(For Business Admin and Management
Project. You can as well change the case study to your locale)
ABSTRACT
The aim is to find out the important of exchange rate variation on small
scale industries in Nigeria especial under the tree floating exchange rate
system which Nigeria opted for since the last quarter of 1986. A compendium of
the research work is t hat exchange rate variation do have grate impact on
manufacturing industries. It raises prices of materials inputs, reduces output
of manufactures, and reduces demand and capacity utilization of firms
especially where the movement (variation) of the exchange rate is against the
manufactures country by being demand.
TABLE CONTENTS
CHAPTER ONE
1.0
Introduction
1.1
General background to the subject matter
1.2
Problems associated with the subject matter
1.3
Problems that the study will be concerned with
1.4
The importance of studying the area.
1.5
Definition of important terms
1.6
(Chapter ) Reference
CHAPTER T WO
2.0 Literature
review
2.1
The origin of the subject area
2.2
School of though within the subject area.
2.3
The schools of though relevant to the problem of study.
2.4
Different methods of studying to problem.
2.5
Reference
CHAPTER THREE
3.0 Conclusion
3.1
Data presentation
3.2
Analysis of the Data
3.3
Recommendation
3.4
Conclusions
3.5
References
CHAPTER ONE
1.0
INTRODUCTION
A critical look at the work or purchasing power of
the naira today and what it had been in the 705 and early 80s when Oil
(Petroleum) was booming would reveal the fact t hat the value of naira in
relation to other currencies is devalued. Variation in exchange rate is not
peculiar to Nigeria alone but3 is a fact of life prevalent in virtually all
countries of the world. From the suspension of U.S dollars convertibility into
gold in August 1971 made possible by President Nixon (1971) and consequent
floatation of the dollar, business firms with overseas interest or rather
manufactures which import or expert have been faced with uncertainties as to
the investment of their base currency.
In this resolution by the 43 member countries in the Breton woods conference of
1944 which culminated to the setting up of the international monetary fund
(I.M.T), each subscriber to the fund agreed to maintain the external value of
its currency with 1 percent of its par value with the U.S Dollar. This, member
countries were granted the right to revalue or devalue its chancy on the
consent of other subscribers to the fund provided such revaluation or
devaluation is not greater than one percent and that the is not grater than one
percent and t hat the (1944) described as fundamental disequilibrium in its
balance of payments’ as this agreement ensures a kind of stability (fixed
Exchange Rate) of exchange rate of currencies currency movement were not key
risk area faced by the
Manufacture s that trades internationally.
Manufacturing firms rather give though to other problems facing them such as
social responsibilities and labour relatives while discharging or giving lesser
thought to exchange rate variations.
As identified by Richard Lassen (1982) the period of stability enjoyed by the
manufacturing fir ms since the Briton woods conference was change with the
events of 1971. The Dutch qguldern floated in may 1971 flowed by the floating
of the U.S dollar and the consequent deionization of gold in August 1971. By
the end of 1971 (December 1971) the smithariah Agreement made an attempt to re
–established fixed parties just as it was during the Bretton wood Agreement
except3 t hat wider margins round the morale peg of t he international
momentary fund t he (I.M.T) were allowed 2.25 percent fluctuation in its
exchanges rate on either side of t he parity. The defiling of the U .S. dollar
from gold which rendered the dollar in invertible ushered in a period of
psoriatic floating of currencies and hence a look to exchange rate variations
was opened. In Nigeria, fluctuating exchange rate had its inception with the
introduction of the second – Tier foreign Exchange market on
September 29, 1986. The relaxation of the fixed exchange rate
existed in Nigeria until 1986 and the introduction of the foreign Exchange
market (F.EM) led to a sharp decline of the value of naira. The value of naira
according to Chizen Benefice (1988) witnessed a
steep depreciation of about 66 percent pre – FIEM and from their the rate
has not been stabilizer but continued to move up and down and in most
cases the movement was against the naira.
The continuous movement in exchange rate does exert a great influenced on
different funct3ional part of manufacturing firm examples and as follows:
A. THE PURCHASING FUNCTION:
In a manufacturing firm that imports parts or all of its materials inputs any
slight change in the exchange rate will have a significant change on the firms
production cost.
B. THE PRODUCTION FUNCTION
The production
function (Capacity utilization) of industries are affected in the same
direction as t he purchasing function is affected by changing in the exchange
rate. :
C.
THE SELLING FUNCTION
Disposing of firm finished goods is influence by
variations exchange rate where the products are made of imported materials. If
the exchange rate variation is favourable to t he manufacture, demand far his
product increases and hence sales boom. Conversely, adverse movement in
exchange rate divides the sales of the manufacture.
D.
THE ACCOUNTING FUNCTION
Reflection must be made of the effect of exchange
rate on the account of the firm. With floating exchange rates this becomes more
difficult.
By affecting the above organizational functions exchange rate variations affect
the profitably of small scale firms that engage in manufacturing with imported
materials. Variation constitute a risk and is an addition risk to other risks
and problems which the manufacture faces such as piling up of stock, liquidity
problem, profit margin, etc.
Inadequate control of t he currency movement
affects adversely t he firms profit3 ability just as inadequate control of
stock levels as well as poor credit control. Thus, a firm t hat has experienced
a boom in its sales and hence its profitability max be downed if does not
exercised adequate care as adverse variation in the exchange rates have gone up
and down like a go – go and over short periods of time “and “this has put
consider able streams on the international business community,” identified
Willingham Deerik ( 1982)
1.2
PROBLEMS ASSOCIATED WITH THE SUBJECT MATTER
The continuous gyration in the exchange rate of the currency of different
countries as claudicated above is not freedom, any effect on the small scale
industry. In fact, a wealth of literaur4e have been written on the implications
of a continuous flotation to small scale manufacturing establishments who
inputs are partly or wholly depended on imported materials.
Some of the problems and arguments of people with regards by Derrik Willinham
(1982) and others are people follows: -
(a) While some people argue that the onrush
of t he world recession cannot be attributed in any way to fluctuation in
exchange rates and t hat such movements and differences in rates off inflation
and rates of interest between countries in order to ensure economic
stability; other above this argument and control that the only problem is t hat
it does not work like t hat. The old truism that a country with high
inflation be brought into balance with a country with low inflation by a
weakening in its exchange does rate in relation to the other, just does not
seven to work anymore and this is because so many other factor often work
political or emotional than economic come into the
equation.”
(b) While some purport the view t hat exchange r
ate goes to custodian investment as risk associated to many be get ride of by
stated by other people t hat “t he manner in which people have reached to the
uncertainty of widely fluctuating exchange rates has been to play safe. The
only thing with today’s fluctuating exchange rates is that whatever forward
view he takes, he will be wrong and t hat it is the degree to which he is
wrong that can be absolutely critical to the future of his business”.
© Una O. Eleazu (1988), consented that
despite the argument that “ a high proportion of world trade is carried
out by medium small companies and they are less able to copse with
the risks and uncertainties involved and their growth rates are infibulated, some
still advocate fluctuating exchange rate angle rate givers access t4oo
manufacturers in general and hence improving their permanence as they can
acquire materials they need for production.
(d)
The echo of the Nigeria government in introducing a market determined exchange
rate system was to achieve stability in the economy by devaluing the naira,
however the would Bank (1983) recognizing the implications of depreciating a
currency value stated that “that are a number of possible advisers consequences
of currency devaluation may weaken a country’s own domestic stability by adding
to inflation any pressures”.
In short, a whole gallery of literatures and
debates of different people describe exchange rate variations as having s very
grate impact on manufacturing firms. The problem is t
hat which of the opposing schools of though can be s
aid to be right in their description of the impact of variations on
manufacturing industries. In other worlds, what does empirical evidence suggest
is the impact of variations in exchange rate on manufacturing
industries. In other words what does empirical evidence suggests is t he impact
of variations in exchange rate manufacturing industries.
1.3
PROBLEMS T HAT THE STUDY WILL BE CONCERNED WITH
Having observed from the believes t he opposing
schools of thought that both improved aggressions in exchange rates to have a
great impact on manufacturing industries, my intention and purpose of this
study are as follows:
(a) There is a great need for a study on this
subject as freely fluctuating exchange rates have come to stay in this country
since September 1986 and thus exchange rate
variations have become one of the most
important phenomena facing this country to day;
(b)
As this country is trying ever possible best to see to expansion of industries
and hence stimulating its export, it is pertinent to examine the impact
variations in exchange rate have had on the small scale manufacturing
industries though freedom is sough as the small manufacturing industries though
whom redemption is sought as to increasing our export base and foreign exchange
earnings;
(c)
As most of the manufacturing industries in Niger ia are purely small – scale
acting as what Dr. C. A Horne (1982) of Oxford polytechnic refereed to as “Jack
t he giant kiiler” successfully meeting the customers need to which the large
corporate are insensitive” and greater percentage of the these
firms utilize important material imputes, it is very important to study the
impact exchange rate variation have had on the demand for their products t he
prices of their impact and their profit level; as well.
1.4
THE IMPORTANCE OF STUDYING THE AREA
To accomplish this study, t he following research are very important:-
(A)
Exchange rate variations does not lead to reduction in the quantity of material
imputes of small scale industries;
(B)
Exchange rate a variation does not lead to increase in cost of imputes of
small scale industries.
(C)
Exchange rate variation does not lead to reduction in output of small scale
industries.
1.5
DEFINITION OF IMPORTANT TERMS
The definition
of terms used in this study is as follows:-
i.
A critical appraise: - This is to estimate the value or quality of foreign
exchange variation and to pass the judgments of the variation of the exchange
rate on small scale industry.
ii.
The impact of foreign exchange rate variation: - This is to able a critical
look at the affect of the foreign exchange rte variation or t he changes on the
small scale industries.
iii.
Small scale industries: - These are the industries which the capital of
operation is very small.
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