Globalization is the "shrinking" of the world and the increased consciousness of the world as a whole. It is a term used to describe the changes in societies and the world economy that is a result of dramatically increased cross-border trade, investment, and cultural exchange. Globalization has been dominated by the nation-state, national economies, and national cultural identities. The new form of globalization is an interconnected world and global mass culture, often referred to as a "global village. “(Bhagwati,2004). Globalization is perhaps the central concept of our age (Bhagwati, 2004).
Developing country refers to the countries which are economicaly and technologically undeveloped. South Africa stands as a semi-sephere nation making it differ from the rest of the developing world although it has party some charectateristics of a deceloping world. For South Africa to be the strongest African economy and attenting positions such as being a member of the g8 as been a clearl work of globalization making it at the center of the Africa. Globalization has managed to have an impact on the economy ,politics and social nature bringing about positive results for South Africa.
In this essay;The situation during economicec sunctions and its leberisation is clear evidance to economic libirazation I am going to illustrate how this process has had a positive impact in South Africa as a whole. primarly focusing on the positive impact globalization has had on South Africas economy . Through the broad and economic lebarization with other counties. The phenomeanall of globalization states that The integration of South Africa into an increasingly integrated world economy has encouraged closer economic, political, and social interaction.
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In South Africa it has given companies access to wider markets and consumers access to a greater variety of goods and services. It has manifests itself in various forms such as an increase in international trade, financial flows, and foreign direct investment (Smith,2001). This has resulted in South African economy managing to emerge its market status. Its economy has been the centre of Africa and one of the strongest in the world and its economic realisation has been due to its effective and successfully eco integration with other parts of the world.
The economic growth has been due to the global economy (Smith,2001). Politically, globalization has resulted in the affluent and efficient government system adapted through integration of political systems party which holds fair economies making the government of South Africa, accountable and durable to stable economies . For instance, ANC leaders chucked decades of rhetoric and opened the South African economy to the rest of the world (Smith,2001). From my own personal perspective and experience in a “global village”.
Globalization has had positive impact in South Africa’s production of goods and services. For instance, the franchise of MacDonald’s has led to production aiming to maintain the global standard of the franchise producing standard global quality of production in South Africa (Ritzer,2000). Globalization has had a positive impact on the South African society . Myopic mindedness has been dealt away with and they have been set a more affluent and integration of ideas from different parts of the world which has helped the society in general.
For instance the AIDS awareness has become a global theme and has encouraged South Africa to get more involved in its Aids awareness which has primarily not been as successful in the past and due to the integration this has been possible. Different cultural ideas and tradition have also been interlinked and have asses to explore the world they leave in improving knowledge (Ritzer,200) In conclusion to my argument, globalization has had a more positive impact on South Africa.
They has been economic, political, technology and social integration (Bhagwati,2004) . They have been open trade improving the economy of the South Africa. Influence in the politics and technology helping develop new innovations helping the county. The global perspective of the society has since grown to be smaller, allowing different cultural integration and eliminating isolation and living the society prom to more knowledge.
Derivatives - Overview, Types, Advantages and Disadvantages
In the present-day society, with the development of globalization, small companies are struggling to survive in a severe environment. Not only do they have to compete with large companies, but also are affected by the impact of fluctuating economic climates. Under this environment, they have no choice but to seize every chance to increase profits.
A feasible method is by using financial derivatives. These financial instruments, which are linked to a specific indicator, commodity or other financial instruments, can receive great rewards with only a small amount of investment. This essay first discusses four main financial derivatives: forwards, futures, options and swaps. Then analyze the pros and cons of financial derivative usage by small companies. Finally, suggestions are made for small companies to better take advantage of financial derivatives.
Definition of small business
“A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships or sole proprietor ships. “
In this article, the four main group of financial derivatives discussed are forward, futures, options and swaps. They are basically business contracts made either in the financial market or individually negotiated between parties. Forwards and Futures obligate one of the parties to buy and another to sell a specific asset at a specific price on a specific date, Options give one party the right of selling or buying, not the obligation. Meanwhile, Swaps have obligations and rights set to exchange one security for another to alternate quality of issue, or investment objectives. In the research of (Kosik and Pontiff 2004), among all the categories of derivatives, foreign exchange derivatives, interest rate derivatives and commodity price derivatives are the most frequently used derivative instruments by small firms.
To start with, the most noticeable advantages for small companies of using financial derivatives are in the financial area. This includes predicting a future price trend, stabilizing costs and maximizing sales profits. When the company is concerned about the derivative market, the price of futures and options and commodity price derivatives can easily help it to predict the future price trend of its raw materials. Thus wise decisions on making instant large purchases or future purchases could be made. If the predictions prove correct, unnecessary expense on raw materials can be avoided. Another way small companies could take advantages is to stabilize their purchase costs. If the company enters into a commodity price forward contract, it could possibly stabilize its purchase costs. Since engaged in these derivative contracts, the company has accepted to buy a certain commodity at a special price, thus the purchase cost is fixed in contractual format. Or it could use foreign currency forwards and options to minimize the impact of exchange rate fluctuation in the same way. (Bodnar and Marston, 1988). A third area a small company could benefit from utilizing financial derivates is to maximize its profits. A foreign currency forward or option contract with its distributors, the company is able to sell its products with fixed sales income in domestic currency. As a result, no more price or exchange rate fluctuation could influence the company’s sale revenue. There are three other advantages caused by derivative instruments. These are: increasing business reputation, expanding the company to enter the finance industry, and training the management team to handle more complex finance problems. There is a further explanation that derivative instruments can increase business reputation. When a company fulfills all the obligations and duties that the derivative contract included, distributors may think it a creditable partner and shareholders may give more credit to their invested entity as well. The second advantage is that a small company can gain opportunities to enter the high level of financial markets for its frequently participation in the derivative market. It is beneficial for the future development of the company. Through earning large quantities of short-term return, the firm’s volume could be increased and expansion into the financial markets could be realized (Gay and Nam, 1998). Finally, the management team of a small enterprise could get plenty of experience in dealing with these advanced financial instruments. This could train them for better understanding of the whole economic trend, so they are better prepared for future financial work, benefiting the company in a fundamental way.
Aside from all the possible advantages financial derivatives can bring for small companies, there are also corresponding disadvantages. Just as proper managing can cut down on material costs and maximize sales figures and profits, if used inappropriately, derivative instruments may result in huge losses or even bankruptcy for small companies.
The most recognized disadvantage that financial derivatives could bring about is financial difficulty. In this situation, it is hard to professionally handle the derivatives instruments, the consequences would be terrible. One appropriate example to illustrate the huge financial losses caused by derivative use is that five to six small firms in India have engaged in a lawsuit with private-sector banks with some improper handling of the derivative product, causing ten million losses on derivative instruments. In the second place, if the prediction is incorrect, a commodity price or foreign exchange future or forward contract will raise the purchase costs for small firms, for that this kind of derivatives sets the future amount due fixed whatever the future prices or exchange rate would be. In a similar situation, when arrangement is improper, interest rate derivatives will cause fund costs to rise. That is because the interest rate derivatives have set a limit to the funding costs. As a consequence, when the interest rate descends, funding costs are increased, leading to financial trouble for the small enterprise.
There have some other disadvantages come in other area except for finance. When company failure on derivative markets, shareholders, creditors and other relevant parties tend to be lose their confidence in the company’s performance, therefore, it will face a much worse financial position. Shareholders may start to sell their stocks, and creditors may ask for early repayment of credit. Under these circumstances, the reputation of company may be seriously damaged. Another drawback is the management team of the company may feel frustrated about their poor operation on derivative instruments, thus losing morale for attempting another innovative financial instrument, which could possibly put the enterprise into a more difficult situation.
After analyzing the advantages and disadvantages of derivative instruments which are used for small enterprises, some suggestions for making full use of these instruments can be made. Taking two fundamental factors into consideration, they are the size of firm and the special characteristics. Forwards, futures and options are recommended for frequent use, whereas swaps should be carefully used. When investing in these financial instruments the level of risk involved the selection of the type of derivatives.
To sum up, from comparing the advantages and disadvantages of derivative investments, it clearly can be seen that certain type of derivatives, such as forwards and futures, when used properly can bring visible benefits for small firms. On the other hand, when inappropriately used, derivative instrument may result in huge losses and even bankruptcy. Thus, the conclusion is that small companies can take many advantages of financial derivatives as long as they pay sufficient attention to their investments.
- The International Monetary Fund.(2008) Financial Derivatives. Available from: http://www.imf.org/external/np/sta/fd/index.htm [Accessed on September 09, 2010]
- Small business .Available from:http://en.wikipedia.org/wiki/Small_business [Accessed on September 09,2010]
- Koski, J. and Pontiff, J. (2004).Wiley Interscience. How are derivatives used.Availablefrom:http://www3.interscience.wiley.com/journal/119065624/abstract?CRETRY=1&SRETRY=0. [Accessed on September 10, 2010]
- Bodnar, G. and Marston, R. (1998). The Wireless Center for International Financial Research.1998 Survey of financial risk management by U.S. non-financial firms. Available from: http://finance.wharton.upenn.edu/weiss/survey98.pdf [Accessed on September 09,2010]
- Gay, G. and Nam, J. (1998). The underinvestment problem and corporate derivatives use. Financial Management 27(4):53-55
- Reuters India. India Axis Bk: clients’ notional derivative loss $169mln. http://uk.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUKBOM14592320080421.[Accessed on September 09, 2010]
- Pennings, J. and Garcia, P. (2004). Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity. Journal of Banking & Finance 28: 951-978.
The Advantages and Disadvantages of Globalization
Globalization is such a commonly used term in the twentiethcentury. It simply means that the world has become integrated economically, socially, politically and culturally through the advances of technology, transportation and communication. It is undeniable to say that globalization has resulted in both positive and negative effects which must be addressed accordingly. To begin with, globalization has contributed to the worlds economies in many beneficial ways. The advances in science and technology have allowed businesses to easily cross over territorial boundary lines.
Consequently, companies tend to become more productive, competitive thereby raising quality of goods, services and the worlds living standard. Secondly, several companies from the more developed countries have already ventured to establish foreign operations or branches to take advantage of the low cost of labor in the poorer countries. This kind of business activity will provide more influx of cash or investment funds into the less developed countries. However, one cannot deny the negative effects which havederived from globalization.
One crucial social aspect is the risk and danger of epidemic diseases which can easily be spread as the mode transportation is easier and faster in todays advance society. This is evidenced in the recent birds flu disease which has infected most Asian countries over a short time frame. As large corporations invest or take over many off shore businesses, a modern form of colonization will also evolve which may pose certain power pressure on the local governments of the less developed countries.
Unemployment rates in the more developed regions like Europe may also escalate as corporations choose to outsource cheaper work force from Asian countries. In conclusion. I like to reiterate that globalization is inevitable and we must urge individuals, companies and governments to use a more balanced approach by taking appropriate steps to deal with matters relating to the financial or economical gains verses the social, political or ecological concerns of the world.
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