Competitive Advantage of First Mover and Late Mover

Competitive Advantage of First Mover and Late Mover Abstract Nowadays due to technology advancement, the way of how businesses were conducted has evolved to be more globally attributed and dependable to technological innovation aids. Furthermore, technology could help a firm to be sustained by having competitive advantage, and this especially true in the situation of where firm had the strong dependency towards technology innovation. Technology had becomes more important to specific firm or business when it has the ability to significantly affect their competitive advantage or industry structure. Thus, it is important for firms to choose and execute their strategy systematically to stay competitive and sustainable in the market. In this report, the strategy of how firms enter a new market will be discussed in term of first-mover and late-mover, taking into account on the creation of how a firm could be either first mover or late-mover, the advantage and disadvantage of being first-mover and late mover, and lastly giving conclusion and insight of what strategy could be better to be implemented in particular situation. Discussion will begin with explanations and definition of what constitute first mover and their advantage and disadvantages. In this part, researcher Marvin B. Lieberman and David B. Montgomery, 1988 in their article survey about first-mover advantages were referred. They enlighten that there are 3 ways of how first-mover could achieve their advantages. The first sources of how first-mover competitive advantage could be triggered are (i) technological leadership, (ii) preemption of assets, and (iii) buyer switching cost. Technological leadership will benefit first-mover in term of leadership in innovation, which ensure the sustainability in technology. Being the first in the market, provide sustainable cost advantage could be achieved if learning curve could be maintained exclusively. This due to the unit production of cost will fall with cumulative output as explained in standard learning-curve model. As learning curve could be made exclusively, this could also make advantage to the first-mover by setting up extensive barrier to entry. Moreover, preemption of assets help first-mover to achieve advantage in term of domination of market shares. As first-mover could controlled the market shares earlier, this provide a barrier for late entrants to seize an amount of market shares which dominated by first-mover. First-mover also could gain the advantage by preempting the scarce asset. By having the control over existing and available assets, first-mover could deter rival in scarce assets acquisition. Preemption of location in geographic and product characteristics also could lead to advantage for those firm which is first-mover. Being the first-mover, advantage could be achieved through preemption of locations in geographic by entering most viable and profitable market earlier than the rivals. Thus, by implementing strategic action to secure and dominates the market, late-mover will find it is so difficult and viewed it as unprofitable to enter the market. This consequently could deter the subsequent entrants. Furthermore, Research and Development (RD) and patents also secure the first-mover advantages. By having extensive and effective RD, this could lead to discovery of new technology, which could be patented. Thus, as patents exist, this could serve as trade secrets. By doing business as the first-mover, this also provide head start for them to do research and exploit all possible potentially new technology, hence provide numerous patents to protect them from patent-race by future rivals. Buyer switching cost, affect first-mover firm advantages in term of time and resources which will be spent by late-movers in qualifying as a new supplier. Whenever late-mover settle in within firstly occupied market by those first-mover, late-mover had the obstacle and resistance in order to be familiarized by the customers or buyer. This will drop profit margin hence, increase operating cost. This will bring harm to late-mover as the costs incurred are higher compared to the first-mover. Besides, switching cost could surface due to supplier specific learning by the buyer or customer. In this situation, when customers are familiar enough with one specific supplier, they will embrace the brand, and become loyal. Therefore, it is quit difficult for new entrants or late-entrants to steal that loyal customer or buyer from the first-mover firm. Moreover, research by Tariq Malik, 2012 which study the advantage of first-mover for a firm when doing strategic alliances with host companies has showed that there is significant advantage for the first mover. (Malik, 2012) The result of this study has support the hypothesis which are first-mover firm in forming an international alliance in China would perform better than late-mover. This finding seen consistent with literature by Lieberman and Montgomery, 1988, and this is due to first-mover creating an environment which is disfavor by late-entrants. For example, when the first-mover has established relationship between China (Joseph G. Nellis, 1997)firms, through strategic alliances, first-mover has the advantage as they will know on how to do business with China government, organization and media. Moreover, first mover also had the edge over late-move in acquiring strategic location, hired and training the human resources, locked in strategy partner, and has created many consumer loyalties for its technology, products and services. Another empirical study could be seen in Thomas Cleff et. al research of Are there any first-mover advantages for pioneering firms? Lead market oriented business strategies for environment innovation. In this research, it has been found that a successful innovator is not necessarily become the first but one of the first-movers within the competition of different innovation design. Concluding from this study, there is advantage from being the first-mover, however it is depending on the environmental circumstances. This describe that first-mover has higher risk compared to late-mover. Furthermore, through this research, it also found that first-mover advantages are not available and very risky if in condition where suddenly technology changes abruptly. Moreover, increase in market dynamic increases potential of first-mover, however does not guarantee it. It also could be learned that, in order to achieve first-mover advantage, it has to acquire the ability in developing dominant design , so that can be market leader. Lead-market approach also crucial for the first-mover to compete with late-mover, as late-mover could diffuse faster than expected if first-mover does not take lead-market approach. Lead-market approach also crucial in faster and widespread diffusion of new technology, so that could not be surpassed by late-mover. (Thomas Cleff, 2012). In emerging economy, first-mover also has the ability to expand business without attracting much attention from the incumbents from the domestic firm. First-mover also should have the necessary human capital, physical and monetary resources in order to stay in advantages zone, if do not want to be outperformed by the late-mover. To wrap up, in order for first-mover to maintain its profit and advantages, they should be one step ahead of its competitor, however as consequences this will require a high rate of innovation in term of technical and new product development. (Joseph G. Nellis, 1997) First-mover advantages could be seen in various areas such as technology leadership, the domination of asset, and also the switching cost. However, first-mover also could posses several disadvantages, which indirectly will explain as the late-mover advantages. Disadvantages of being the first-mover in the market includes the (i) free-rider effects, (ii) resolution of technological or market uncertainty (iii) shift in technology or customer needs, and (iv) incumbent inertia. Late-mover could have advantage in free-rider effect, as late-mover can imitate where first mover innovate. They can imitate in various part involving the Research and Development (RD), buyer education and infrastructure development. As consequences, they have advantage in cost reduction as imitation is less costly when compared to innovation cost. This ability to imitate then, leads to could reduction of the profitability to first-mover. Resolution of technological or market uncertainty is also one of the advantage of late mover. How late-mover can benefit from this factor is by being late to enter a certain unknown market. This will reduce the risky selection of market, as being first in the unknown market, will serve many challenges and risk to be overcome. As late-mover could delay their time to enter unknown market, they could avoid any unwelcome problem or issues. Shifts in technology or changing in customers need also affect the first-mover and this will be taken advantage by late-mover. Marvin B. Lieberman and David B. Montgomery in their journal has review many literature on how shift in technology or changing customer demand can cause advantage to the late-entrants, which relate to creative destruction model introduced by Schumpt (Schumpter, 1961)er (1961). Through creative destruction model, existing product were said to be obsolete by the emergence of innovation of new firms. This late-entrant then will exploit technological discontinuity which by eliminating and replacing existing incumbent. While customers need something new and this will create dynamic condition. This will create loophole where late-mover could take advantage, unless the first-mover are very fast to alert and respond. While in incumbent inertia, late-mover could be in advantage as late-mover can evade from being locked in specific set of asset. First-mover disadvantage in incumbent inertia also could probably become organizationally inflexible, thus they cannot respond to environmental changes or competitive threats. (Montgomery, 1988) Reviewing from marketing perspective, late mover could be seen as having the potential to leapfrog those first movers at least in two ways either by beating them in their own game, or secondly by surpassing them using innovation as the tool. In term of beating first movers in their own game, late movers approach could start by providing consumers preferences in the category of product positioned by first mover. This could be the source and anchor for competition to start, hence late movers could take the opportunity to see any gap, overlooked superior product positioned, compete on price, or even could take the action to flood the market hence liquefy first mover’s distribution. Whereas, in term of innovation, late mover could innovated their products or strategy, hence could bring the competition between late entrants and first mover come to intense, providing late entrants to surpass first mover. (Venkatesh Shankar, Gregory S. Carpenter and Lakshman Krishnamurthi, 1998). Moreover, study conducted by Venkatesh Shankar, Gregory S. Carpenter and Lakshman Krishnamurthi, 1998 shows that innovation lead to the key of late mover advantage when compared to first movers entrants. First mover or also known as pioneer has the advantage in experiencing higher potential market compare to those late mover. Furthermore, the diffusion and marketing mix effectiveness are unaffected by diffusion of non-innovative late entrants. However, when compared with that late mover with innovative, which is stated as innovative late mover, even higher market potential could be achieved with higher repeat purchase rate compared to first mover. Moreover, innovative late mover claimed to create asymmetry in diffusion as it has unequal response to marketing expenditure, market potential and repeat sales. For example, when first mover’s diffusion take place, consumers will shift to the late-mover products does not affected much due to market shares potential and also consumers preferences towards late mover still strong. However, when innovative late-mover diffuse, they will diffuse faster as they had the more superior innovation and lower price compare to the first-mover. In term of brand growth, pioneer will have to spend a lot of advertising cost, as to create awareness of brand for product and the product category. However, late-mover does not have to prepare such cost, or in other words they could enjoy less expenditure on creating awareness, but only focus on developing brand awareness and could depend on the first-mover to establish the category. They also find the implication of late-mover if, late-mover could not beat first-mover in their own game, which cannot defeat first-mover’s diffusions or marketing strategy, which in turn will cause late-mover will experience low repeats rates and also less effective marketing plan, another way of how late-mover could be in advantage should be discovered. In this situation, what late-mover could do is to lower the price, and spend more on marketing mix. However, it is effective for late-mover to refine their product in which category in compete with the first-mover in order to beat and compete more intensely. (Venkatesh Shankar, 1998). Conclusion In conclusion, being first-mover and late-mover has their own disadvantages and advantages. Thus, in order to implement an entry strategy, the requirement and deep understanding of each firm’s SWOT and the market where they would like to enter is required. To become first-mover in an industry, a firm should possess technological leadership, preemption of asset and also buyer switching cost. In order to maintain first-mover advantage to be sustainable, first-mover should be one step ahead of competitior or late-mover so that learning curve could be made exclusive hence slowing down the innovation process diffusion by the late-mover. In the other side, late-mover could have the advantage in term of free-rider effect, which focuses on imitation or refining of the first-mover product category. However, late mover must be aware that if first-mover is very fast in product innovation and development, hence slowing down product diffusion in the market, focus on quality and pricing cou ld be made. Finally, to choose either first-mover or late-mover is the best strategy is depending on the requirement, circumstances, market condition, assets and also firm’s capacity and capability. References Joseph G. Nellis, D. P. (1997). The Essence of Business Economics. New Delhi: Prentice Hall of India Pvt. Ltd. Malik, T. (2012). First-Mover, Strategic Alliances and performance: Context of turmoil in China. Chinese Management Study, 647-667. Montgomery, M. B. (1988). First-Mover Advantage. Strategic Management Journal, 41-58. Schumpter, J. (1961). The Theory of Economic Development. New York: Oxford University Press. Thomas Cleff, K. R. (2012). Are there any first-mover for pioneering firms? Lead market oriented business strategies for environmental innovation. European Journal of Innovation, 1460-1060.

Restorative Justice and Restitution Essay

Restorative Justice and Restitution Introduction   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Morals and values are considered to be the same to majority of the people in the society. Values or ethics, however is considered to be the standards that are set within a society and portrays how the views of other people can be considered to be right or wrong, either at the workplace, in the social circles or even nationally (Van Ness, & Strong, 2013). Morals on the other hand are considered to be independent to every individual since they originate from matters of belief, choices and religion. Morals deal with the making of either right or wrong, fair or unfair decisions, honest or dishonest choices that have a direct impact on the religion or belief of an individual (Zehr, 2002).   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The theories of morality that play a role in this case include the theory of utilitariansm, whereby it is considered to be morally good for the majority (Zehr, Mika, & Umbreit, 1997). The other theory is the theory of moral courage, which is considered to be to be the main pillar of ethics. Moral courage requires that one makes steadfast commitment to principles that are ethical and fundamental despite facing issues such as potential risks, shame, loss of reputation, isolation, emotional anxiety, retaliation and even loss of employment (Umbreit, 1989). Tough and morally right decisions have to be made despite the consequences.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The concept of restorative justice and restitution is an approach that is mainly focused on the various needs that victims of crime and the offenders have as well as the community within which people live in (Zehr, 2002). The aim and purpose of restorative justice and restitution is not just to satisfy the principles of the legal process or punishment to the offender but to satisfy the needs of the offenders as well as that of the victims (Van Ness, & Strong, 2013). The restorative justice and restitution is based on the theory of justice. This theory simply considers wrongdoing and crime as an offense that is committed against a community and an individual and not the state (Zehr, 2002).   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The legal process, as much as its purpose is to serve justice where it is due, does not aim at increasing animosity and hatred in the society and hence the reason for restorative justice and restitution. It is important for people to live in harmony and get along (Zehr, Mika, & Umbreit, 1997). The process that is involved in restorative justice does not aim at benefiting the offender but to bring people together, the victims as well as the offenders and find peace and harmony in the society. Everyone in the society should be ready to support a process that encourages harmony and nit promote hatred and animosity hence restorative justice and restitution plays a major role in building a better society for the future (Umbreit, 1989).   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The ethical issues that are related to the concept of restorative justice and restitution include the issue of forgiveness between the people that have been affected by the actions of the offender (Zehr, 2002). Another ethical issue that is involved with regard to restorative justice and restitution is that a crime is not committed against the state but rather against the victims and the society (Van Ness, & Strong, 2013). The needs in addition to the issues that the victims have as well as the offenders need to be considered to promote harmony in the society. The other ethical issue to be considered under restorative justice is whether offenders should be given a second chance in the society and allowed to make things right with the victims of their offenses (Umbreit, 1989).   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Restorative justice also has its implications in the long run. The implications of restorative justice and restitution include increased accountability in the society; restoration and improvement of relationships in the society hence reduce chances of future offenses in terms of retaliations and revenge (Zehr, 2002). Furthermore, restorative justice has the implication of restoring trust and helping in the growth of long term relationships in the community and between the people involved in the whole process (Umbreit, 1989). Long-term safety and building of confidence is also another implication of restorative justice that will be achieved.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The approach that will be suitable in reaching the decision on whether to meet the convicted murder would be through counselling sessions for the family members and through seeking of information from people or families that have had an experience with restorative justice (Van Ness, & Strong, 2013). The needs and concerns of each family member will need to be addressed and find out their views about the meeting and what they would want done differently. Counselling sessions for the family members will help build their confidence and gradually acceptance of the loss of the loved one (Zehr, 2002). After the counselling sessions, regular meetings should be conducted with the family members to discuss on whether to allow for the meeting or to refuse the meeting.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The steps to undertake in approaching the decision making process will involve calling for a family meeting whereby all members should be present. Every family member is to be given a chance to air their views and their opinions based on the theory of moral courage and virtues (Umbreit, 1989). After the family meeting, it would be important to contact the member of the Victim’s Group and discuss the conditions under which the meeting would be held if it will take place and establish the final motive why the convict wants the meeting (Zehr, Mika, & Umbreit, 1997). After that, have another family meeting and analyze the findings based on moral values and in the spirit of restorative justice (Zehr, 2002). This will lead to a decision of meeting the convict since the benefits of the meeting outweigh lack of the meeting. The possible questions would only be two main questions and that includes: What exactly led the convict to commit the crime and did the victim deserve to die in such a manner? What would the convict have done if his situation was reversed?   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Restorative justice and restitution is beneficial in the society and helps in avoiding continued criminality within a society. However, it should not be over exercised since criminals may tend to take advantage of the same to continue committing heinous crimes. The full force of the law should also play a major role in curbing crimes in the society. References Umbreit, M. S. (1989). Crime victims seeking fairness, not revenge: Toward restorative justice. Fed. Probation, 53, 52. Umbreit, M. S., Coates, R. B., & Kalanj, B. (1994). Victim meets offender: The impact of restorative justice and mediation (pp. 53-64). Monsey, NY: Criminal Justice Press. Van Ness, D. W., & Strong, K. H. (2013). Restoring justice: An introduction to restorative justice. Newnes. Zehr, H. (2002). The little book of restorative justice. Intercourse, PA: Good books. Zehr, H., Mika, H., & Umbreit, M. (1997). Restorative justice: The concept. Corrections Today, 59, 68-71. Source document

Comparing Autodrive And Dis - 895 Words

The steady base can be felt vibrating through the neighboring rooms. Two boys sit behind a wall to wall desk in their bedroom at a university halls of residence, piled with laptops and turntables, mixing music and writing lyrics. The walls are canvassed with the posters of Daft Punk and Chet Faker. A single bed has been flipped over and pushed up against a wall to make a counter, holding an arrangement of speakers. Curious students walk past popping their heads in and whistling. Cheers erupt as the rhythm catches and they have produced their second hit. CLAYE, a Wellington-based duo of 20-year-old Oscar Nikola and Giorgio Scott is on the rise after viral success of their first two singles ‘Autodrive’ and ‘Places’. The duo began in their†¦show more content†¦Ã¢â‚¬Å"Music is a sort of refuge for both of us and we want our music to be that for someone else† says Giorgio. The boys say their influences come from a diverse range of artists such as Tourist, and Majid Jordan which is reflected in their unique sound, a mixture of woozy electronica and garage, coated in Oscar’s smooth vocals. All three singles flaunt the boy’s talents on a range of instruments from drums to guitar. Both boys spent years at high school scraping together songs but when they began playing together the electronic route clicked. The two take me into Giorgio’s room where they have a plain backdrop set up with coloured lights. They turn on a filter and the whole room is submerged in a red haze. Oscar shoots Giorgio while he works and the creativity and enthusiasm between the two is infectious. Giorgio is dressed in ripped jeans and a bomber jacket and can barely be torn away from the decks to talk to me. Oscar, however, can’t stop talking. A stream of excited words bubble out from under a mop of dark hair and a camera. â€Å"I get a rush out of seeing people enjoying the music we make. I love it and I would continue to make music even if I was the only one who listened to it, but the fact that others do too is crazy† he says. â€Å"We also get a lot more interest from girls† adds Giorgio grinning. Their debut single ‘Autodrive’ was released in May and made it to #1 on Spotify’s Fresh Finds

Factors Affecting the Exchange Rate of Aud/Usa - Free Essay Example

Sample details Pages: 13 Words: 3907 Downloads: 8 Date added: 2017/09/14 Category Advertising Essay Did you like this example? Analysis about factors affecting Australian Dollar US Dollar exchange rate (2006- Q1 2010) Project Report Final Project in Banking and Finance (FP 238) Raffles College of Higher Education I. Introduction 2. 1. Don’t waste time! Our writers will create an original "Factors Affecting the Exchange Rate of Aud/Usa" essay for you Create order Background Most of the country in the world will have export and import and they will use money to pay for it. Each country will have their different unit of money, which is called as currency. Currency is a medium that is used in the world to be the media as payments. Each country have their own currency, some small country are using the same currency as their surroundings e. . USA – US Dollar (USD); Germany, Spain, Greece, etc. – Euro (EUR); UK – Poundsterling (GBP); Singapore – Singapore Dollar (SGD); Australia – Australia Dollar (AUD). Therefore one currency will be related to the other currency in the other country, in other word, if country A is facing recession, all country that is located near country A will be facing the same problem and not only the surrounding, but for those country who have import and export agreement with country A will be affected as well. Therefore there is always a fluctuation in the exchange rate. This fluctuation will fluctuate every time, even in a second, it might have fluctuates. Fluctuation in the exchange rate is divided into upward market trend (bull market) which indicate that a currency of a country is getting stronger compare to the other countries’ and downward market trend (bear market) which indicate that a currency of a country is getting weaker compare to the other countries’. â€Å"The exchange rate fluctuates. Sometimes it rises and sometimes it falls. A rise in the exchange rate is called an appreciation of the dollar, and a fall in the exchange rate is called a depreciation of the dollar. † (Parkin, 2010). 2. 2. Statement/ Problem to investigate There are many types of investment, one of it, is Foreign Exchange (Forex). This Foreign Exchange investment is done by exchanging one currency to other currency and sells it back, this investment is categorized as profitable investments, which means you can gain profit from it, but in reality it turns out the other way, many investors are making huge losses. Most of the investors only look at the trend from a graph then they will do the investment, this is why many investors making huge losses, they should not only look at the trend from a graph, but they must aware that there are other factors that is affecting the exchange rate such as the interest rate, inflation, GDP, monetary and fiscal policy, etc. and the exchange rates of a country will change because of these several factors. In this report the several factors will be discuss using the Australia and USA contexts. 2. 3. Objective By knowing the problem that investors are not aware about the factors, therefore the objective of this report is to analyze the factors that are affecting the Australia Dollar US Dollar exchange rate and from reading this report, it hopes that it can create and awareness for those investors who are going to invest (buy, sell) in Australia Dollar and US Dollar in Foreign Exchange. II. Theory of Foreign Exchange 3. 4. Hard Currency and Soft Currency In investing in Foreign Exchange Rate/ Currency, the terms for â€Å"buy† and â€Å"sell† is well known. The investors will put their position into a â€Å"buy† position if the investors expect that the price of that currency will increase (going up) and they will put their position as â€Å"sell† position if they expect that the price will decrease (going down). In buy and sell the currency, the investors will buy and sell the currency that they want to invest their money in. The currency in the world is divided into two types, first one is called â€Å"Hard Currency† and the second one is called â€Å"Soft Currency†. Hard Currency is a currency that is often use as the media of payment in international transaction, because this currency is quite stable. This Hard Currency usually come from developed country such as USA – US Dollar (USD), Japan – Yen (JPY), UK – Poundsterling (GBP), etc. â€Å"Hard Currency is Stable, convertible currency (such as the Euro, US dollar, or Yen) or that enjoys the confidence of investors and traders alike. Hard currencies serve as means of payment settlements because they do not suffer from sharp exchange rate fluctuations. (Business Dictionary, 2010). Soft Currency is a currency that is â€Å"weak† and not stable therefore this currency is rarely use as the media as payment in the international transaction. This currency usually comes from developing country such as Indonesia – Rupiah (IDR), etc. â€Å"Soft Currency is a Currency belonging to a small, weak, or wildly fluctuating economy and which, therefore, is not in favor with foreign exchange dealers. † (BusinessDictionary, 2010). 3. 5. Types of Exchange Rate Systems in the world There are 3 types of exchanging rate systems that is used in different part of the world which is Fixed Exchange Rate System, Floating Exchange Rate system which is including Freely Floating and Manage Float and Pegged Exchange Rate System. 1. Fixed Exchange Rate System. This exchange rate system was used in the Bretton Woods era, which is an article of agreement that was signed by 29 countries and inside the agreement there is a statement that said foreign exchange rate between countries in the IMF must be fixed. In this type of exchange rate, they will have fixed exchange rate, so they will not bother about the market equilibrium. The demand and supply are important because it will decide the equilibrium, but in this type of exchange rate system, the changes in the demand and supply will no longer affect the exchange rate. The reason for having fixed exchange rate is to create a stable exchange rate that will help to facilitate trade and investment flows between countries. This exchange rate system is not used by any country in the world. . In the Floating Exchange Rate systems, there are 2 types which is Freely Floating Exchange Rate System and Managed/ Controlled Exchange Rate System. Freely Flexible (Freely Floating) Exchange Rate System. In this exchange rate system, the currency is left freely floating and the rate is determined by the demand and supply in the market. â€Å"Value is determined by the supply and demand of the currency and there are no set standards regarding interventio n that need to be observed† (ForexRealm, 2010). In a simple word, if there is higher demand for a currency, it can make the currency to appreciate, lower demand for a currency, it can make the currency to depreciate. On the other hand, the increase in supply of a currency can make the currency to depreciate, and decrease in the supply of a currency can make the currency to appreciate. â€Å"Since 1971, economies have been moving towards flexible exchange rate systems although only relatively few currencies are classifiable as truly floating exchange rates. † (Weerapana, 2003- 2004). The example of country that is using freely flexible exchange rate system is USA, Canada, Australia, Britain, and the European Monetary Union. Managed/ Controlled Exchange Rate System. A managed exchange rate system is a mixture between fixed exchange rate system and freely flexible exchange rate system. This system is unlike the fixed exchange rate system where it doesn’t allow the market to freely determine the value of the currency based on the demand and supply of the market, and this system is unlike the freely flexible exchange rate where the central bank does not have full authority to control the exchange rate. In this system the central bank becomes a key participant in the foreign exchange market. In this system the fluctuation of the exchange rate is left freely floating but in the range that is desired by the Central Bank. In this system, the Central Bank will interfere if the exchange rate is above or below the desired exchange rate range by buying and selling domestic (the country’s own currency) and foreign currency (other countries’ currency) in order to keep the exchange rate close or in the range of the desired range values. There are many countries are using this system, one of it is Singapore, this country use this system so that the government can control the exchange rate because Singapore is a country that is based on their import, so they need to maintain their currency so that those countries that is exporting to Singapore do not find the Singapore currency (SGD) too expensive. 3. Pegged Exchange Rate System. Based on the name of the exchange rate system, this exchange rate system is determined by pegging the currency of one country to another country’s currency. This system is applied by some countries in Africa who peg their currency to France Currency (FRF) and other countries that peg their currencies to GBP USD and SDR. † (Hamdy, 2007). â€Å"Many smaller economies have pegged their currency with that of countries with larger economies that they consider to be economic liaisons. Many of the Caribbean nations, like Jamaica, have chosen to peg their currencies to the U. S. dollar. † (ForexRealm, 2010). III. Factors Analysis The factors of fluctuating exchange rate is because of the macro economy in the country and each country will have different macro economy in terms of the number of the factors, e. . the difference in the inflation rate, interest rate, etc. , therefore for the purpose of this report, all of the data and analysis will be using Australia and US since both of the country are using freely flexible (freely floating) exchange rate systems. As what has been mention above, Australia and USA are using freely floating system on their exchange rate, which means that the fluctuation is based on the demand and supply in the market. The cause of the fluctuation is not only based on the market’s demand and supply, but it can come from the country itself. The factors that come from the country itself that can create the exchange rate to fluctuate as well are inflation, interest rate, and GDP of the countries. Not only that, but the respond of each government in each country on the time before and after crisis time will be different as well, because it depends on the effect of the crisis to the country whether the country is badly affected or just slightly affected. 4. 6. Inflation and Interest Rate 4. 7. 1. Inflation Rate One of the internal factors that can cause the exchange rate to fluctuate is inflation rate. Inflation can be considered as the most important economic factors in the world, especially for those countries that is export oriented. Simple definition for inflation is the price of goods increase. â€Å"Inflation refers to a general rise in the level of prices throughout the economy. † (Sloman, 2007). Although inflation is the general rise in the prices level throughout the economy, but with inflation it means that the economy of a country is growing. † In the long run, the rate of inflation will be determined by two factors: the rate of money growth and the rate of economic growth. (Grauwe and Poland, 2005). There are 2 figures in the appendices list that shows the graph of inflation rate which is Figure 1: inflation rate in Australia and Figure 2: inflation rate in USA. In figure 3 in the appendices list, which is the combination of Figure 1 and Figure 2, we can see that on the inflation rate graph from September 2008 to December 2008, it was a very steep decrease for both Australia and USA, especially USA, this happened because in the middle of September 2008, to be exact is September 15th, 2008, Lehman Brothers Holdings Inc. eclare bankruptcy, the filed for Chapter 11 bankruptcy protection. â€Å"The largest bankruptcy in history was of the US investment bank Lehman Brothers Holdings Inc. , which listed $639 billion in assets as of its Chapter 11 filing in 2008. † (Wikipedia, July 22nd, 2010). US’s inflation rate is badly affected by the bankruptcy of Lehman Brothers because the bankruptcy cause the financial crisis, recession, therefore there was deflation instead of inflation. It goes the same thing for Australia, their inflation rate also decrease, because they also faced crisis, but since Lehman Brothers was in USA, not in Australia, therefore Australia is not badly affected, but since USA is the most largest economy in the world therefore if USA is facing problem, most of the countries in the world will be affected as well. From September 2009 to December 2009, the inflation rate was having very steep increasing, because of the Emergency Economic Stabilization. The Emergency Economic Stabilization Act of 2008 (Division A of Pub. L. 110-343, enacted October 3, 2008), commonly referred to as a bailout of the U. S. financial system, is a law enacted in response to the subprime mortgage crisis authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks. † (Wikipedia, August 21st, 2010). As what have been mentioned above, inflation can affect the exchange rate in Australia and USA and every country in the world, because inflation is the increase in the price of goods, it means it will affect the import and export of a country, where the import and export of a country need domestic currency and foreign currency in order to pay and receive for the goods to and from other countries. The effect of inflation rate on the fluctuation of the exchange rate of AUD and USA can be explained using the theory of Purchasing Power Parity. Purchasing power parity is  the situation where the exchange rate between two currencies represents the difference between the price levels in the two countries. † (Pearson Education, 2005). The explanation for this theory is based on the law of one price, where it states that price of a same product in two different countries will have the same value if the currency is converted into the same currency. â€Å"The Law of One Price says that identical goods should sell for the same price in two separate markets. This assumes no transportation costs and no differential taxes applied in the two markets. † (Maxi-Pedia, 2010). The theory of PPP is not realistic, because it does not take other factors such as inflation into consideration. Therefore there is PPP relative, which consider inflation as well. ef = | 1 + Ih| -1| | 1 + If| | (Hamdy, 2007). The formula above is the formula for Purchasing Power Parity relative, where the ef = Percentage change of foreign and home currency exchange Ih = Inflation Rate Home Country If = Inflation Rate Foreign Country Dusd| Ih If | | Saud| | | | | Daud | Ih If | | | | Susd | If the Inflation Rate Home Country is higher than the Inflation Rate Foreign Country, the demand for the foreign country, in this case, US will be the foreign country and Australia will be the home country, will increase and the supply of the home country will increase which will create the AUD depreciate against the USD. This happen because when the demand for USD increase, Au stralian will buy USD using AUD, therefore the supply of AUD will increase and AUD will depreciate. On the other hand, if the Inflation Rate Home Country is lower than the Inflation Rate Foreign Country, the demand for AUD, as the home country, will increase and the supply of the USD, as the foreign country, will increase. This can happen because, when the inflation increase, people will tend to sell the currency, in this case, Australian will sell the USD that they have since the inflation in USA is higher than the inflation in Australia. Therefore they will sell USD and buy back AUD, which will cause the AUD appreciate against the USD. After using data from 17 periods, and using Microsoft excel to calculate the correlation, the correlation between inflation rate and exchange rate is negative, which means that they have negative relationship, so when the inflation increase, the exchange rate will decrease, vice versa, when the inflation decrease, the exchange rate will increase. | 4. 7. 2. Interest Rate Why information about the interest rate in a country is an important factor for the foreign exchange traders? One of the main reasons is the fluctuation of the interest rate, both increase or decrease, of the two countries can affect both of the countries’ currency. First of all, what is interest rate? â€Å"An Interest Rate is very well described as the price a borrower pays for the use of money he does not own, and has to return to the lender who receives for deferring his consumption, by lending to the borrower. † (articlesbase, 2010). Which means that interest rate is the price that you, as the borrower, need to pay to the lender which is the principal amount plus the interest. There are 2 figures in the appendices list that shows the graph of interest rate which is Figure 4: interest rate in Australia and Figure 5: interest rate in USA. In figure 6 in the appendices list, which is the combination of Figure 4 and Figure 5, we can see that starting from September 2008 until now, the interest rate for both Australia and USA are decreasing except for Australia, which start to increase again on September 2009 until now and this was because of the bankruptcy case of Lehman Brothers Holding Inc. The interest rate in Australia and USA was decreased in order to boost their economy so that they can come out from the financial recession. In the recession, companies become unproductive and businesses are not growing which can affect the economic growth of a country. Not only that, even the bank also might face liquidity problem, liquidity problem can happen because in recession time, the depositors, which is the lender, will withdraw their money from bank, one of the reason is they afraid that the bank where they put their money in will go bankrupt because of the recession. It these thing happen, logically the bank will increase the interest rate so whoever wants to take loan need to pay higher interest. But if the government or the central bank let the bank to increase the interest rate, the country will collapse (bankrupt), because no growth at all. Therefore it will be better for the government to push the interest rate lower the before the recession, this is done in order to make the companies to borrow money from the banks so that they can be more productive and at the end the economy of that country can grow as well. Then after the economy of a country is getting better then the interest rate can be bring up again. After using data from 17 periods, and using Microsoft excel to calculate the correlation, the correlation between interest rate and exchange rate is ositive, which means that they have positive relationship, so when the interest rate increase, the spot exchange rate will increase. Vice Versa, when the interest rate decreases, the spot exchange rate will decrease. This thing can happen because when the interest rate is increase, the traders that hold US dollars will starts to sell their US Dollar and start to buy Australian Dollar, supply for USD increase and demand for AUD increase, therefore the AUD will apprecia te against the USD. 4. 7. Monetary and Fiscal Policy Every government in the world is using monetary policy in order to control the economy in their own country. Monetary policy is the process of managing a nations money supply to achieve specific goals—such as constraining inflation, achieving full employment or more well-being. † (WordIQ, 2010). There are three tools in monetary policy that is been used by the government in the world in order to control the economy in the nation, which are Open Market Operations, Discount Rate, and Reserve Requirements. Open Market Operations is the tool that is use most often. This can be done by the central bank in each of the country, in Australia will be Reserve Bank of Australia, and in USA will be Federal Bank of America. The RBA will always buys and sells the Australian government securities in the financial markets which in results can have influence to the economy. When the RBA sell government’s securities, public and banks will start to buy it which will cause the supply of money in the market decrease, they will buy it because government’ securities can be considered as low risk investment sometimes can be considered as zero risk, because the government will be able to pay back, unless the whole country will go bankrupt. On the other hand, when RBA starts to buy back the government’s securities, RBA is providing more supply of money into the market, by buy back the government’s securities and pay money. By using this tools, if the RBA buy back the government’s securities, the supply of money in market will decrease, which will cause the Discount Rate is the special lending rate that the central bank gives to the banks when the banks want to borrow from them. If the rate is higher, it will make borrowing become less attractive to banks, and if the rate is lower, bank will be attracted to borrow which will increase their reserves Reserve Requirements Pengaruh monetary policy terhadap xchange rate itu apa Fiscal Policy Tax – tax income naek, income turun, purchasing power turun, demand terhadap goods n services turun, deflation happens, therefore exchange rate appreciate Pengaruh pajak ke exchange rate itu apa 4. 8. GDP Gross Domestic Product is the total market values of goods and services produced by workers and capital within a nations borders during a given period (usually 1 year). † ( Wordnetweb, 2010). In other word, GDP is the total values of good and services that are produced in a country during a given period. This is the reason why the total GDP for USA is much higher than the total GDP for Australia. â€Å"The  gross domestic product (GDP) is one  the primary  indicators used to gauge the health of a countrys economy. It represents  the total dollar value of all goods and services produced over a specific time period you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP  is up 3%, this is thought to mean that the economy has grown by 3% over the last year. † (Investopedia a Forbes Digital Company). Since the gap of total GDP between Australian and USA is too wide (One is in billion units (USA) and the other one is in million units (Australia)), therefore we are going to discuss the total GDP in Australia. From the Figure 8 in the appendices we can see that on December 2008, the total GDP in Australia was not growing, it even face degrowth, this can happen because of the financial crisis, the bankruptcy files of Lehmann Brothers. Since degrowth is not good, therefore the Australian government take initiative to decrease the interest rate for loans, therefore every firms are more willing to take a loan in order to finance their daily productivity. And we can see the results of lowering the interest rates in Figure 8 in the appendices list as well, where the total GDP in Australia from March 2009 onwards starts to grow again until today. * The effect of GDP on Australia’s exchange rate IV. The Expected Results and Conclusion The expected results by doing this report is to create awareness for the investors so that they will look at the economy in the country that they want to do Foreign Exchange (trading currency). In this part, I will do future projection based on the report analysis whether the Australia Dollar will be stronger or weakened against US Dollar.