Sample Dissertations | University Dissertations | Dissertation Examples
Category: Economics Dissertations
Our sample economics dissertations are an ideal tool for any student struggling to start their own economics dissertation. It is worth noting that economic management is an essential part of any organisation and there are many components of economic management. By browsing our collection of economics dissertation topics, you will get ideas for your economics dissertation through the following economics subjects:
Explain the Importance of the Micro-Economic Environment to Business Organizations
Business in a literal term is collective work of bunch of people with similar interests in production of goods and services for trading purpose at any market and draws some monetary reward for this whole exercise”. There are so many factors which effect the business organizations one of them is the Micro-Economic environment. This type of environment basically related to the analysis of small area or the marginal aspects of the any organization. The factors which are analyzed in micro economic environment are as following:
Characteristics of organization’s human resource and their ability to manage the organization are analyzed.
Both types of customers (major and minor) are evaluated.
Dig about the means of generating money by organization.
Information is gathered about the suppliers of raw material and their network.
Analysis of local communities , competitors and their business performance is conducted (Hiriyappa,B, 2008)
From above discussion if we conclude that Micro-Economic environment has direct relation to any business organization then it would not be wrong and we are going to discuss the effect of Micro-Economic environment on the performance of any company that how these micro economic environment affect the performance of any company. The company which would be under discussion is Vodafone which falls in the services sector. Vodafone is included in one of the leading companies in communication sector which is providing services in 30 countries and having partnership networks in over 40 countries. Customer count is 360 million in the world and it is 19 million only in United Kingdom. Vodafone started working on 1 January 1985 at London. Vodafone is having more than 8,000 employees in UK. Until 2013 Vodafone was earning £429 million profit.
Micro economic Environment Importance for Business
Micro-Economic environment is very important for business organizations as it could be said that it is complementary for the business organizations because micro economics studies the basic factors which affect the individual business like consumer behavior, market environment, competition in the market and demand and supply forces prevalent in the market place. For the better understanding and explanation of effects of Micro-Economic environment on business organization it is necessary to discuss it which the help of a case study on Vodafone in terms of services. If Vodafone wants to deliver its services in certain country or area then it has to apply certain Micro-Economic principles in order to check the feasibility of business environment in that area. First of all Vodafone has to evaluate the market environment whether market of that particular area is feasible for that kind of business or not.
Micro-Economic environment also includes the environment of the marketplace which is further subdivided into location and governmental policies. Vodafone has to check whether these both factors are in harmony with their business policies or not. They have to check how much tax and other duties they have to pay if Vodafone starts business in that particular country. Micro-Economic environment also include the location for setting up the office for starting business. Vodafone has to find place where it can target its potential customers easily and customers could have easy access to their services. I deal location could be any business hub where lots of offices are located and have to use the telecommunication services on daily basis and want any company with fastest service, better signals, voice quality and internet services.
Survey of other communication networks working in that country would also help the Vodafone to identify how much competition it has to face if it set up their business at any place.
So identification of Micro economic environment is very important for any business organization if it has to do or start new business at any particular place. Regular survey of the micro economic environment also helps the organizations to do their SWOT analysis and keep pace with the ever growing business in the market (Ejim Esther, 2014).
Business Objectives and Behaviour Analysis
In managerial economics the basic purpose of business organization is to maximize the profit of organization. So in economics terms profit maximizes when certain condition of marginal revenue equals the marginal cost (MR=MC) is met. Diagram below is the analysis of changing circumstances which effect the business objective of profit maximization in an imperfectly competitive market in other words monopoly. Profit maximization is considered most important objective of any business when dealing in any type of market whether competitive, oligopolistic, or monopolistic.
Micro-Economic Environment Dissertation
There are different objectives ahead of any organization and they also affect the performance of organization in certain ways.
Satisfaction Behavior
This kind of behavior is adopted by the business organizations to set and minimum but acceptable level of revenue and profit collection for business for example a firm has set a certain amount for sale growth or return on any capital which it is acceptable for firm if they get it in case of minimum revenue and profit. In other words it is could be called as the scale for measuring profitability of firm.
Optimization of Sales Revenue
Revenue of any business organization is considered maximum when the certain assumption is fulfilled which is Marginal revenue (MR) = 0.
Managerial Satisfaction
Williamson opined to increase the utility of managerial level through high revenue from sales of firm, a good share achieved in market or through output targets are included in all this.
Constrained Sales Revenue Maximization
Managers would give shareholders free hand to design a constraint which could be minimum profit gaining constraint in order to support their shares worth.
Every business has its own paradigms and at profit maximization level every business organization operates in separate way. If business behavior is summarized then few things are kept in mind while taking decisions such as competitors’ reaction towards policies made by particular organization. Local demands and competitions from rivals make it necessary to give managers authority to set the prices.
Diagram illustrates that how change in objectives affects the business in terms of price and output (Samuelson, 2010).
Market Structures Impact on Business Organizations
Business organizations are categorized on the basis of market structure in which these are serving. Various variables are induced in market which determine its structure and affect the organization’s business working in that market. Variables are costs, mutual dependence, free entry and exit etc (Baumol, 1982; Colton, 1993). Following are the different type of market structure and these variables act under any of these types.
Perfect competition: Gives liberty to many sellers of same product to enter in the market.
Monopolistic Competition: There are lots of sellers in market but also offering different products.
Oligopoly: limited number of sellers but products could be same or different.
Monopoly: Only one seller ruling the market.
Market structure has very profound impact on the business organizations because it has direct effect on different business dynamics such as motivations, opportunities, and business organizations’ decisions. This basic theme of analysis of market structure’s impact on business organizations is to study these effects separately and make the market more predictable for business organizations (McNulty 1968; Broaddus, 1991).
In order to study the impact of market structure on the business organizations, it is very important to define market because product substitutability is important task performed by the market structure which is very key element in the working of any organization (Broaddus, 1991). But any economist from Adam Smith to onwards is not able to crack this hard nut.
Through market structure analysis business organizations become able to predict market and act accordingly in order to generate more revenues and compete with their rivals. Market structure analysis also helps business organizations to keep pace with the changing dynamics and challenges of market.
In case of mobile network performance Vodafone increased its mobile network speed up to Mbps which shows that Vodafone is on track of achieving their target of 3Mbps. Vodafone held maximum market share in year 2013 too according to analysis of its relative market share performance report. Vodafone has increased their dividend up to 7% consecutively three years. Revenue collection was not much satisfactory in year 2013 as it remained -1.9% and £40.9 billion in case of services which was less than last year (Vodafone annual report 2013).
References
Hiriyappa, B. (2008) Strategic Management for Chartered Accountants, New Age, pp 3, 30 Micro-Economic Environment.
Ejim, H (2014) What Is the Relationship between Micro-Economics and Business? Wise Geek Micro-Economic Environment
Samuelson, (2010) Micro-Economics and the Micro-Economic Environment 19th edition, McGrawhill
Baumol, W J., (1982). Contestable Markets: An uprising in the Theory of Industry Structure. American Economic Review (March): 1-15.
Colton, R D. (1993) Consumer Information and Workable Competition in Telecommunications, Journal of Economic Issues 27(3) (September):775-792.
McNulty, P, J. (1986) Economic Theory and the Meaning of Competition Quarterly Journal of Micro-Economic Environment (November: 639-656.
Broaddus, A (1991) The Structure of the Market for Banking Services. Federal Reserve Bank of Richmond Monthly Review Micro-Economic Environment (November): 35-42
Vodafone Group Plc (2013) Annual Report for the year ended 31 March 2013, the way ahead Introducing Vodafone 2015”.
Office of National Statistics, 2013, Statistical bulletin: Gross Domestic Product Preliminary Estimate, Q2 2013.
The Contribution Of Art And Fashion Industry To The National (UK) Economy
According to a report released by the British Research Council (2014), the fashion industry in Britain contributes £26 billion to the country’s economy. This is a 22 % increase from the contribution made in 2009 which added up to £21 billion. The report was released by the council during the London Fashion Week. These statistics intrigue various questions relating to the contribution of art and fashion to the economy of the country. Although art and fashion have been part of the UK’s culture for many years, their impact on a country’s economy has not been greatly considered over the years. However, in the recent years, the expansion of the global market has greatly impacted the art arena, which has further impacted the economy either positively or negatively.
Research Question: Is the art and fashion industry influential enough in the economy to attract both local and foreign investments in the long-term?
Purpose and objectives
The aim of the research is to assess the impact of the arts and the fashion industry on the economy in the UK in accordance to information revealed by the Arts Council and the British Fashion Council. The main objectives of the research will be to review and collate existing research relating to the economic impact of the arts and the fashion industry in the country. The other objective is to understand the measures and methodologies put in place for assessing the effect of creative industries, programmes, facilities and projects. Assessing the quality and comprehensiveness of the existing evidence is another objective of the research. The research also aims at informing the future agenda for effective research within the sector. It will also include evidence-founded making of policies by the Arts Council and Fashion Council. Identifying fundamental research needs that will assist in improving the research’s robustness is another scope of the research. The proposal will also include a practical resource to help the parties working in the sector.
Theoretical Framework
The Keynesian theory states that the production of goods and services by the businesses is influenced by consumers’ ability to spend. The twenty first century has experienced changes in issues relating to increase in consumer spending, hence the increase in production of various goods and services. The arts and fashion industry has not been alienated from this impact. The rapid expansion of economies that started taking place in the late twentieth century through to the twenty first century has been of great impact globally. It is believed that one of the most impacted is the arts and fashion industry.
The consumption, investment, government and net exports characterize the Keynesian theory. This research will analyse these concepts in relation to the oil and arts industry, and how they have affected the economy in the UK. The research is also sensitive to the impact of the local fashion industry on its economy. It is relevant to assess whether the most impact is evident from exports or products bought by the local consumers. The household disposable income and the general GDP are of relevance to this research. It is relevant to understand the past scenarios relating to the industry and steps that have been taken to heighten the industry to the current position. As evidently put by Keynes, the increase in consumer spending will increase the production of goods. Consequently, a decrease in consumer spending will also decrease production in the industry. It is relevant to understand the individual contribution of the various sectors in an economy. This will allow the relevant parties to make decisions relating to the present and the future of the industry in question. In this case, it will be identified whether the impact on the economy, if any, is long-term. It is relevant to understand whether it can attract investors.
Empirical / Contextual Literature Review
The Art Council England and British Fashion Council provide various reports that reveal the financial/economic impact of the arts and the fashion industry in the economy. Other economic related sources will be assessed in order to realize the share of the industry on the overall economic figure. Research will be carried out in some areas such as the Research Department of the Arts Council. The research may also include email, telephone or postal inquiries from the Culture, Media and sports Department. Other sources include the Arts Council of Northern Ireland, Arts Council of Wales, the Scottish Arts Council, among others.
Fashion Industry Economy
After the research process, a small number of studies will be gotten, read and evaluated with the use of Draft Standards for Reporting on Statistics (Hutton, 2001). Sharp and Benefield (2001) insist that the NFER (National Foundation for educational Research) guidelines to be incorporated in order to present quality research. The researcher will also scrutinize the references in order to assess whether there are other potential materials that are relevant. The review will mainly cover research that is done in the United Kingdom. This will include England, Wales and Scotland. In order to make the research more comprehensive, statistics relating to other countries such as the USA and Australia will be included.
The research will include literature which has information concentrating on the economic contribution of the fashion and arts sectors. The inclusion of the arts sector will also lead to the inclusion of some aspects of the creative industry and culture in the UK. The research will briefly give the social-economic aspect of the industry, due to issues relating to the employment arena and the general impact of the people’s livelihoods. The materials considered are gauged on various levels. They include a widened geographical spread, diversified study foci, diversified methodologies and approaches, research quality and studies target groups. Other issues relate to issues addressed or policy area, research date in question, impact on the sector and best evidence presentation. Blake (2000) reminds researchers that a review does not have to reproduce in detail the articulated claims relating to the economic impact of the fashion or arts industry. This is because they have been covered adequately in these resources. The researchers only need to find the information relevant to their topic and then integrate it accordingly in order to answer their research question (Jermyn, 2001).
The study design that will be used is the historical approach. Babin et al (2012) states that the historical approach is one in which information is collected by reviewing the historical data presented by older reports or valid sources of information. This empirical report should not be altered. In order to place more emphasis on historical study, Gillham (2008 state that historical method is something that exceeds simple data-gathering. It involves analyzing, and confirming the information retrieved from these sources by engaging other research methods. For example, interviews will be included in this research method. The true meaning of data collected should be reported from the point of view of the objectives and the basic assumption of the project under way. The facts obtained may be accurate expressions of central tendency, deviation or correlation; but the report is not research unless discussion of these data is carried up to the level of adequate interpretation. Data must be subjected to the thinking process in terms of ordering reasoning. The design also saves on time. The researchers are also able to present factual information from the target resources using cheaper means.
Methodology
The main method will include reviewing the past and current statistical information available on the materials. However, interviews will be integrated in the research method. The interviews will be done in order to verify some of the unclear data, or place emphasis on the available information. Such technique will be used for target people who may provide more information other than the information available in the report. Since interviews are one-on-one, the researcher is able to read other forms of communication such as body language, hesitations, amongst others (Creswell, 2003). Interviews also limit the time that the information will reach the researcher.
Additionally, questionnaires will be handed to people who will not find time for interviews. It can be passed through emails or other communication channels agreed upon by the researcher and the target person. As indicated earlier, it is used to verify information that is unclear or that which has not been updated. VanderStoep & Johnston (2009) indicate that the measurement quality is highly dependent on the reliability of the instrument used to collect data. In order to follow this statement, the researcher will pre-test the questionnaires being used. Validity entails, whether the spirit of the questionnaires is in accordance with the purpose of the research. In order to confirm validity, selected questionnaires will be given to respondents in order to pre-test data collection. Once the questionnaires are returned, they will enable the accurate assessment of the validity of research instruments. The questions in the questionnaires will also be used to conduct the oral interviews. The questionnaires will not be included in the final analysis.
References
Babin, B. J., Carr, J. C., Griffin, M., & Zikmund, W. G. 2012,. Business research methods (9th ed.). Stamford, CT: Cengage Learning.
Blake Stevenson Limited, 2000, “The Role of the Arts in Regeneration”, Scottish Executive Central Research Unit, Edinburgh.
Creswell, J. W. 2003, Research design: Qualitative, quantitative, and mixed method approaches. Thousand Oaks, CA: Sage Publications
Gillham, B. 2008, Small-scale social survey methods: Real world research. London: Continuum International Pub. Group.
Hutton, L, 2001, Draft Standards for Reporting on Statistics, The Arts Council of England. 110
Jermyn, H, 2001, The Arts and Social Exclusion: A review prepared for the Arts Council of England, The Arts Council of England, Londo.
Sharp, C and Benefield, P, 2001, Literature Reviews Course Notes, NFER, unpublished.
VanderStoep, S. W., & Johnston, D. D. 2009, Research methods for everyday life: Blending qualitative and quantitative approaches. San Francisco, CA: Jossey-Bass.
Writing an economics dissertation can prove to be a tough task and quality economics dissertation topics are hard to come by. The dissertation in hand allows you to investigate your ability for, and interest in doing economic research. Economics is not the easiest of subjects but it is one of the most interesting. Economics touches nearly every aspect of business and economic theory has been taught for centuries. Economics is seen as the analysis of production, consumption, distribution of wealth and allocation of limited resources to satisfy the needs of people and business. Nowadays, economics extends across national boundaries in the form of international business and global fiscal policy; this is noticeable with the formation of the European Union and flow of international finance.
Your economics dissertation is likely to be the biggest project you undertake at university or college. It can consist of anything between 10,000 to 15,000 words for a typical undergraduate dissertation and will involve in-depth research, time and dedication, you must organize your own time effectively in order to make it a success and set realistic goals. Here we have given a few thoughts and some advice on planning, researching and writing your dissertation. You will see a list of economics dissertation topics further on in this post.
Economics Dissertation Topics
Before you begin your economics dissertation, you must decide on an appropriate economics dissertation topic and title. Your dissertation should focus on a specific issue try to avoid generalizing as you may write a fragmented and disjointed piece of research. The topic should be interesting, something that can uphold in-depth research.
Choosing an economics dissertation topic and getting started
What is your topic question?
Do you have adequate background research?
Stay focused on it
In previous posts, I always stress to keep the research up to date and to engage the reader. There is no real benefit in writing an economics dissertation on outdated theory or defunct policy.
Choose a topic from an area you are familiar and comfortable writing about. Remember that this is a large project that will keep you engaged for most of your final year. It is advisable to revisit topics you have already covered on your degree as this may lead you to elaborate and base your dissertation on a project you have already completed. Writing your economics dissertation will be the ideal opportunity for you to use your intellect, skills, creativity, and economics training.
Economics Dissertation Advice
For empirical papers: Where will you get your data? How will it help answer your question?
What statistical techniques will you be able to use? Will you be able to identify causation or only correlation?
Theory papers typically are not just informal discussions. They tend to involve more mathematics than empirical ones, not less.
If you are having trouble understanding a topic, a good place to start is to look in several relevant textbooks to see how they handle it.
Economics is a specialized and scientific subject that involves equations, mathematics, figures and tables, economic theory is often underpinned by statistics and you need to be mindful of this. The field of economics differs vastly from other business subjects such as marketing, strategy and information management. These subject areas tend not to rely heavily on statistics or equations to strengthen findings and recommendations.
Below is a list of economics dissertation topics that will help you
I hope you have benefited from reading this post. Feel free to add comments or suggests that I may have left out. These will be considered and added to this post.
The existing literature argues property’s role in a multi-asset portfolio to be a means of risk reduction opposed to a method of returns. However, with the recent credit crunch having an adverse effect on the property market, this study will look into the affect it has had upon property’s role. To reach this finding, a combination of primary and secondary data will be used.
The secondary data was obtained through a literature review and the primary data from interviews and a questionnaire. The findings were that the credit crunch has left the UK property in a position where it can offer investors opportunity to make capital gains and a secure income through rents. This has led to property’s role now being mainly focused on returns but still included as a means of risk reduction.
Multi-Asset Portfolio Dissertation
In a multi-asset portfolio an investor will likely include property to diversify and better their overall returns. However, with property values falling, it is likely investors were wishing to pull out of this asset class, cut their losses and venture elsewhere due to their risk adverse attitudes. A negative correlation when comparing property with stocks and bonds makes the later pair appears the way forward. Reason being; they should theoretically be outperforming the current property market rectifying diversification in a multi-asset portfolio.
If investors make this decision and reduce the amount of real estate, levels of diversification will decrease, increasing specific risk. The chance of disposing their property is extremely slim however because of property’s liquidity being further extenuated by a market downturn. Property is evidently not offering the attributes investors’ want, yet they are unable to dispose of this unwanted asset. This puts investors in a very difficult situation of being left with a depreciating asset in their multi-asset portfolio.
A possible solution to this would be identifying potential emerging markets, such as Latin America and India, which may offer the desired benefits currently unattainable in the UK. So with property still existing among UK fund managers’ portfolios the role it now offers must be determined. This dissertation will be based on three key assumptions namely:
Investors’ main reason for including property in a multi-asset portfolio is to reduce risk
Due to the poor performance of property in recent years, investors are reducing the property exposure in a portfolio and replacing it with more traditional methods such as bonds
Even with the recession being a global problem, certain investors feel there are still benefits from international property investment
The opening chapter of this dissertation has been produced to give readers an understanding of the overall study and what the upcoming chapters will be exploring. Chapter two will be a literature review analysing applicable company publications and academic literature, relating to the use of property within a multi-asset portfolio. It will clarify why various investors wish to include property, its characteristics, alternative assets to invest in and overseas investment.
Each of these points will be tackled in their own independent section. The following chapter (three) will exhibit clearly the use of methodologies used throughout the dissertation to find out how the actions of investors has changed towards property during the credit crunch. Within the chapter it will also justify why these research methods were best suited for this field of research. The fourth chapter will bring together the results from the literature review, interviews and online questionnaire, clearly explaining what has been identified.
The final chapter of the dissertation shall be the conclusion. It will summarise the key findings answering the aims and objectives outlined at the start of the paper, identifying how the role of property within a multi-asset portfolio has been affected by the credit crunch. It will also make clear the limitations of the study and recommendations for similar studies in the future.
This research will help support many other studies that have been carried out over the years in regard to property’s role within a multi-asset portfolios. This paper will differ to previous studies, carried out by the like of Bryne and Lee, as it is primarily focusing on an economic downturn opposed to data over long periods with varying market conditions. There is a distinct lack of existing literature on this matter. By shedding light on this aspect, it will give an investor’s insight on how property is best used in a multi-asset portfolio during a struggling market.
If you enjoyed reading this post on multi-asset portfolios, I would be very grateful if you could help spread this knowledge by emailing this post to a friend, or sharing it on Twitter or Facebook. Thank you.
Balance of Advantages of the UK Joining the EMU and/or Using the Euro as a Functional Currency
Introduction
The Economic and Monetary Union is an agreement between participating European nations to share a single currency, the Euro and a single economic policy with set conditions of fiscal responsibility. There are currently 27 member-states of varying degrees of integration with the EMU.
Currently there are 16 member states who adopted the Euro: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, Spain, Cyprus, Malta and Slovakia. Further 3 countries including United Kingdom, Denmark and Sweden did not join the EMU even though they had an option to do so. Main reason for the UK not to join the Euro was the strength of the Pound and the British economy against the countries in the Euro zone. Joining EMU was predicted to cause economic problems in the country as European Central Bank would seize full power over the monetary policy in the UK including for instance setting benchmark interest rates. Economists are therefore divided into two groups: pro and cons the EMU. Aim of this report is to show on the example of invented for the purpose of the report Multinational Corporation (Insomnia plc) the influence of UK joining the EMU and/or using Euro as a functional currency.
History of Insomnia PLC
Insomnia plc is a UK based Multinational Corporation with their headquarters in Aberdeen, Scotland. The company was founded in 1987 by Mira Stavika. Insomnia designs, produces and sells luxurious clothing, shoes and accessories for adults and kids. The company has internationalized through subsidiary undertakings in Italy, Spain, Germany and France as well as international trade with India, where the clothing is manufactured and exported to UK. The special packaging for cloths is produced in Slovakia. Since 2001, the company is listed on the London Stock Exchange and the largest German stock exchange in Frankfurt (FWB Frankfurter Wertpapierborse). The corporation owns approximately 60% of each subsidiary.
Scope of Business
After importing clothing to the UK, Insomnia stores it and resells majority part of it to their subsidiaries at the 20% mark-up. The remaining part is being sold in the UK. Subsidiaries and parent trade the clothing in the Insomnia branded shops. Apart from the payments for the import of clothing, foreign entity has to pay to its UK parent the management fee for the administrative and managerial services it provides. Out of the profit the foreign entities obtain, 70% is re-invested in their business; the remainder is paid to shareholders in form of dividends. Almost 40% of Company’s debt is denominated in Pound Sterling where the remaining part (60%) is in Euro. Revenue of the company comes in 70% from Euro and 30% from UK braches in Pound Sterling.
Parent company uses Pound Sterling as a functional and reporting currency, whereas all of the subsidiaries occupying in the Euro zone, use Euro as a functional and reporting currency.
Monetary Union
Current Exposures in a Monetary Union
Insomnia plc trades mainly in the foreign markets. This exposes the company into a series of uncertainties mainly regarding the exchange rate of the currencies. Exchange rates cannot be predicted with the ideal accuracy, but companies can at least forecast their exposure to exchange rates fluctuations which comes in three types.
Transaction Exposure
Transaction exposure is the degree to which the short–to–medium term cash flows denominated in foreign currencies are affected by the exchange rate fluctuations. This type of exposure has direct and large effect on the value of the company’s earnings.
Insomnia is highly affected by this type of exposure due to majority of its operations denominated in foreign currency. Buying clothing from the manufacturers in India and selling these to their foreign subsidiaries highly exposes company. Depending on the economic conditions, value of Indian Rupee and Euro can change rapidly within short period of time (Even as much as 10% within a year; Madura, 2007). Invoicing of clothing imported from India is denominated in Rupee, so if the value of this currency appreciates against the Pound, payables of UK company will increase and adverse. Similarly sales of the clothing to subsidiaries are invoiced in foreign currency, the Euro, which can affect cash flow in the adverse way to Rupees. Transaction exposure affects debt as well. Due to the Euro/Sterling exchange rate increase by 16.3% in 2009, debt of the company increased significantly last year as 60% of debt is denominated in Euro.
Economic Exposure
Extent to which present value of company’s future cash flows are affected by the exchange rate fluctuations is referred as economic exposure. ‘All types of anticipated future transactions that cause transaction exposure also cause economic exposure because these transactions represent cash flows that can be influenced by exchange rate fluctuations. Economic exposure includes transaction exposure and indirect effects on revenue and cost. ’ (Madura, 2007)
Insomnia is exposed as well to the economic exposure. If the Indian Rupee appreciates against the Pound as in previous example, the company may need to increase the price of clothing sold in the UK and price of goods sold to subsidiaries as will have to pay more for the supplies. In this case, customers might shift their purchases to the cheaper clothes’ retailers both in the UK and Euro zone which will decrease export of cloths to subsidiaries and result in the reduction of the future revenues of the corporation. If Pound appreciates, home sales are expected to decrease due to the foreign competition as well. Basically, increase in value of Pound will result in a decrease in both cash inflows and outflows, and adverse. (Madura, 2007)
Translation Exposure
How does this affect a wider monetary union? Subsidiaries have their own accounting records, but in reality parent fully controls the entities. Parent company has to show its own and subsidiaries’ accounts in a consolidated manner through consolidated financial statement. To do so, there is a need to translate financial statements of all subsidiaries of different currencies into reporting currency of the parent, which is Pound Sterling.
As exchange rates vary over time, the translation of the foreign entity’s accounts is exposed to exchange rate movements called translation exposure.
Insomnia plc has to translate the Euro denominated financial statements of its subsidiaries to the Pound Sterling, which is governed by the Financial Reporting Standards (FRS 23) and the International Accounting Standards (IAS 21). Assets and liabilities should be translated at the closing date; whereas income and expenses at the exchange rates at the transaction dates (average rate for the period is allowed, if reasonable).
Translation exposure does not affect the cash flow directly, but investors base their decisions on the consolidated financial statements. When in 2005 Insomnia announced that its consolidated earnings will be negatively affected by the translation exposure to Euro, investors responded very fast by selling their shares of the company, which led to decline in value of the stock by 5%.
Hedging
What is the impact of hedging on a wider monetary union? Exchange rate fluctuation exposures affect the cash flows of the entity in a direct or indirect way. The main aim of hedging is to minimize the effects and the uncertainty of the exchange rates fluctuations. Hedging may as well reduce agency costs, expected tax liability, and the cost of financial distress. Insomnia uses forward contracts to secure the exchange rate of their transactions and thus minimize the transaction exposure. For payables it negotiates the forward contract to buy foreign currency, for receivables – contract to sell foreign currency. The company, being risk averse, uses forward contracts to minimize the economic and translation exposure as well. To minimize the cost of hedging, company first calculates the net transactions exposure in each currency for each of the subsidiaries, then hedge against this balance. Additionally, company invoices the exports to its subsidiaries in the same currency in which they will pay management fees and dividends to a UK parent. It cannot be done for the transactions with the suppliers in India and Slovakia.
Effects of the UK Joining EMU on Insomnia Plc
Creating single market forming free flow of goods, capital, services and people within the European Union was the main objective of creating the EMU. To adopt Euro, countries need to fulfill “Convergence Criteria” set out by the Maastricht Treaty, but benefits outweigh the hard to accomplish objectives of price, exchange rate and fiscal stability as well as interest rate convergence and an impact on a wider monetary union.
Cost Savings on Cross-Border Transactions
Increase in trade within the European Union is one of the main objectives of the EMU. It is supposed to increase the consumption possibilities. According to Rose (2000) trade within domestic economy is far higher than international. Joining EMU and having single market with other EU countries will significantly increase the trade by making it domestic. It could be a great advantage for the Insomnia. It is thought to be achieved through cost savings on the cross-border transactions. Trading across Euro zone is much cheaper due to no need for exchanging money to foreign currency, hedging or keeping high reserves of foreign exchange. This will speed up the transactions and decrease its cost. Insomnia will benefit from this as company already trades with the subsidiaries from the Euro zone. Joining EMU will decrease costs of trading with them, whereas leaving problem of high costs of trade with India unsolved. Staying outside the EMU could be a big disadvantage in case of Pound appreciation. Shall this happen, export and sales in foreign countries will decrease as price of company’s goods will be higher. If joining EMU, Euro fluctuations would not have an effect on the exports to subsidiaries.
So far, strength of Sterling against Euro has already resulted in the reduced UK exports, which in turn forced foreign investors to pull out of the UK (Gillette, Siemens) and many more threat to pull out if UK will not adopt Euro. For the economy it is a disadvantage, but it is in favour of Insomnia plc, as it will reduce the competition. However, today’s situation is not positive for the company as “investors come here [to UK] because we have lower taxes and less regulation than the Euro-zone.” (Dominic Cummings, F/T; 12/06/01)
Stability of Prices
Stability influences monetary union, one of the advantages of joining EMU according to the European Commission is having more stable prices due to anti-inflationary regulations by European Central Bank. It is to be done by setting benchmark interest rates (according to the Fisher Effect) and exchange rate. It will affect Insomnia indirectly. In the event of the crisis in one of the EMU countries it is very possible that ECB will adjust interest rates in all other countries regardless the domestic conditions of single states. UK economy then may become unstable and collapse unfavourably affecting cash flows of the company. The risk of this happening is large due to high Euro volatility comparing to Dollar and Pound since it was introduced.
However, price stability can bring more advantages than the disadvantages to the Insomnia. Creditors being sure that prices will remain stable in the future are more willing to lend at lower interest rate which encourages domestic investments. Historically, UK interest rates have been higher than in the Euro-zone. In case of higher interest rates in the country, it may attract foreign investors in putting funds into Insomnia, but customers are more willing to save money rather than spend on clothing. Controlled inflation, stabilized prices and elimination of exchange rate fluctuations result in the ease of making long term investment decisions, planning and borrowing for Insomnia. (“Stability: Why is it important for you?”; ECB, 2009)
Price Transparency in a Monetary Union
Price transparency of a monetary union is driven by the price stability. When joining EMU, costs of the same goods across the whole Euro-zone will be much easier to compare. Prices of the Insomnia plc are relatively more expensive than the competitors, revealing it will lead customers to shift their purchases to different retailers. This might effect in the downwards pressure on prices and make it harder to keep different pricing policies on similar quality and use products. It is a big advantage for customers, but not for the Insomnia businesses. On the other hand, price transparency might help the company to find and work with the new, cheaper suppliers of clothing’s packaging. In addition, if Insomnia wants to set up a new subsidiary in the Euro-zone country, can easily compare costs of doing so among various locations. Stock prices of EMU countries are more comparable and prices are more stable as well, so it is easier and safer for the foreign investors to chose and invest in stock of Insomnia. Although, highly correlated markets decrease the diversification of the European investor.
Other Effects
Joining Euro will effect in long-term savings on the book-keeping. The Company has to hire people and keep tracks of costs, expenditures, margins etc. in various currencies. These costs will be reduced due to single currency used by the parent and subsidiaries. On the other hand, the disadvantage of one currency would be the cost of change over. This will require staff training, new tills software as well as labelling. Using Euro by UK might make company’s products more attractive to Euro zone customers due to easier purchases of goods online with no exchange rate uncertainty.
However, contrasting to the UK, in the Euro zone there is a VAT fee on children clothing, which will increase the price of such company’s items. It is a disadvantage for the clothing company. (Stephen Castle, the Independent, 15/07/03)
The level of hedging in Insomnia will be significantly decreased. Due to having Euro as a functional currency, company’s transaction exposure will be minimized drastically, due to having majority of transactions denominated in Euro. Insomnia will have to hedge only against the Indian Rupee. Economic exposure to exchange rate fluctuations will be decreased as well due to majority of the company’s operations based in the single, highly integrated market. Appreciation or depreciation of the Euro will not have an effect on the price of goods relatively to the competitors, trade or competition itself within the EMU. It will influence only trade with India and only Rupee will have to be hedged against. Translation exposure will be eliminated. As company needs to translate only the financial statements of its subsidiaries within the EMU, there is no need for this, therefore any need for hedging.
Using Euro as a Functional Currency of Insomnia Plc
“Functional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash.”(IAS 21) Insomnia considers the choice of the functional currency based on the factors stated by the IAS 21:
The currency: That mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
The currency: That mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).
According to the factors stated above, Insomnia should change its functional currency into Euro. The effect of this action will be similar to joining the EMU. Insomnia having Euro as a functional currency will benefit from the fixed exchange rate and reductions in cost of managing currency risk, speed of Euro transactions as well as price transparency. UK market will not be highly integrated with the Euro zone, as it would be in case of joining EMU. Insomnia would not be able to gain from the lower interest rates and stable prices. Obtaining cross-border funds will be easier when having Euro as functional currency, but due to prices being less stable, the cost of financing will be slightly higher than in the EMU. VAT on children clothing will not be introduced giving an advantage to Insomnia. Hedging will be decreased as well. Transaction exposure will be minimized, but by less than when joining EMU. There will be a need to hedge small amounts against receivables in Pounds and payables in Rupees as the majority of transactions are denominated in Euro. The company could easily reduce the exposure even more by invoicing in Euro, shifting this way the exposure down the supply chain. Economic exposure will be slightly decreased. In opinion of the report’s author, appreciation or depreciation of Euro throughout the EMU will not have an effect on the company or its competition. Although, UK will not be consistent with the single market, interest rates and inflation of the EMU zone, which may cause the differentiation in prices of the same goods (no price stability). Translation exposure will be shifted from translating from Euro to Pounds, to translation of Pounds to Euro. Exposure will be however decreased due to only 30% of revenue coming in Pounds.
On the other hand, it is argued (E. Christie; A. Marshall) that there is no connection in reduction in hedging with the decrease in risk. According to the article, the majority of UK MNCs using Euro as functional currency stated that there is no reduction in hedging. Author of the report argues with this opinion. It is probable that questioned companies had different levels of trade with the Euro zone states. Insomnia plc has its majority of operations focused within the EMU zone, therefore the advantages of reduced risk will benefit in lower incentives for hedging. Moreover, hedging policies could stay unchanged due to the different types of risk (non currency) faced by the companies. According to the article, using Euro did not encourage companies to expand internationally, which illustrates currency exchange risk as only one of the factors influencing investment decisions.
Conclusion
UK joining the EMU will bring Insomnia Plc lots of advantages. Stable prices, elimination of the exchange rate uncertainty leading to cost savings on the cross-border transactions, price transparency, possible growth, easier accessible borrowing, higher stock liquidity and decrease in hedging are just the major benefits to the company. However, there are factors which can influence the corporation in a negative way including not always favorable price transparency or additional costs of change over. Similarly, using the Euro as a functional currency involves its advantages and disadvantages, but the last have greater power than in the case of joining the EMU. It is decided that main exposures of the company involve the exchange risk; therefore reducing this uncertainty will be significantly beneficial to the Insomnia plc in the short and long term.
References
Anon, An Analysis on Whether UK Should Join the Euro
Artis, M., The call of a common currency, Europe without Currency Barriers, paper no. 3
Castle, S., 2003. Britain fights EU plan for children’s clothing tax.
Christie, E., Marshall, A., 2001. The Impact of the Introduction of the Euro on Foreign Exchange Risk Management in UK Multinational Companies. European Financial Management, Vol. 7, No. 3.
Currie, D., 1997. The pros and cons of EMU
HM Treasury (1997), UK membership of the single currency: An assessment of the Five Economic Test
Rose, A.K., 1999. Does a Currency Union Boost International Trade?
International Accounting Standards. ,2009,IAS 21, The Effects of Changes in Foreign Exchange Rates
Madura, J., Fox, R., 2007. International Financial Management. London: Thomson Learning.
