Question

f) Assume company has established the subsidiary in both Canadian and Mexican markets by June 2019. By late December 2019, you realized that the COVID-19 has badly hit the global economy. Analyse how the pandemic may affect the performance of the overall company? Between the two subsidiaries, which is more adversely affected by the pandemic? (Hint: compare the economic impacts between the two markets, analyse exchange rate risk, and reflect your analysis with goal of the firm). (12.5 marks)

for a us based company

Answer 1

Hi,

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Question:

Answer:

Macroeconomic statistical data of Canada and Mexico (current data)

Economic Indicators	Canada	Mexico
GDP	-2.1%	-1.2%
Unemployment	12.3%	2.9%
Inflation	0.7%	3.3%
Interest rate	0.25%	5%
Balance of trade	-677 CAD million	5547 USD million
GDP to debt ratio	89.7%	45.5%
MPMI	47.8	38.6
Consumer confidence	44.9	42.6
Business confidence	58.2	38.6

Real Interest rate in canada = 0.25 - 0.7 = -0.47%

Real Interest rate in Mexico = 5 - 3.3 = +1.7%

Balance of trade of Canada in USD = -677 *1.34 = 907.08 million

Balance of trade of Mexico in USD = 5547 million

Exchange Rate:

USD/CAD = 1.34

USD/Mexican Peso = 22.18

Here, we can see that the economic growth of Canada is lower than Mexico (both have negative growth but Canadian economy fallen down more compare to Mexican economy).Other side the real interest rate in Canada is negative and positive in Mexico. Trade of balance of Canada is far better than Mexico. Unemployment is more in Canada compare to Mexico. MPMI, consumer confidence and business confidence in canada is little better than Mexico.

Macroeconomic Principles/concepts and its Impact on Business:

As per macroeconomic concept when the real interest rate is comparatively higher than other countries then the country which have higher real interest rate attracts more foreign capital that increase the demand for domestic currency and domestic currency get appreciated. Other side a country have more strong and stable currency which trade deficit is comparatively lower than others. Here Canada and Mexico both have trade deficit but the deficit of Mexico is higher than Canada. Lower interest is better for increasing consumer demand and investment level that increase aggregate demand and vice-versa. When aggregate demand increase its increased GDP growth and prive level and vice-versa. Here, Canada is better than Mexico with lower interest rate. This time facing the problem of COVID-19 crisis that has badly affected to the aggregate demand. So, world is aggressively following expansionary fiscal and monetary policy to boost the AD in the economy.  Other side higher trade deficit will also negatively affects to the Mexican economy and will damage exchange rate also.

The USD/CAD exchange rate 18/04/2016 to 18/04/2020 are respectively 1.27022, 1.34565, 1.26130, 1.3464, 1.41032

The USD/ Mexican Peso exchange rate 18/04/2016 to 18/04/2020 are respectively 17.4747, 18.8112, 18.5334, 18.774, 24.98

So here we can see that USD/CAD is more stable than USD/MXN. Both have fluctuated but USD/MXN is fluctuated more than USD/CAD. Depreciated CAD or MXN will negatively affect to the profit of the company because when a company books its profit then the company sells foreign currency and purchases domestic currency. To make profits and expansion of market penetration and a long-term stability are the most important objectives of the company that expands its business oversease.So, both the current situation and future forecast of a economy affect to the objectives of the company. A company always prefer a stable and growing economy.

There is also a greater chance for the Canadian economy that it will recover and come back quickly or early compare to mexican economy because of some favorable macroeconomic date.

After all the macroeconomic data analysis we found that Mexican market will more loss making market for the company compare to Canadian market.

Thank You