CAMBRIDGE ASSOCIATION OF MANAGERS Postgraduate Diploma in Management INTERNATIONAL BUSINESS MANAGEMENT The Impact of Fixed Exchange Rates in a Global Economy A Research Project Report on the Relevance of Fixed Exchange Rate Systems A case of World Vision Kenya Student’s Name:Hesbone Nzambuli Kang’e Registration Number: CAM/2006/PGD/KEN/00143 Purpose:Fulfilment of the Requirements of the Postgraduate Diploma in Management Presented to:Cambridge Association of Manger, International Examinations, UK August 2007 DECLARATION
I declare that this project is my original work and has not been exhibited or published in any way and has never been presented for any awards in any institution. Name:Hesbone Nzambuli Kang’e Signature: ____________________Date____________ This project has been submitted for examination with my approval as the supervisor. Name:Catherine Mwangi Signature: Date: This project has fulfilled the Quality Assurance Policy requirements Name: Signature: Date: Head of Quality Assurance This project has been submitted for examinations with my approval as the moderator. Name: Signature: Date: Project Assessments Coordinator
This project has been submitted for examinations with my approval. Name:Dr. Humphrey Oborah Signature: Date: Head of Missions and Curriculum Manager, Digital Advisory and Learning Centre ACKNOWLEDGEMENTS The successful completion of this project would have been impossible were it not for the guidance, assistance, encouragement and cooperation of many people to whom I owe a tremendous debt of gratitude. Recognition goes to my employer, World Vision Kenya (WVK) for paying part of the tuition costs. My supervisor at work, Girma Begashaw, is appreciated for allowing me to undertake this research in the organisation.
The tuition and guidance provided by the module tutor Prof. Dr. Chritos Pitelis of the University of Cambridge, the research supervisor Ms Catherine Mwangi and the administrative support provided by the DALC Nairobi West Campus staff are also appreciated. Without the participation of the questionnaire and Interview responded, this research would not have succeeded. I owe special thanks to them and to my dear wife Elizabeth and sons Daniel and David who supported me by allowing me to research at night and over weekends. Thank you all for your unqualified sacrifice without which this project would not have been a reality. EXECUTIVE SUMMARY
This research was carried out in World Vision Kenya (WVK), a member of a global organisation, WVI. WVK has clearly defined Vision, Mission, Core Values, Objectives and Strategy. The objectives of this research were; to research the WVK’s business environment, explore the advantages and disadvantages of Fixed Exchange Rate System (FERSs) propose a preferable FERS for WVK, assess impact of FERS on WVK and determine relevance of FERS to WVK. Only primary and secondary qualitative data were collected from responses to a questionnaire and face-to-face interviews. The 16 staff in the Finance and Administration Group formed the sample size.
Purposive sampling method was used to identify the Group as the research sample. The PESTLE and the SWOT analysis tools were used to assess WVK’s business environment. All data was recorded, later sorted out and analysed. This research found that WVK’s funding comes from diverse sources which necessitate adoption of International Business Management (IBM) practices. The research also found that there are advantages and disadvantages of FERSs, and that it’s difficult to prescribe an ideal ERS for WVK because of the challenges faced in predicting the Kenya Shilling to United States of America Dollar (Kshs:US$) changes twelve months in advance.
ERSs affect decisions on several aspects of WVK e. g. level of operation and type of services offered, which makes FERSs relevant to WVK. Some of the recommendations were; he WVK management should keep on reviewing its business environment to determine an appropriate ERS at any given point in time; before WVK could adopt any ERS the management should take cognisance of its disadvantages and plan for them accordingly; irrespective of the ERS that WVK may choose, it should be objective, reliable and stable, nd it should provide an ER that is as close to the market rates as possible; and the WVK’s management should use FERSs as points of reference with a view to setting more realistic ER targets for each year. Further research is also recommended on the quantitative impact of FERSs on Not-For-profit organisations. These findings and recommendations will provide a reference point for WVK and other Non-Governmental Organisations (NGOs) as they endeavour to minimise the impacts of fluctuating ERs on its business.
Researchers and academicians will draw lessons from these findings, especially as they design appropriate Exchange Rates Systems for NGOs. TABLE OF CONTENTS | |PAGE | Declarationi Acknowledgemntsii Executive Summaryiii Table of Contentsiv List of Tables and Figuresvi List of Tablesvi List of Figuresvi Definition of Terms, Abbreviations and Acronymsvii Definition of Key Operational Termsvii List of Acronyms and Abbreviationsviii
Chapter One: Introduction1 1. 1. Organisational Background1 1. 2. Research Context1 1. 3. Statement of the Problem1 1. 4. Research Justification and Purpose2 1. 5. Research Objectives2 1. 6. Importance of the Study2 1. 7. Limitations2 1. 8. Scope of the Study2 Chapter Two:Literature Review3 2. 1. Definition of Exchange Rates3 2. 2. The Bretton-Woods Agreement3 2. 3. Types of Exchange Rate Systems (ERSs)3 2. 4. Problems with ERs4 Chapter Three:Research Methodology6 3. 1. Research Design6 3. 2. Target Population6 3. 3. Sampling Design6 3. 4.
Data Collection Tools and Procedure6 3. 5. Data Analysis7 Chapter Four:Research Findings8 4. 1. WVK’s Business Environment8 4. 2. Advantages and Disadvantages of FERSs10 4. 3. Preferable Type of ERS for WVK11 4. 4. Impact of FERS on WVK11 4. 5. Relevance of FERSs to WVK12 Chapter Five:Conclusions and Recommendations13 5. 1. Conclusions13 5. 2. Recommendations13 References15 Web Sources15 Appendices17 Appendix A: The Research Questionnaire17 Appendix B: Research Interview Guide22 Appendix C: Detailed Analysis of Methodology23 Appendix D: Detailed Analysis of Findings25
Appendix E: Trends of Exchange Rates of Kshs against other Currencies46 Appendix F: Journal Reference; Impact of the Exchange Rate on Export Volumes49 Appendic G: Request Letter for WVK to Allow the Research51 Appendix H: WVK Letter Approving for the Research52 Appendix I: Request Letter for Interviews and Responses to Questionnaire53 Apendix J: Timelines for the Study54 Appendix K: Resources and Budget for the Study55 LIST OF TABLES AND FIGURES List of Tables | |PAGE |
Table 1: Results of SWOT Analysis9 Table 2: Target Respondents for Questionnaire and Interview26 Table 3: Actual Respondents to Questionnaire and Interview27 Table 4: Impact of Environmental Factors on WVK’s Operations31 Table 5: Understanding of Various Aspects of IBM33 Table 6: Gantt Chart for the Study54 Table 7: Budget for the Research Project55 List of Figures | |PAGE | Figure 1: Gender Distribution of Actual Respondents27
Figure 2: Impact of Environmental Factors on WVK’s Operations32 Figure 3: Understanding of Various Aspects of IBM33 Figure 4: Sources of WVK’s Funds42 Figure 5: Kshs Exchange Rates Trends 2004 – 200647 Figure 6: Kshs Exchange Rates Trends 2002 – 200748 Figure 7: Impact of the Exchange Rate on Export Volumes50 DEFINITION OF TERMS, ABBREVIATIONS AND ACRONYMS Definition of Key Operational Terms There are considerable differences in the marketplace regarding the definition of various monetary terms.
With the aim of making this report easier to understand, the following provides an at-a-glance definition of a range of monetary and economic terms as used in this report. |Economy |: This system of production, distribution, and consumption keeps a country going. It has | | |four aspects to it namely: economic system, the efficient use of resources, thriftiness and | | |saving. | |Global Economy |: This is also referred to as World Economy.
It is a term for the fact that the economies of| | |most of the world’s nations have become increasingly interconnected. | |Inflation |: This is an economic indicator that assesses the fall in purchasing power of a currency. | |Monetary System |: This refers to a system that secures the proper functioning of money by regulating | | |economic agents, transaction types and money supply. |Summative Evaluation |: A method of judging the worth of a programme at the end of the programme activities. The | | |focus is on the outcome. | |Qualitative Research Approach |: The qualitative approach involves the collection of extensive narrative data in order to | | |gain insights into phenomena of interest; data analysis includes the coding of the data and | | |production of a verbal synthesis (inductive process). |Quantitative Research Approach |: The quantitative approaches involve the collection of numerical data in order to explain, | | |predict, and/or control phenomena of interest; data analysis is mainly statistical | | |(deductive process). | List of Acronyms and Abbreviations |ADA |: Associate Director for Administration and Procurement | |ADF |: Associate Director for Finance | |B? : British Pound | |CSR |: Corporate Social Responsibility | |ER |: Exchange Rate | |F&A |: Finance and Administration | |FD |: Finance and Administration Director | |FER |: Fixed Exchange Rate | |FERS |: Fixed Exchange Rate System(s) | |FY |: Fiscal Year | |GB |: Great Britain | |GoK |: Government of Kenya | |HIV&AIDS |: Human immunodeficiency Syndrome and Acquired Immune Deficiency Syndrome | |IBM |: International Business Management | |IMF |: International Monetary Fund | |Kshs |: Kenya Shillings | MNC |: Multinational Corporation | |MNE |: Multinational Enterprise | |TNC |: Transnational Corporation | |MNO |: Multinational Organisation | |MS |: Microsoft | |PESTLE |: Political Economical Social, Technological Legal and Environmental factors. | |SWOT |: Strengths, Weaknesses, Opportunities and Threats Analysis | |U. K. : United Kingdom | |US$ |: US Dollars | |WB |: World Bank | |WFP |: World Food Program | |WVK |: World Vision Kenya | |WVI |: World Vision International | CHAPTER ONE:INTRODUCTION 1 Organisational Background
World Vision Kenya (WVK) is a Christian relief, development and advocacy organisation that was established in 1974. The organisation works for the well being of all people and has adopted the following characteristics. WVK’s Vision is our vision for every child, life in all its fullness; our prayer for every heart, the will to make it so. Its Mission is to follow our Lord and Saviour Jesus Christ in working with the poor and oppressed to promote human transformation, seek justice and bear witness to the good news of the Kingdom of God. The organisations Core Values are: We are Christian; we are committed to the poor; we value people; we are stewards; we are partners; and we are responsive.
WVK’s Objectives are; transformational development; humanitarian emergency affairs; promotion of justice; partnership with churches; public awareness; and witness to Jesus Christ. Its Strategy has nine strategic outcomes namely; Christian commitments; well-being of children; ministry quality; policy and advocacy; economic development; organisational effectiveness; humanitarian emergency affairs; HIV&AIDS response; and donor engagement. 2 3 Research Context Fixed Exchange Rate Systems (FERSs) are still relevant in a global economy but would WVK be better off under a FERS especially as the US Dollars (US$), the yen and the Euro move toward parity?
This formed the background and context for this research. 4 Statement of the Problem WVK budgets in Kenya Shillings (Kshs) but it receives most of its funds in United States (of America) Dollar (US$). The organisation spends in Kshs, which involves conversion from one currency to another. As a result, the organisation incurs exchange losses when the Kshs appreciates against the US$. The converse is true. This makes financial projections difficult, requires a lot of time to revise budgets. Whenever there’s an exchange loss, WVK is forced to cut back on planned activities, which puts its image before its stakeholders at risk. 5 Research Justification and Purpose
A FERS has both positive and negative impacts on the supply and demand sides of the global economy. Does this make it relevant to WVK? The purpose of this research was to find this out. 6 Research Objectives i) To research the WVK’s business environment. ii) To explore the advantages and disadvantages of Fixed Exchange Rate System (FERSs) iii) To propose a preferable FERS for WVK. iv) To assess impact of FERS on WVK. v) To determine relevance of FERS to WVK. 7 Importance of the Study i) The study will provide WVK with a reference point as it endeavours to minimise the impacts of fluctuating ERs. ii) NGO’s will learn from this research as they design effective financial management systems. ii) Researchers will draw lessons from these findings, especially as they research on appropriate ERSs for NGOs. 8 Limitations While carrying out this research, the research encountered some limitations as follows. a) Combining employment and research didn’t allow adequate time for broad study of the topic. Consequently, the researcher focussed only on exchange rates. b) Being self-sponsored limited funding for the extensive quantitative and qualitative data collection and analysis. Therefore the researcher focused on qualitative data only. c) Relying on secondary data only would have skewed the information and therefore the researcher sought primary data as well. ) Focus on only FERS didn’t allow for wide study of the topic. The researcher therefore made recommendations for research in other areas. 9 Scope of the Study This research was conducted in WVK’s Finance and Administration Group and focused on Exchange Rates Systems, especially the FERS and its impact on WVK’s business. CHAPTER TWO:LITERATURE REVIEW 1 Definition of Exchange Rates The Government of Canada (GoC) (2006) defines exchange rate (ER) as the value of one currency in relation to another. Understanding of this is important to WVK because it receives most of its funding in US Dollars (US$) whereas it budgets and spends in Kenya Shillings (Kshs).
This means that the amount of Kshs available for WVK’s use depends on the relative value of the Kshs as compared to the US$. This relative value is determined by the reigning Kshs to US$ ER at the time of currency conversion. According to Kouri (1976), an ER directly influences whether citizens purchase domestic or foreign-made products. A devalued currency makes it more attractive to foreign customers to buy local goods, which boosts sales for the country’s exporters. It also makes it more expensive for citizens to buy foreign products. In essence, devalued local currency makes exports more competitive, while simultaneously making imports less competitive. 2 The Bretton-Woods Agreement
The GoC (2006) noted that during the 1930s, the world’s major economies had unstable ERs and hence in the early 1940s, the US and Great Britain proposed institutions that would stabilise the ERs. This culminated in the Bretton-Woods Agreement in 1944, which established the Fixed Exchange Rates System (FERS). According to Eichengreen (1994), this FERS remained in use until 1970s when ERs became uncompetitive because of infrequent changes in parities. In view of the currency used to fund WVK and the one it uses when spending, a FERS would be very useful, especially if this could be achieved over a one year period. This has however not been possible because of the current government policy which supports a flexible ER system. Types of Exchange Rate Systems (ERSs) a) Flexible Exchange Rate Systems According to the GoC (2006), in this system the value of the currency is determined by the market so that higher demand for a currency leads to an appreciation of the currency and vice versa. The equilibrium ER (Specialinvestor. com, n. d. ), is the value that is consistent with interest rate parity. Since 1971, the OECD countries have been moving towards flexible ERS although only relatively few currencies are classifiable as having a truly floating ERs (Dornbusch, 1976). Something similar to this happens in WVK where the organisation pre-determines the ER to use for budgeting purposes.
This ER however changes throughout the year depending on the market ER and the actual ER agreed upon with the organisation’s bankers. b) Managed Floating Rate Systems (MFRS) A MFRS is a hybrid of a FERS and a flexible ERS. In a country with a MFRS, the central bank (CB) doesn’t have an explicit set value for the currency. However, it doesn’t allow the market to freely determine the value of the currency (Fleming, 1962). The CB either develops a target value or a range of values for the currency. It intervenes by buying and selling domestic and foreign currency. MFRS can only work when the implicit target is close to the equilibrium rate that would prevail in the absence of CB intervention.
The situation in Kenya may be described to be like this and WVK is expected to operate within its parameters, which it does. c) Fixed Exchange Rate (FER) System This is an ER regime whereby the ERs of member countries are fixed against the US$ and the CB announces a FER for the currency and then agrees to buy and sell the domestic currency at this value (Edwards, 2002). Edwards further noted that the basic motivation for keeping ERs fixed is the belief that a stable ERS facilitates trade and investment flows between countries by reducing uncertainty and fluctuations in relative prices. This would be an ideal situation for WVK, especially because it doesn’t trade with its funds.
However this is not entirely workable mainly because WVK’s funds come from diverse sources and have to be converted into US$ before being received at WVK where they have to be converted into Kshs before being spend. 4 Problems with ERs Beardshaw (1998), Frankel (2003) and others have identified the following problems with ERs. a) Different ERs exist among nations which occasions exchange losses for corporate that use both local and foreign currencies (Weerapana, 2004). b) Exchange control where ERs are interfered with by governments. In such situations, ERS could be misused for National pride where unrealistic ERs are supported to ensure ‘a strong currency’. c) Responsiveness to both local and international political and civil environment (Wikipedia. com, n. d. which means that the cushion from trade shocks offered by floating ERs can’t produce the desired results. d) Rigid pegs to the dollar are dangerous when the dollar appreciates (EASYForex™, 2006) whereas the gold standard (Eichengreen, 1985) fails when there are large fluctuations in the gold market (Cooper, 1985 and Frankel, 2002). e) FERSs don’t allow countries freedom to pursue own monetary and fiscal policies. In view of the above problems, Frankel (1999 and 2003) advanced the Peg the Export Price (PEP) system for countries that specialise in the production of a particular commodity. He advised that such counties should PEP of that commodity in terms of domestic currency.
But despite this proposal, are FERSs still relevant in a global economy in general and to WVK in particular? This research sought to answer this question. CHAPTER THREE:RESEARCH METHODOLOGY 1 Research Design This research was done in WVK and involved seeking and securing approval from WVK to carry out the research in the organisation. This was followed by literature and documents reviews, development of data collection tools (Appendices A, B and C) and administration of the tools. It also involved identifying potential respondents to the questionnaire and interview, and data analysis and reporting. 2 Target Population The target population was the 16 WVK staff working in the F&A Group as at 31st June 2007.
The Finance, Procurement and Administration staff formed the target and survey populations. 3 Sampling Design In order to safe on time, purposive sampling technique was used. The WVK payroll formed the sampling frame and the Finance and Administration (F&A) Group was identified as the research sample. The 16 staff in the Group formed the sample size and target population. The sample was randomly divided into two clusters: thirteen to respond to the questionnaire and three for the face-to-face interviews. This sampling method was used because the research topic covered a specialised discipline and only specialists in that discipline could competently participate.
The identified respondents had a broad understanding of Finance and international business. They use ERs more often than other WVK staff and hence their feedback was more reliable. 4 Data Collection Tools and Procedure A research questionnaire was administered to one cluster while face-to-face interviews were conducted with the other. A computer was used to conduct internet research and to key-in the collected data. The political, economic, socio-cultural, technological, legal and ecological (PESTLE) and the strengths, weaknesses, opportunities and threats (SWOT) analysis tools were used to assess WVK’s internal and external business environment. Only qualitative data were collected.
Primary data came from responses to the questionnaire, internet searches and face-to-face interviews while secondary data came from literature and document review and internet searches. The questionnaire was administered through a blind copy of an email and the respondents returned their responses via email. All data were recorded and preserved for analysis. Journals were read to confirm the validity of the information received from the employees. See Appendices E and F. 5 Data Analysis All the data collected was sorted and then keyed-in into a computer using MS Excel computer software. The keyed-in data was collated and ranking to establish emerging themes.
Statistical data was presented in tabular and figure formats. The information generated there from was triangulated and correlated for moderation and coherence. The findings were used to draw conclusions and make recommendations. CHAPTER FOUR:RESEARCH FINDINGS Detailed analysis of the following research findings, complete with tables and figures are presented in Appendices D. 1 WVK’s Business Environment a) External Environment i) Political Environment: The change of Kenyan political leadership in 2002 allowed for increased funding to communities through the Constituency development fund whose approach differs from WVK’s. The resulting confusion slows implementation rates.
This predisposes WVK to exchange losses in case the Kshs appreciates within. ii) Economic Environment: Many Kenyans live in absolute poverty which calls for NGOs to partner with the Government to assist the communities to regain their livelihoods sustainability. However, the needs are enormous yet the resources are grossly inadequate. iii) Socio-cultural Environment: The growing Kenyan economy has attracted Foreign Direct Investment in Kenya resulting to increased demand for skilled labour. The staff turnover occasioned by this impacts WVK negatively in that recruitment can’t coped with this turnover which results to delay in activities’ implementation. v) Technological Environment: Technology enables WVK to conduct internet banking and hence reduce the turnaround time for processing transactions. However, technology failure results to delays in both disbursements for ongoing activities and payments to suppliers. This negatively impacts WVK’s image before the donors. v) Legal Environment: A 16% value added tax in Kenya makes it virtually impossible to receive gifts-in-kind, which limits WVK’s funding mix. Lack of a legal framework for self-regulation of NGOs invites unscrupulous individuals who engage in activities that bring negative criticism, making it harder to access additional funding. i) Ecological Environment: Fulfilling the requirement for environmental conservation delays project implementation in that it takes long to get the environmental impact assessment/audit, which in turn delays implementation and causes budget underutilisation and hence predisposes WVK to potential for exchange losses if the Kshs appreciates? a) Internal Environment Table 1: Results of SWOT Analysis |Strengths | |Weaknesses | |Experienced staff and BoD, with wide knowledge of the | |Complicated business processes that delay delivery of services. | |organisation. | | | |Clear organisational Vision, Mission, values and structure to | |Inadequate monitoring & evaluating means level of internalisation | |ensure support. | |of these. |Elaborate departmental reporting system that ensures timely | |Poor information quality due to diverse business needs and issues | |quality reports. | |to deal with. | |High level of computerisation, with computer literate staff. | |Operating disparate IMSs which make it difficult to share | | | |financial information. | |Highly competent/qualified staff, very familiar with current | |Poor change management that result to resistance to changing | |business practices. | |staffs’ actions. | |Good Finance Management strategy implemented by competent staff. | |Inadequate capital investment to mitigate changes in technology. | | | | |Threats | |Opportunities | |New aggressive competition | |Greater selection of suppliers | |New cultures of stakeholders | |Access to new funds. | |Fast technology evolution | |Easier knowledge acquisition | |Increased demand for quality and complexity of beneficiaries | |Availability of new sources of personnel | |High costs of program development and implementation |Better potential for optimisation of use of equipment and | | | |facilities | |Rapidly changing Economic dynamics often resulting to exchange | |Globalisation and internalisation in a Knowledge-Based Economy | |losses. | |(KBE) | |Rapidly changing political, legal and technological environment | |Harnessing KMSs for increased productivity of all factors of | | | |production. | Source: Kang’e (August 2007) Interplay of the above environmental factors influence WVK’s business and therefore it’s important to take cognisance of them because they impact on the means of doing the business.
The monetary and legal environments are especially important because WVK has to operate within the set local and international accounting and reporting standards. 2 Advantages and Disadvantages of FERSs A FERS is an ER regime where a currency’s value is matched to the value of a reference currency which could be another single currency, a number of other currencies or another measure of value, e. g. gold. As the reference value rises and falls, so does the currency pegged to it. Some of the advantages and disadvantages of FERSs are presented below. a) Advantages of FERSs i) Demand and supply for currency still exist but changes in the demand and supply don’t always affect the price of the fixed currency.
Whenever the ER changes, it is a one off large change compared to the continuous, small changes in the Floating ERS. ii) The Central Bank (CB) stands ready to exchange local currency for foreign currency at a pre-announced rate. To do this, the CB fixes and pre-announces an ER that may not coincide with the market ER unlike in a flexible ERS. iii) The CB absorbs excess demand or supply by holding adequate stocks of both foreign and domestic currency to sustain the FER. This way, a FERS enables the CB to determine which currency and what amounts to hold in reserves, which is difficult in a floating ERS. iv) The CB effectively manages the money market by selling the local currency in exchange for the foreign currency.
By reducing excess supply of the foreign and increasing the local currency value, the CB devalues the local currency instead of depreciating it. v) Variables of a FERS exist. This enables countries to set FERs that make imports cheaper or make their currency less valuable to encourage exports. Currency boards are established to ensure that the country doesn’t exhaust Forex reserves and hence forced to devalue its currency. vi) Unrealistic ERs can be maintained by combining a FERS with restrictions on who has access to Forex. b) Disadvantages of a FERS i) A FERS doesn’t stay fixed on its own because Governments have to redirect their monetary and fiscal policies to keep the rate constant.
However, the price of the fixed currency may only remain fixed in the short run followed by substantial changes in the ER in the long run. ii) A strict rule on FERS prevents monetary policy from changing in response to the needs of the economy due to loss of monetary independence and automatic adjustment to export shocks and extraneous volatility. iii) Under a floating ERS deterioration in the international market for a country’s exports leads to a fall in the value of its currency. This doesn’t happen in a rigid FERS. iv) For a country whose monetary policy is linked to some nominal anchor, fluctuations in that anchor creates fluctuations in that country’s monetary conditions, producing volatility in the country’s international price competitiveness. ) FERSs variables such as velocity shocks, supply shocks and measurement errors during GDP targeting are subject to fluctuations that add monetary volatility. 3 Preferable Type of ERS for WVK A preferred ERS must shield WVK from exchange losses. This depends on several factors e. g. the type, size and location of business; the ruling monetary and fiscal policies such as tax regime, tax rebates and tax concessions; ability to achieve economies of scale; franchising; and type of company e. g. local, international or Multinational Corporations (MNC). These factors impact WVK’s business in different ways at different times, making it difficult to prescribe an ideal ERS for WVK.
Hence, WVK will need to keep on reviewing its business environment to determine an appropriate ERS at any given point in time. 4 Impact of FERS on WVK a) Impact on Export Business WVK is not involved in import and export business. However in view of the importance of FERSs and the responses generated from this research, the researcher generated a case scenario to illustrate how FERSs could impact exporters as follows. If WVK is located in the UK and exports its products to Kenya, it will require a stable ERS in UK and in Kenya to enable it prepare reliable financial projections that can be implemented for at least within a production cycle. WVK will need a lower B? to Kshs ER, which’s not possible because the B? is already stronger than the Kshs.
A FERS will therefore not be favourable for WVK but a floating ERS will, because the ER is determined by market forces, which renders the ER some stability without skewing it in favour of the Kshs. The reverse is true for exporters from Kenya to the UK, who will need to make cost recovery from increasing the volume of business, adopting ERSs that shield them from exchange losses, carefully determining the price of its products and reducing the production overhead costs. This means that irrespective of the ERS that WVK may choose, it should be objective, reliable and stable, and it should provide an ER that is as close to the market rates as possible. This is only achievable if the business environment that WVK operates in is carefully evaluated. b) Impact of FERS on MNCs
Although WVK is not a MCN it receives most of its funding in US$ from outside the country but spends it in Kshs. This is what renders FERS relevant to WVK’s business because if the US$ appreciates against the Kshs, the organisation gets more Kshs and therefore has to revise its budget upwards. If the Kshs appreciates against the US$, then WVK incurs exchange loses and is forced to cut back on its activities. Either way this isn’t favourable because of the time and consultations required for the commensurate budget adjustments. WVK also risks being viewed as lacking in integrity by its stakeholders especially whenever there are exchange losses and WVK has to cut back on its activities.
It’s difficult to predict the Kshs:US$ ER changes twelve months in advance. Though ER hedging may help, it’s not been possible under the current financial management framework. Therefore, the WVK’s management must ensure WVK’s business practices are aligned with WVI policies on ERs management. This means that ERSs affects decisions on several aspects of the organisation such as mode and level of operation and type of services offered. 5 Relevance of FERSs to WVK The respondents believed that FERSs are relevant to WVK because they are favourable for long-term planning and budgeting processes. WVK can use FERSs to hedge the ERs for a year or so.
Business expansion requires additional funds but losses arising from unfavourable ERSs are not conducive for such ventures. A FERS would cushion WVK against these in which case, WVK could adopt a FERS and thereafter carry out continuous reviews of the results of maintaining it with a view to adopting another system as and when business environment dictates otherwise. CHAPTER FIVE:CONCLUSIONS AND RECOMMENDATIONS 1 Conclusions a) WVK is a member of a global organisation whose funding comes from diverse sources that are outside the country. This, in addition to the organisation’s business environment, dictates that the WVK management must adopt IBM practice. b) Despite the advantages of a FERS, the government may use it for the wrong urposes, with adverse impact on WVK’s business. This, as well as other factors acting either singly or collectively, impact WVK’s business in different ways at different times, c) It is difficult to prescribe an ideal ERS for WVK because of the challenges faced in predicting Kshs:US$ changes twelve months in advance. d) The major impact of FERS on WVK is that it affects decisions on several aspects of the organisation such as location of branches, mode of operation, level of operation and type of services offered. e) A FERS is relevant to WVK in that it offers its managers a point of reference while considering several aspects of their business. 2 Recommendations ) The WVK management should always evaluate the global business environment in which the organisations works before deciding on the organisation’s strategy, especially ER management. WVK will need to keep on reviewing its business environment to determine an appropriate ERS at any given point in time. b) There are advantages FERS but before WVK could adopt it for use in its business, the management should take cognisance of its disadvantages and plan for them accordingly. This should go alongside a continuous careful evaluation of the business environment. c) Since its not possible to prescribe an ER for WVK, irrespective of the ERS that WVK may decide on, it should be objective, reliable and stable, and it should provide an ER that is as close to the market rates as possible.. ) Since it’s difficult to predict Kshs:US$ changes twelve months in advance, the WVK’s management should adopt practices that ensure WVK’s business is aligned with WVI’s ERs management policies and in deciding on several other aspects of the organisation. e) WVK should use FERSs as reference points before and during operations, with a view to setting a more realistic ER target for each FY, and reviewing it as the business environment changes within the FY. f) Further research is recommended on the quantitative impact of FERSs on NGOs. REFERENCES Cooper, Richard (1985), The Gold Standard: Historical Facts and Future Prospects, Brookings Papers on Economic Activity, 1, 1-45 Dornbusch, R. (1976), Expectations and Exchange Rate Dynamics, Journal of Political Economy 84: 1161-1176
Edwards, Sebastian (2002), Exchange Rate Regimes, Capital Flows, and Crisis Prevention, in Economic and Financial Crises in Emerging Market Economies, edited by Martin Feldstein Chicago: University of Chicago Press Eichengreen, Barry (1985), The Gold Standard in Theory and History. New York, Methuen. Eichengreen, Barry (1994), International Monetary Arrangements for the 21st Century. Washington, DC: Brookings Institution Fleming, J. M. (1962), Domestic Financial Policies under Fixed and under Floating Exchange Rates, IMF Staff Papers 9: 369-379 Frankel, Jeffrey (1999), “No Single Currency Regime is Right for All Countries or at All Times,” Essays in International Finance No. 15 Princeton NJ: Princeton University Press Frankel, Jeffrey (2002), “Should Gold-Exporters Peg Their Currencies to Gold? ” Research Study No. 29, World Gold Council, London Frankel, Jeffrey (2003), A Proposed Monetary Regime for Small Commodity-Exporters: Peg the Export Price (“PEP”) First draft: July, 27; revised Nov. 13, 2002, and April 14, 2003 Kouri, P. K. (1976), The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run, Scandinavian Journal of Economics 78: 280-304 WEB SOURCES EASYForex™ (2006), Dollar-Euro Currency Exchange, Found at http://www. easy-forex. com/en/Forex. dollareuro. aspx, Accessed on 7th July 2007
Government of Canada (2006), 1944 – Bretton Woods Agreement: Developing a New International Monetary System, found at http://www. canadianeconomy. gc. ca/english/economy/1944Bretton_woods. html accessed on 3rd July 2007 Specialinvestor. com (n. d. ), Financial Directory, Fixed Exchange Rate – Definition, found at http://www. specialinvestor. com/terms/2798. html, accessed on 17th July 2007 Weerapana, Akila (2004), Lecture 5: Exchange Rate Systems Spring Semester ’03-’04, found at http://www. wellesley. edu/Economics/weerapana/econ213/econ213pdf/lect213-05. pdf, accessed on 4th July, 2007 wikipedia. org (n. d), Fixed Exchange Rate – Definition, found at http://en. wikipedia. org/wiki/Fixed_exchange_rate, accessed on 17th July 2007
APPENDICES Appendix A: The Research Questionnaire INTERNATIONAL BUSINESS MANAGEMENT; RESEARCH QUESTIONNAIRE Notes to Respondent: 1. It is not a requirement to include your name in the filled in questionnaire. 2. The responses shall be treated with utmost confidentiality. 3. You may type in the responses (preferred) or print it out and fill out by hand. 4. Additional papers could be attached in case the spaces provided are not adequate. 5. The report of this research shall be submitted for the award of the Cambridge Association of Managers’ Postgraduate Diploma in Management and shall be used for academic purposes only. Instructions to Respondents 1.
Choose ONLY ONE score per row that best indicates you observations or understanding of the applicability of the issue in question. 4. Respond to each item separately and distinctly, without being concerned with how the previous items were rated. 5. Your candid and objective answers will be most helpful in determining the reliability of the information generated. Please do not refer to documents. Just respond off the mind. With this information and using your understanding of International Business Management please take about 60 (sixty) minutes to indicate your observations, understanding and applicability of the various issues in the table below. Bio Data of Respondents
Please do not include information on the organisation, its personnel or performance that you consider confidential. |Respondent’s Name (Optional) | |Department | | |Position in World Vision Kenya (WVK) | |Years in WVK | | |Gender (Please tick one) |Male | |Female | |Years in Profession | | |INTERNATIONAL BUSINESS MANAGEMENT; RESEARCH QUESTIONNAIRE | |No. Question/Issue |Response | | |In the following space, describe WVK, its purpose and services. You could use the back of this paper or additional papers if more | | |space is required. | | | | | | | | | | | | | | |What internal and external factors affect the operations of WVK? Please list these in the space below. You could use the back of | | |this paper or additional papers if more space is required. | | | | | | | | | | | | | | | | | | | |Do the factors you’ve listed in question 2 above impact on WVK operations either singly or collectively? Please indicate your | | |opinion by marking one of the columns below. | | |All the factors affect effectiveness of WVK | | | |Most of the factors affect effectiveness of WVK | | | |Some of the factors affect effectiveness of WVK | | | |Few of the factors affect effectiveness of WVK | | | | | |WVK describes itself as a member of a Global Partnership. Does this imply that its management must adopt international business | | |management practices? | | |Yes | | | | |No | | | | | | | | | |Please use the space below to explain your answer in question 4 above. Information considered confidential may not be included. | | |You could use the back of this paper or additional papers if more space is required. | | | | | | | | | | | | | | | |If your answer to question 4 above was “yes”, please answer all the questions below. However if your answer to question 4 was “No”, please | |skip question 6 and 7. Proceed from question 8 to the end. | | |I understand the following aspects of International Business Management (IBM). Yes |No | | |Government’s Fiscal Policy | | | | |Government’s Monetary Policy | | | | |Exchange Rate Systems | | | | |Import and Export Business | | | | |Multinational Companies | | | | |Global Economy | | | | |Please briefly explain each of the items 6. 1 through 6. 6 where your answer was ‘Yes’. Information considered confidential may not | | |be included. You could use the back of this paper or additional papers if more space is required. | | | | | | | | | | | | | | | | | | | | | | |Please briefly explain Fixed Exchange Rate Systems how they Work. You could use the back of this paper or additional papers if | | |more space is required. | | | | | | | | | | | | | | | | | | | | | | |What are the Advantages or Benefits of a Fixed Exchange Rate System | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |If you were to recommend an appropriate Exchange Rate System for a Corporate from the list you’ve given in #8 above, which one | | |would that be. Please briefly explain your answer here below. | | | | | | | | | | | | | | | | | | | |In the space below, please describe the various sources of WVK funds. Information considered confidential may not be included. You| | |could use the back of this paper or additional papers if more space is required. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |With reference to your answer to question 11 above, what is the impact of a Fixed Exchange Rate System on WVK’s Business? | | |Information considered confidential may not be included. You could use the back of this paper or additional papers if more space | | |is required. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |What, in your opinion, is the impact of a Fixed Exchange Rate System on Multinational Companies? | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |In view of your responses above and experiences gained in International Business, would you say that Fixed |Yes |No | | |Exchange Rate Systems are relevant in a Global Economy? Please tick (v) or cross (X) one of the columns on the | | | | |right and explain your answer in the space below. You could use the back of this paper or additional papers if | | | | |more space is required. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |General Feedback – Please use the space below and the back of this page to provide any additional information. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Source: Kang’e (August, 2007) Appendix B: Research Interview Guide
INTERNATIONAL BUSINESS MANAGEMENT; RESEARCH INTERVIEW GUIDE Notes for the Interviewer: Remind the respondents that in their responses, they shouldn’t include information on the organisation that they consider to be confidential. Bio Data of Respondents |Respondent’s Name (Optional) | |Department | | |Position in World Vision Kenya (WVK) | |Years in WVK | | |Gender (Please tick one) |Male | |Female | |Years in Profession | | INTERNATIONAL BUSINESS MANAGEMENT; RESEARCH INTERVIEW GUIDE | |S/No |Question |To Ask | | |Briefly describe WVK, its purpose and services. |F&A Director (FAD), Associate Directors | | | |for Finance (ADF) and Procurement (ADP) | | |What internal and external factors affect the operations of WVK? |FAD, ADF and ADP | | |As a member of a Global Partnership must WVK adopt international business management |FAD | | |practices? Explain. | | |Please discuss Fixed Exchange Rate Systems (FERS). |FAD and ADF | | |What advantages does a Fixed Exchange Rates System (FERS) have over other exchange Rate |FAD and ADF | | |Systems? | | | |Please describe the sources of WVK funds. |FAD and ADF | | |WVK receives its funding in US$ but spends in Kshs. What’s the significance of Exchange |FAD and ADF | | |Rates in this? | | | |What Exchange Rate System is in use in WVK? FAD | | |What’s the impact of Fixed Exchange Rates on WVK’s Business? |ADA | | |Are FERSs relevant to WVK business? |FAD, ADF and ADA | | |Any other information regarding FERSs and their role/impact on WVK’s business? |FA, ADF and ADA | Source: Kang’e (August, 2007) Appendix C: Detailed Analysis of Methodology Target and Survey Populations It was impossible to study the whole of the target population and therefore the researcher identified and defined the Finance department’s staffs as the survey population. This ensured that the respondents had a wide knowledge of WVK’s finance systems.
The researcher indented to generalise the results to the target population, all the 16 staff in the F&A Group at 31st July 2007. Sample Size and Sampling The WVK payroll formed the sample frame. Purposive and random assignment sampling techniques were done where the fifteen members of the Finance Group were identified as respondents. Since the survey population was small, selecting a sample would be meaningless and therefore it was not done. This ensured a high degree of generalisation due to the accuracy of the sampling frame. The purposive sampling technique allowed for hand picking of respondents because they were informative and they possessed the required characteristics with respect to the study objectives.
Random assignment was used where the subjects within the survey population were randomly assigned to two clusters; (1) the thirteen Accounts and Finance Departments’ staff members who would respondent to the questionnaire and (2) The Finance Director, Associate Director Finance and Associate Director Procurement who would respond to the interviews. Therefore sixteen respondents were targeted for this research, which achieved representation from all clusters in the survey population such that they were more or less reproduced in the target population. Analysis of Respondents This sam
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