Global Competitiveness - The impact of movements in exchange rates - 4.2.5.

Global competitiveness - is the ability of a business, usually a MNC, to perform better than its rivals across markets in different countries. This can be achieved through performance on price and quality or customers' perception of these factors.

Exchange rates - is the price of one currency expressed in terms of another e.g. £1 = $1.65. This means that an American would need to pay $1.65 to buy each £... or, we would need to pay 65p to buy each $.

The exchange rate decides how much currency has to be spent by a business in order to buy a specific amount of another currency. Exchange rate movements are fluctuations in value between currencies, which can result in losses to businesses that import and export goods and to investors.

EXCHANGE RATE APPRECIATES...

This means that;

• Exports are less attractive in terms of price competitiveness and businesses will find it harder to compete with competitiors as their products will be more expensive in terms of the local currency.
• Imports will be more attractive in terms of price competitiveness
• Stronger pound will lower the price of imports and reduce the cost of imported materials.

EXCHANGE RATE DEPRECIATES...

This means that;

• The price of imports will increase and potentially inflation. This is especially true for businesses who rely on the import of primary raw materials.
• This means that the rise in import price will deter FDI as the expected return on investment is unknown. However, for domestic businesses, this could mean that the deterrent of high import costs should be ideal for gaining market share from foreign importers, for example the UK before Brexit was importing steel from China. However, with the depreciation of the pound making imports so dear, British-made steel became more attractive for UK car manufacturers.

Changes in exchange rates can eliminate profits for a business or increase returns dependent on the direction of the fluctuation. For example, in June the £ hit a 31 year low against thr $ after Brexit. As a result, when US businesses convert their UK profits into dollars there will be a significant loss as each £ buys less $. In the same way, British businesses that operate heavily in the US market, such as Burberry and Topshop, should see significant increase in profit as they turn $s into £s.

Exporters will look at ways to minimise the negative impacts of exchange rate fluctuations by strengthening product differentiation and branding. Customers who want a Burberry raincoat buy that raincoat whether the price is £1,600 or £1,800.