Fluctuation of Currency exchange rates
Rao. (2008) , exchange rate risk in the automobile industry, small currency exchange rate fluctuations have negatively effect on the stock returns of firms. Using quantitative research method, the research investigated the effect of currency exchange rate movements on stock returns of European based motor vehicle companies with market interests in USA concluded that the short movement in exchange rates have no significant effect on the stock returns of the companies investigated in the research
According to Juan (2008) money used in global purchases is moved between the domestic countries and the foreign partners in global sourcing and the stability of the domestic currency used enables the international trade to be easier as instability makes global sourcing more complex introducing more risks in the markets. If trade amounts to millions of dollars per transaction then a slight deviation of about 0.5% on the exchange rate creates a huge effect on the effectiveness of global sourcing strategy and the profitability of the whole supply chain of the firms.
Recent contributions in global sourcing show that depreciation in exchange rates are beneficial to some firms in promoting economic growth through technology transfer between the firms. Exchange rates have a strong effect on the current account balances as within three years of a depreciation event, for example, the account balances depreciate by three percent points of GDP. This is through a reduction in saving without meaningful reduction in investment of these firms which creates the need of developing countries to create confidence in their economic policies, (Marcus, 2011).
Higher currency inflation rates have a relation with higher inventory levels in firms buying additional inventories for later use during periods of rising prices in the world global markets. In considering these global sourcing strategy firms must have a large enough storage for the products they purchased before the rise in prices and this will raise the storage cost in the firm therefore the need to balance in forward purchasing as inflation is associated with an increase in the holdings of raw material in the firms (Chaodong , 2008).
2.3.3 Governments Policy related to sourcing
Special regulations by governments involved in global sourcing influence the global sourcing strategy either directly...