INTERNATIONAL FLOW OF FUNDS: A Case Study

BLADES PLC
Kristelle B. Jarabelo
International Finance
Masters in Business Administration Ateneo de Davao University August 2, 2013

I. INTRODUCTION
Blades PLC is a U.K.-based company that has been already been incorporated for three years. Blades PLC is a relatively small company that produces roller blades, of which their primary product is the Speedos Roller Blades. To counteract the decreasing demand of the Speedos, the company, led by their Finance Director Ben Holt, has decided to export their products to Thailand where they face little competition from other UK roller blades manufacturers. Blades have also decided to import some of the components needed for Speedos from Thailand due to the low cost. An estimated $15 million or 10% of Blades total sales are contributed by the sales in Thailand. In addition, the cost of rubber and plastic components from Thailand are 20% cheaper than similar components from the UK, hence giving Blades PLC a cost advantage. In terms of dealing with their external stakeholders in Thailand, Ben Holt believes that their policy of invoicing in Thai Baht gives them an additional advantage over their competitors who invoice in British Pounds. This strategy of adapting the local currency is more expedient for their local customers because the instability of currency fluctuations will be avoided from their end. Ben Holt is rather content with the current arrangements and believes that the lack of competitors in Thailand, the quality of Blades products, and its approach to pricing will ensure Blades position in the Thai roller blade market in the future. Holt also feels that Thai importers will prefer Blades PLC over their competitors because of their invoice currency.

II. KEY PROBLEMS

While Blades PLCs business strategy is promising, the expectation for the Thai economy is not entirely positive. Current forecasts indicate a high level of anticipated inflation, a decreasing level of national income, and a continued depreciation of the Thai Baht. How will these future developments affect Blades financially given their current arrangements with their supplier and customers? How could a high level of inflation in Thailand affect Blades? How could competition from Firms in Thailand and from Europe conducting business in Thailand affect Blades? How could a decreasing level of national income in Thailand affect Blades?
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How could a continued depreciation of theThai Baht affect Blades directly; and relative to UK exporters invoicing in the British pounds? What are the international agencies available that can help firms like Blades regain their financial footing should they experience serious financial problems?

III. AREAS OF CONSIDERATION

International business is facilitated by markets that allow for the flow of funds between countries. The transactions arising from international business cause money flows from one country to another. Financial managers of Multi-National Corporations monitor the balance of payments so that they can determine how the flow of international transactions is changing over time. 1. Thailands Trade Flows It is important to consider the economic and even political conditions of your trading country. Because international trade can significantly affect a countrys economy, it is important to identify and monitor the factors that influence it such as the following: Inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money a loss of real value in the medium of exchange and unit of account within the economy. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates, and encouraging investment in non-monetary capital projects.

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The inflation rate in Thailand was recorded at 2 percent in July of 2013. Inflation Rate in Thailand is reported by the Ministry of Commerce. Thailand Inflation Rate averaged 4.63 Percent from 1977 until 2013, reaching an alltime high of 24.56 Percent in June of 1980 and a record low of -4.38 Percent in July of 2009. In Thailand, the most important categories in the consumer price index are Food (33 percent of total weight), Transportation and communication (27 percent of total weight) and Housing and furnishing (23.5 percent of total weight).

National Income A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted national income (NNI* adjusted for natural resource depletion). All are especially concerned with counting the total amount of goods and services produced within some "boundary". The boundary is usually defined by geography or citizenship, and may also restrict the goods and services that are counted. For instance, some measures count only goods and services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods by imputing monetary values to them.

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The Adjusted net national income (annual % growth) in Thailand was last reported at 5.51 in 2010, according to a World Bank report published in 2012. Adjusted net national income is GNI minus consumption of fixed capital and natural resources depletion.

Thailands Development Indicator (World Bank)

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Thailands Economic Indicators 2013

Exchange Rates In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, FX rate or Agio) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one countrys currency in terms of another currency. Each country, through varying mechanisms, manages the value of its currency. As part of this function, it determines the exchange rate regime that will apply to its currency. For example, the currency may be freefloating, pegged or fixed, or a hybrid. A market-based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).
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The USDTHB spot exchange rate appreciated 0.3300 or 1.07 percent during the last 30 days. From 1981 until 2013, the USDTHB averaged 32.5400 reaching an all time high of 55.5000 in January of 1998 and a record low of 20.3600 in July of 1981. The USDTHB spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the THB. While the USDTHB spot exchange rate is quoted and exchanged in the same day, the USDTHB forward rate is quoted today but for delivery and payment on a specific future date. Thailands 10-year Historical Exchange Rate: BHT vs GBP

2. Blades PLCs Financial Stability In its early year, Blades has been quite successful. However, as the demand for their products has been tapering off, Blades has not been performing well. Recently, their return on assets is only 7%. Their shares has fall from a high of GBP20 per share
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three years ago to only GBP12 last year. If Blades increases its business in Thailand, it means increasing their investment. 3. Competition While Blades face little competition in Thailand from their fellow UK manufacturers, their invoicing strategy may negatively affected the company should both Thai consumers and firms adjust their spending habits if certain developments and economic factors occur.

IV.ALTERNATIVE COURSES OF ACTION

1. Status Quo. Ben Holt is already content with the current arrangements between Blades PLC and their suppliers and buyers. He is forecasting that the lack of competitors in Thailand, the quality of their product, and their approach to pricing will ensure Blades position in the Thai roller blade market in the future. Holt also feels that Thai importers will prefer Blades over its competitors because of their invoicing scheme. As Ben Holt considers this guaranteed future success, there is no more need to challenge Blade PLCs company strategies in trading in Thailand. 2. Withdraw Investment in Thailand The market condition forecasts seem to be dire, especially for foreign investors such as Blades PLC. Given the projected increase of inflation, decreasing national income, and the continued depreciation of the Thai Baht, prospects for leisure products such as Roller Blades may be severely affected and would impact Blades PLC not only in Thailand, but also their interest in the UK seeing as they have already started importing some of their raw materials. To cut the losses, Ben Holt must decide to withdraw their investment in Thailand and revert the focus back to their home base. 3. Expand Investment in Thailand The existing strategies being practiced by Blades PLC has sound dimensions. With the strategies in place, Ben Holt can also focus on monitoring the factors that influence the trade flows in Thailand and play them to the companys advantage. Blades PLCs value can be affected by international trade. The cash flows (and therefore the value) of
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Blades as an exporter to Thailand is typically expected to increase in response to a higher inflation rate (causing local substitutes to be more expensive) or a higher national income(which increases the level of spending) in Thailand. The expected cash flows of Blades that export or import may increase as a result of country trade agreements that reduce tariffs or other trade barriers. On the other hand, the expected cash flows of the company may be reduced if they now face increased competition from foreign exporters who will also capitalize on these opportunities. But given the measures put in place by Blades as an early player in the industry, their competitive edge has already been acknowledged.

V. RECOMMENDATION
It is recommended for Blades PLC to continue trading in Thailand with a possibility for expansion. This is based on the following analysis: A high level of inflation in Thailand relative to the United Kingdom could affect Blades favorably. Generally, if a countrys inflation rate increases relative to the countries with which it trades, consumers and corporations within the country will most likely purchase more goods overseas, as local goods become more expensive. Consequently, Blades sales to Thailand may increase. At first glance, it would appear that a decreasing level of national income in Thailand could hurt Blades financially, as Thai consumers will have less money to spend. Furthermore, this effect may be magnified because Blades manufactures a leisure product, which is probably one of the first products Thai consumers will stop buying. The arrangement Blades has with its primary Thai importer mitigates this effect somewhat, since the latter has committed himself to the purchase of a certain number of Speedos annually. Nevertheless, the importer may not offer to renew this arrangement in excess of the original three years if the Thai economy does not improve. However, a continued depreciation of the Thai baht would hurt Blades, especially because the firm invoices its roller blades in baht. A continued depreciation of the baht means that the baht-denominated revenue in Thailand will convert to fewer U.K. pound. Blades also has some expenses in baht, but this amount is less than the revenue denominated in baht. Although Blades would be hurt by a depreciating baht because its exports are denominated in baht, the demand for Blades products may increase relative to that of its U.K. competitors exporting to Thailand. This is because most of the U.K. firms exporting roller
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blades to Thailand invoice their products in U.K. pound. If the baht depreciates, Thai importers will have to convert more baht to dollars in order to pay for the dollardenominated exports. Blades would be favorably affected relative to Thai roller blade manufacturers and relative to other U.K. roller blade manufacturers with operations in Thailand. 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. This is especially true if both groups of firms source their supplies directly from Thailand, so that the prices of these supplies are subject to the higher inflation in Thailand. Conversely, Blades cost of goods sold incurred in Thailand is relatively small. Consequently, 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.K. manufacturers with operations in Thailand. Should they push through with an expansion, an agency extending direct loans to corporations involved in international trade is the International Financial Corporation (IFC). Besides extending loans, the IFC may also purchase stock in a corporation, thereby becoming part owner. This makes it easier for Blades to source out the much needed funds to increase their business in Thailand.

VI.CONCLUSION
A countrys international trade flows are affected by inflation, national income, government restrictions, and exchange rates. High inflation, a high national income, low or no restrictions on imports, and a strong local currency tend to result in a strong demand for imports and a current account deficit. Hence, an effective manager should be able to identify and correctly interpret the trends in the international market. This way, the company may be able to work on a corporate strategy that can easily adapt to the dynamic changes in world trade.

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