Future's Management

Author: Konstantina Karatzoudi

As every year, the World Economic Forum releases its Global Competitiveness Report. Since its launch in 2005, the GCI has been the basis for the ranking of nations and it is undoubtedly widely recognized and the best available measure of the relative competitiveness of a nation’s economy (Joshi, 2015). Usually, these rankings are eagerly awaited and hotly debated when they arrive every year.

So, what is competitiveness according to WEF economists? It is a function of 12” pillars” that measure the quality of infrastructure, the social infrastructure, the institutional framework, the market transparency the technological readiness and the like. The interesting thing is that these 12 pillars of competitiveness are grouped into three categories: the first one are basic factors, such as institutions and infrastructure that mostly drive factor driven economies (such as India), less developed countries that present cost advantages, cheap labour or natural resources. The second one are efficiency factors, such as market transparency and education that drive efficiency driven economies. They focus on improving efficiency and productivity, as they can no longer keep cost advantages. The third one are innovation factors, such as business sophistication that drives innovation driven economies. These countries must innovate to maintain their competitiveness. The usefulness of this grouping is that it introduces the concept of transitional economies and the ability with which these economies make those critical transitions from one stage to another, a very useful tool for policy makers that helps them to set their priorities.

Furthermore, the practicality of the Global Competitiveness Index is that it is a tool for benchmarking a country’s strengths and weaknesses, as assessing a country’s competitiveness is a challenging task because there is a variety of influences on national productivity (WEF, 2008). For this reason, the correlation among many of the indicators makes their impact complex from a statistical point of view. It was thus important to find an approach that could achieve a consensus on specific drivers of competitiveness, such this index. The global competitiveness index has served to assess a country’s performance since 2004, a time frame that has been great changes in the global economic landscape and has been seen also as an exploration of new avenues in how an economy grows.

Going further, the index is a useful tool for business managers, as they can use these factors into business opportunities. The importance of the index is higher now, as seven years after the global financial crisis, the global economy is growing at a lower rate there is lower productivity and higher unemployment. Although the overall prospects remain positive, it is expected that the growth will remain below the levels of previous decades, in most developed countries and in many emerging economies. This information can be used by businesses to evaluate any future investments in other countries based on those factors. In addition, the Inclusive Growth and Development report presents a database of cross-country statistical indicators that inform about comparative economy profiles, diagnostic scans of the institutional environment and the socially inclusive growth in 112 economies.

The Global Competitive Report 2016-2017 assesses the competitiveness of 138 countries, providing insight into drivers of the productivity and prosperity (WEF, 2016). Switzerland, Singapore and USA remain the three world’s most competitive economies. The importance of the Global Competitiveness Index can be summarised in Klaus Schwab’s declaration, Founder and Executive Chairman of World Economic Forum” Declining openness in the global economy is harming competitiveness and making it harder for leaders to drive sustainable, inclusive growth”

 

References

Joshi, C. (2015). Global competitiveness: what makes an economy great? Linked in.

Schwab, K., & Sala-i-Martin, X. (2015). The Global Competitiveness Report. World Economic Forum.

World Economic Forum (2008). The Global Competitiveness Report 2008-2009.

World Economic Forum (2016). The Global Competitiveness Report 2016-2017.

 

 

 

 

Author: Konstantina Karatzoudi

Globalization is reshaping the international environment and leading businesses into new territories. The new advanced technologies are the means which reduce the costs of global communication and increase the exposition to practices of other cultures. The new reality is characterized by the reduction of trade and investment barriers and the globalization that forces businesses to try to be more competitive to survive. This competition is intensified on a global scale as multinational companies from developed countries and emerging markets seek new customers and new opportunities. This new reality has transformed the way companies do business and affected cultures worldwide.

The core element of globalization is the expansion of the world trade and the enhancement of national competitiveness. This greater openness can in turn stimulate the foreign investments that can be a source of employment and promote the economic growth of developing countries as well as economic resilience and flexibility. As opportunities do not exist without risks, globalization of markets can also challenge the traditional market entry strategies, such as Foreign Direct Investments. A paper by IMF’s Research Department discusses about the effects of financial globalization. The findings support that countries must carefully weigh the benefits and risks of unfettered capital flows. It is possible that certain factors are likely to influence the effect of financial globalization on economic volatility and growth. Countries with sound macroeconomic policies, developed financial sectors and trade openness are more likely to gain from market liberalization and less likely to face financial crises.

The point here to make is that foreign direct investments are long-term projects and as such, risks are uncertain during the life of FDI and can substantially affect its performance. Examples of risks are country risks, default risks and exchange risks. In recent literature, FDI is assumed to behave as foreign portfolio investment and therefore, the exchange rate risks affect extensively the FDI, as they affect the revenues and cost structures of firms.

Although there are many risks associated with FDI, there are companies from emerging markets that buy up companies in other countries. The reason can be that emerging companies have suffered less during the economic downturn and have rebounded faster by taking advantage of their strengths and purchasing a wide range of businesses. Emerging economies want to move beyond the advantage of cheap labour and create organizations with the skill base found in western countries. These companies appear to hold many advantages in industrialized countries and can overcome many disadvantages, as they possess innovation processes and management systems, as well as sophisticated technologies and access to financial and human resources.

 

 

 References

Aihajhouj, H.R. (2012). Foreign Direct Investment and Exchange Rate Risk. Scientific Journal of King Faisal University. Vol 3 No1.

Hirschler, B. (2011). Analysis: Emerging Market Companies Buy Up the World. Reuters.

International Monetary Fund (2008). Globalization: A Brief Overview. International Monetary Fund.

Wild, J.J. & Wild, K.L. (2012). International Business, The Challenges of Globalization. Pearson, 6th edition,

Author : Konstantina Karatzoudi

Junk bonds are corporate bonds that are high-risk and high-return. They have been rated as not investment grade by Standard & Poor’s or Moody’s because the companies that issue these bonds are not economically sound. Therefore, they give higher return to compensate the higher risk, such as default risk, interest rate risk, economic risk and liquidity risk. So, why would investors invest in junk bonds? When cash deposits pay almost zero, investors are willing to take risks for hunting higher returns. But these bonds are much likelier to default. They have more similarities with stocks in their acting as their prices are closely tied to the corporations that issue them and their ability to service their debt. They are an attractive income stream to investors but if they are part of a diversified portfolio.

 

But what was their impact on the economic landscape? The economic conditions at the birth of this new market of high-yield debt offered the fertile ground to increased acceptance of junk bond at this time. The changing industrial structure stimulated the growth of a huge number of medium-sized companies whose lack of credit history prevented them from qualifying for investment grade bond ratings. Junk bonds were their opportunity to gain direct access to investors and had been provided a lower cost alternative to borrowing through financial intermediaries. At this time, junk bonds were a means that boosted the economy as it gave the opportunity to non-financially sound companies to have access to more cost-effective borrowing resources. This greatly expanded the use of high-yield debt in corporate finance and mergers and acquisitions which in turn boosted the leveraged buyout boom. Thus, high-yield bonds were extremely attractive as they had lower interest rates and greater liquidity.

So, the financial technology, including the use of non-investment-grade debt helped right than wrong. Many public and private markets started to replace banks and insurance companies as their main capital source. The results were extraordinary, as from 1970 to 2000 junk companies created 62 million net new jobs in America even as the large investment grade businesses contracted by 4 million employees. The growing flexibility of capital markets allowed many companies to recapitalize during the recent economic downturn proving that the capital structure plays a significant role.

 

But a pitfall to high-yield investing is that a poor economy and rising interest rates can worsen bonds’ yields, as there is inverse relationship between bond prices and interest rates. Therefore, the impacts that junk bonds can have depends highly on economic conditions.

References

Amadeo, K. (2016, April 2). What Are Junk Bonds? Pros, Cons, Ratings.

Carpenter, D. (2010, January 8). Junk bonds: Savvy investment or fool’s gold?

Merkel, S. (2016, June 29). Are High-Yield Bonds Too Risky?

Taggart, R., Jr. (1987) . The Growth of the ”Junk” Bond Market and Its Role in Financing Takeovers. The National Bureau of Economic Research. University of Chicago Press.

The Economist (2013, October 19). High-yield bonds. An appetite for junk.