 4. roller blade manufacturers with operations in Thailand. How could competition from firms in Thailand and from U.S. How could a continued depreciation of the Thai baht affect Blades? How would it affect Blades relative to U. Consequently. Nevertheless. Both groups of firms will likely be forced to raise their prices if they want to maintain the same profit margin should inflation in Thailand increase. the importer may not offer to renew this arrangement in excess of the original three years if the Thai economy does not improve. consumers and corporations within the country will most likely purchase more goods overseas. the demand for Blades’ products may increase relative to that of its U.S inflation remains constant)? ANSWER: A high level of inflation in Thailand relative to the United States could affect Blades favorably. A continued depreciation of the baht means that the bahtdenominated revenue in Thailand will convert to fewer U. this effect may be magnified because Blades manufactures a leisure product. Consequently. Conversely. Although Blades would be hurt by a depreciating baht because its exports are denominated in baht. This is especially true if both groups of firms source their supplies directly from Thailand. dollars.S dollars? ANSWER: A continued depreciation of the Thai baht would hurt Blades. as Thai consumers will have less money to spend. manufacturers with operations in Thailand. Blades’ cost of goods sold incurred in Thailand is relatively small.S exporters invoicing their roller blades in U. Blades’ sales to Thailand may increase 2. so that the prices of these supplies are subject to the higher inflation in Thailand.S. The arrangement Blades has with its primary Thai importer mitigates this effect somewhat. Furthermore. since the latter has committed himself to the purchase of a certain number of “Speedos” annually. as local goods become more expensive. costs will not be subject to the higher level of inflation in Thailand to a great extent and Blades will probably not have to raise its prices to the same extent as Thai roller blade manufacturers or U. it would appear that a decreasing level of national income in Thailand could hurt Blades financially. which is probably one of the first products Thai consumers will stop buying. How could a decreasing level of national income in Thailand affect Blades? ANSWER: At first glance. if a country’s inflation rate increases relative to the countries with which it trades. but this amount is less than the revenue denominated in baht. Generally. 5. dollars. If the baht depreciates.Thailand. thereby becoming part owner . If Blades increases its business in Thailand and experiences serious financial problem.S. Besides extending loans. are there any international agencies that the company could approach for loans or other financial assistance? ANSWER: An agency extending direct loans to corporations involved in international trade is the International Financial Corporation (IFC). the IFC may also purchase stock in a corporation. This is because most of the U.S. Thai importers will have to convert more baht to dollars in order to pay for the dollar-denominated exports. firms exporting roller blades to Thailand invoice their products in U. 000 = Baht-denominated expenses 206. If the net Baht received from the Thailand operations are invested in Thailand. how will US operations be affected? (Assume that Blades is currently paying 10% on dollar borrowed and needs more financing for its firm) ANSWER: If the cash flows generated in Thailand are all used to support U. Blades is not subject to any future depreciation of the baht that would result in less dollar cash flows. it should invest the excess funds generated in Thailand at 8 percent and borrow funds at the lower interest rate.S.920.000 = Baht-denominated revenue 826.000 Calculation of baht-denominated cost of goods sold: Cost of goods sold per pair of "Speedos" 2. the Thai investment will render a yield of roughly 5 percent. Plan 1–Ben Holt's Plan Calculation of baht-denominated revenue: Price per pair of "Speedos" 4.S.871 × Pairs of "Speedos" 72. (or the international money market) at an interest rate of 10 percent.594 × Pairs of "Speedos" 180.000 Calculation of dollar receipts due to conversion of baht into dollars: Net baht-denominated cash flows now (826.000) 620.712.000 . 2. For example.S. the baht should probably be converted into dollars today to forgo the additional (expected) interest expenses that would be incurred from this action. Since the funds could have been converted into dollars immediately and used in the U.) If Blades can borrow funds at an interest rate below 8 percent. operations. Blades should use the excess funds generated in Thailand to support its operations rather than borrowing. Explain what this means? ANSWER: If the net baht-denominated cash flows are converted into dollars today. if the baht will depreciate by 10 percent over the next year.compare the choice of investing the funds versus using the funds to provide needed financing to the firm? ANSWER: (See spreadsheet attached. then Blades will have to borrow additional funds in the U.Ch3 1.712. while the company pays 10 percent interest on funds borrowed in the U. One point of concern for you is that there is a tradeoff between higher interest rates in Thailand and the delayed conversion of Baht into dollars.For this question assume that allaa baht denominated cash flows are due today. however.208.S.920. Costruct a spreadshhet to compare the cash flows rsulting from 2 plans. 3. If.. Blades can borrow funds at an interest rate above 8 percent (as is currently the case with an interest rate of 10 percent).000 – 206. 884.691.691.190.075.712.Interest earned on baht over a one-year period (15%) 93.799 = Dollar receipts in one year $ 16.791 Calculation of dollar difference between the two plans: Plan 1 $ 15.022 = Expected dollar receipts in one year $ 15.000) 620.024 = Dollar receipts now $ 14.920.712.000 × Spot rate of baht now $ 0.871 × Pairs of "Speedos" 72. the cash flow generated in one year by Plan 1 exceed those generated by Plan 2 by approximately $384.000 = Baht-denominated revenue 826.200 Baht to be converted in one year 713.031.529.262 Plan 2 16. Therefore.000 Calculation of baht-denominated cost of goods sold: Cost of goods sold per pair of "Speedos" 2.000 – 206. .529) Thus.000 Calculation of dollar receipts due to conversion of baht into dollars: Net baht-denominated cash flows to be converted (826.920.239.208. Ben Holt's plan should not be implemented.594 × Pairs of "Speedos" 180.075.992 Interest earned on dollars over a one-year period (8%) 1.262 Plan 2—Immediate Conversion Calculation of baht-denominated revenue: Price per pair of "Speedos" 4.791 Dollar difference $ (384.200 × Expected spot rate of baht in one year $ 0.000 = Baht-denominated expenses 206. the demand for the former country’s currency declines as its exports decline (due to its higher prices). Because of Blades’ export arrangement. it states that the rate of change in the prices of products should be similar. However. Since the baht has become a freely floating currency. it is unable to increase its prices in line with Thai levels of inflation. The relative form of PPP states that prices of similar products of different countries will not necessarily be the same when measured in a common currency because of market imperfections. However. 2. Thus. What is the relationship between the exchange rates and relative inflation levels of the two countries? How will this relationship affect Blades’ Thai revenue and costs given that the baht is freely floating? What is the net effect of this relationship on Blades? ANSWER: The relationship between exchange rates and relative inflation rates is summarized by the purchasing power parity (PPP) theory. a depreciation of the baht will result in a conversion of baht into fewer dollars. Both forms of the theory suggest that the currency of the country with the higher level of inflation should depreciate to offset the inflation differential. What are some of the factors that prevent PPP from occurring in the short run? Would you expect PPP to hold better if countries negotiate trade arrangements under which they commit themselves to the purchase or sale of a fixed number of goods over a specified time period? Why or why not? . Blades’ cost of goods sold generated in Thailand will increase as Thai exporters adjust their prices according to Thai inflation rates. the high prices resulting from high levels of inflation in Thailand may be somewhat offset by a depreciation of the baht. consumers and firms in the country with higher inflation tend to increase their importing. the absolute form of PPP states that prices of similar products of two different countries should be equal when measured in a common currency. Furthermore. since Blades’ exports are denominated in baht. it will be negatively affected by PPP. Blades’ revenue generated in Thailand will be negatively affected by PPP. the currency should be expected to depreciate due to the high inflation levels prevailing in Thailand.Ch4 1. When one country’s inflation rate rises relative to that of another. Since Blades generates net cash inflows from its Thai operations. However. certain goods may not be affected by PPP because no suitable substitutes are available in the home country. Therefore.S. national income levels. Thus. Furthermore. at least in the short run. and government controls. the trade relationships between two countries for these goods may not be affected by inflation rate differentials in the manner suggested by PPP. consequently. and since it is considering the expansion into Thailand. the company should be concerned with PPP. Inc. 4. 3.ANSWER: PPP may not hold because exchange rates are affected by other factors in addition to the inflation differential between two countries. the high level of nominal interest rates in Thailand are primarily the result of high expected levels of Thai inflation. However. This would place upward pressure on the currency of the country with the higher level of real interest rates. the Thai baht should depreciate by an amount sufficient to offset the nominal interest rate differential between Thailand and the U. it has been found to hold reasonably well in the long run. such as relative interest rates. How do you reconcile the high level of interest rates in Thailand with the expected change of the baht-dollar exchange rate according to PPP? ANSWER: High levels of real interest rates in a given country may increase the demand for that country’s currency as foreign investors can earn higher rates of return in the foreign country than may be available domestically. causing a delayed impact of inflation rates on trade relationships and. exchange rates. Given Blades’ future plans in Thailand. Since Blades is under a three-year export arrangement with Entertainment Products. Arrangements whereby firms with differing inflation commit themselves to the purchase of a fixed number of goods over a specified period of time will cause PPP not to hold. according to the international Fisher effect (IFE). in the long run. the relatively high level of Thai inflation may result in a . should the company be concerned with PPP? Why or why not? ANSWER: Although PPP may not hold well in the short run. This is because contractual agreements are not easily terminated. whether PPP holds between the U. when the baht was pegged to the dollar. Yet.S.S. the baht-dollar exchange rate was not affected by the inflation rates in the two countries. One possible alternative is to investigate.depreciation of the baht sufficient to offset the inflation differential. Given that the Thai baht has been freely floating for only a short period of time. other economic characteristics. this form of testing whether PPP holds is not appropriate for Thailand. Blades will be able to renegotiate its arrangement once the three-year period for the existing arrangement is over. how do you think Blades can gain insight into whether PPP will hold for Thailand? ANSWER: One possible way to determine whether PPP holds between two countries is to regress historical exchange rate changes on the inflation differential between two countries. via regression analysis. and trade relationships with the U. since the baht has only been freely floating for a short period of time. and a country similar to Thailand in terms of inflation rates. . and Thailand in the future. 5. PPP may hold better for some countries than for others.S. However. The regression results could then be used to assess how the baht-dollar exchange rate may be affected by the inflation differential between the U. The increase in currency value is referred as appreciation and it is measured as: Percentage change in currency: = S-St-1 St-1 = (.How high level of inflation and interest rates will effect Thai bat's value? • • High Inflation will likely reduce baht's value High Interest rates are expected to Increase baht‘s value. Cycle can be analyzed as: Change In Economic Factors Change in Trade-flows/Capital-flows Change in Demand/supply Change in Equilibrium At equilibrium exchange rate demand for currency (₤) is equal to supply of currency (₤) against any other currency (i-e $).022)/.026-.1.How lack of Confidence in baht's will effect Blades ? • • Blades CGS will reduce and GP will increase.How percentage changes are measured?  An exchange rate measures the value of one currency in units of another currency. 4. .Basic factors that determine value of currency? What is relationship in equilibrium?  Demand and Supply are two basic factors that determine the value of a currency.022 = 18. A decline in currency value is often referred to as depreciation. Blades Revenue will decrease due to fixed price and quantity of Speedos.18% S represents recent and S t-1 represents earlier spot rate Positive change reflects appreciation in Thai baht  2.      3. Assumptions: • If other central banks don’t make same adjustments at same time. Supplier doesn’t increase prices of inputs i-e they remain the same • 5.How Thai Central Bank Can reduce outflow of funds using interest rates ? Thai Bank can increase interest rate to make investment in Thailand attractive than any other countries.Assumptions: • We assume here that US and Thailand are mainly invloved in trading say 60% so to some extent it will and should depreciate relative to US $. .  
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