Essay on "Global Business International Trade Has Driven Mankind"

Essay 6 pages (1719 words) Sources: 2 Style: MLA

[EXCERPT] . . . .

Global Business

International trade has driven mankind throughout history. Conquerors and explorers traversed the earth in the name of enhancing economic opportunities. Today, international business manifests itself not in caravans and caravels, but in a web of cross-border transactions. To facilitate modern global trade, today's nation-states have developed complex trade agreements that outline the manifestations of trade to the finest detail. To support this trade, an international financial system had developed. This system is critical because it allows for the flows of capital to move relatively freely, despite the existence of over one hundred different currencies. We have seen in recent years that various trade agreements have allowed even developing markets to become integrated into the global financial system (Das, 2003).

The company that perhaps best encapsulates the global nature of international interaction on a philosophical level is Lonely Planet Publications. Now a division of the British Broadcasting Corporation, LPP still operates a global company from its Melbourne headquarters, with international offices in London and Oakland, CA. This paper will examine the nature of international monetary flows within the context of Lonely Planet, with the goal of gaining an understanding of the interdependencies that comprise our modern economic system.

The International Monetary System

There are essentially two types of currencies in the world. There are convertible currencies and non-convertible currencies. The world's major currencies are convertible -- that is to say they are easy to trade and with ready secondary markets. They are backed by relatively strong, stable governments. While not all convertible currencies can be used everywhere, they can all be trusted as a medium of exchange. The vast majority of convertible currencies float on the open market, and are therefore subject to price fluctuations based on supply and demand. Among convertible currencies, some (the U.S. dollar and the Euro in particular) have become currencies franca. It worth noting that even these dominant currencies are fiat currencies, that is to say they are backed by nothing other than legal decree. Their value is tied only to the backing of the issuing government.

Non-convertible currencies are more minor currencies, backed by unstable regimes and weak economies. Such currencies can still be exchanged, but typically not on international markets. Their value may or may not be subject to exchange rate controls. Some non-convertible currencies are subject to official exchange rate controls but trade freely within their own country at market rates on the black market. Occasionally, a non-convertible currency will be back by a stable government and strong economy, but remains subject to relatively strict price and supply controls (the Chinese yuan or the Russian ruble, for example).

Purchasing

Most international companies do the majority of their purchasing in convertible currency. Today's currencies are fiat currencies, so corporations prefer to conduct business in convertible currencies back by governments with genuine assets (tax bases, natural resources). Making purchases in convertible currency also helps to mitigate exchange rate risk. At Lonely Planet, purchasing takes many forms. The major physical input is the material used to make the books. This paper may come from the country in which the printing press is located, or it may come from another country. The American operations are as likely to have Canadian paper; the British publishing arm likely sources paper from Scandinavia. If we follow the flow of money, we see that paper is closely linked to the natural resource, wood. Funds therefore flow from one convertible currency to another. The major input at the raw material level is labor, so the flow of funds stops.

Another key physical input is physical machinery. Printing is contracted out to a variety of printers. Some South American books, for example, are printed by Quebecor (a Canadian company) in Peru. Some Asian books are printed in Singapore by a local company. The contracts are typically in U.S. dollars, leaving the currency risk to the local party. This is even the case in Singapore, which has a convertible currency. Labor costs for the subsidiaries are in local currency, while the machinery may contain parts from any number of machinery and computer hardware manufacturers around the world, with raw materials coming from a variety of countries specializing in raw metals.

Labor

Another key input at Lonely Planet Publishing in labor. Some labor is conducted at the three offices, but the company also makes extensive use of freelancers. These freelancers include western writers who do primary research and local writers in the different countries who assist with this process. The staff in the three different countries are all paid in local currencies. However, sales in each country more than offset this particular outflow.

The freelance writers, however, are all paid in U.S. dollars, which is the main currency in the publishing world. They do not use Australian dollars because, although they are perfectly convertible, they are not as useful for writers who may be from any of a dozen English-speaking nations. Moreover, many of the writers live overseas, which is where they draw their expertise from, so a universally accepted currency is necessary.

Another capital flow is with respect to the expense money that the writers receive while conducting research. The writers do not disclose their intentions when the visit places, so as not to receive special treatment. This means they must pay for their transactions. As a result, the company must reimburse the writers. This represents a capital flow to all of the countries that Lonely Planet covers, which is to say all nations that are not active war zones.

Cash Inflows

In global corporations, cash flows both ways. Lonely Planet sells its books in dozens of countries around the world. As a result, they receive revenue in dozens of different currencies. Some of this money is in convertible currency, some of it is not. Moreover, while some of the revenues can be used to pay local expenses, the company does not have operations in more than a small handful of countries. Therefore, the currency must be repatriated. Thus, cash inflows come from purchasers around the world, both wholesale and retail. These inflows are ultimately translated back to Australian dollars, where they are used to first pay for head office expenses, with the rest being profit.

Changes in the Global Economy

The complexity of cash flows involved at Lonely Planet illustrates the way that global economies have become interdependent. This interdependency has been fueled by several factors -- trade agreements, communication and transportation among them. Trade agreements allow LPP to publish its books in Peru and Singapore, despite being located in Australia. These books are then shipped to markets all around the world. Without trade agreements, the tariffs and duties on these books would make the purchase price at the consumer level prohibitively expensive. That would force LPP to publish in each country, a situation that was common for most of the 20th century.

Enhanced communications allows for the internationalization of several components of LPP's enterprise. It allows them to receive data from writers all over the world. A Lonely Planet writer could theoretically produce entire texts from the road, never once coming to Melbourne or returning to their own home. The writers could receive pay through their own bank, and access the money through the global banking network in any currency they need. Entire books can be transmitted electronically, allowing LPP to complete the file one day in Oakland and begin printing the next day in Lima.

That first book could then be on store shelves in Canada, Brazil or Hawaii by the next week. Transportation has allowed many businesses to go global. Even with trade agreements, it is the speed at which goods can be moved that allows for overseas production. The computers that run the printing presses in Peru could be made in Taiwan, using semiconductors that were sent by FedEx from the Philippines.

Future Outlook

The changes that we have seen in the past fifteen years -- communication (especially the Internet), trade agreements (regional agreements, the Doha Round), and transportation allow for Lonely Planet to operate not only as a global business but to do so more efficiently than they could when they started in the 1970s. In that milieu, they were restricted to local operations, local writers, and local distribution.

The trends of today are expected to continue into the future, with the possible exception of transportation. There are threats, such as the repeated currency crises that have emerged from liberalization of monetary flows (Steil, 2007). Also, the current economic situation has some populist politicians talking protectionism, but the reality is that most politicians believe in freer trade as a means to economic growth. Therefore, we will see further trade agreements that open up trade to more countries in more products. Communications infrastructure will continue to be built up, which will result in further improvements to that respect. Transportation, however, may be subject to higher costs as fuel prices are generally increasing.

One result of this is that it may no longer be economically viable to produce… READ MORE

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