Cyclopedia Of Economics 3rd edition

The exporting country has:

1. 
   An overvalued currency;
   
2. 
   Low inflation or deflation as prices and wages decrease to restore competitiveness.
   

The importing country's inflation rate is affected by the deflation embedded in imported goods and services. Cheap imports thus exert downward pressure on prices and wages in the importing country.

This, in turn, tends to increase the purchasing power of the local currency and to cause its appreciation.

In other words:

The macro-economic parameters of the importing country tend to REFLECT the macro-economic parameters of the exporting country.

If the exporting country's currency is overvalued - the importing country's currency will tend to appreciate as a result of the export/import transaction.

If the exporting country's inflation is low - it will exert a downward pressure on wages and prices (on inflation) in the importing country.

Unemployment will tend to decrease in the exporting country and increase in the importing country.

Following the export transaction, the importing country will have:

1. 
   An appreciating currency;
   
2. 
   Deflation or low inflation;
   
3. 
   Higher unemployment.
   

Because it has a monopoly or a duopoly on knowledge, intellectual property, technology, or other endowments.

The exporting country has:

1. 
   An undervalued currency;
   
2. 
   High inflation as prices and wages increase (to restore equitable distribution of income).
   

The importing country's inflation rate is affected by the inflation embedded in imported goods and services. Expensive imports thus exert upward pressure on prices and wages in the importing country.

This, in turn, tends to decrease the purchasing power of the local currency and to cause its devaluation.

In other words:

The macro-economic parameters of the importing country tend to REFLECT the macro-economic parameters of the exporting country.

If the exporting country's currency is undervalued - the importing country's currency will tend to depreciate as a result of the export/import transaction.

If the exporting country's inflation is high - it will exert an upward pressure on wages and prices (on inflation) in the importing country.

Unemployment will tend to decrease in the exporting country and increase in the importing country.

Following the export transaction, the importing country will have:

1. 
   A depreciating currency (devaluation);
   
2. 
   Higher inflation;
   
3. 
   Higher unemployment.
   

Spielberg's blockbuster, "Minority Report", is set in the year 2054. The future - at least according to a team of MIT futurologists, hired by the cinematic genius - is the captive of embarrassingly personalized and disturbingly intrusive, mostly outdoor, interactive advertising.

The way Internet advertising has behaved lately, it may well take 50 years to get there.

More than 1 billion people frequent the Internet daily. Americans alone spent $69 billion buying things online in 2004. eMarketer, a market research firm, predicts that e-commerce will climb to $139 billion in 2008. American Internet advertising revenues boomed to $7.3 billion in 2003 and $9.6 billion in 2004. Shares of companies like Yahoo! and Google - sellers of online advertising space and technologies - have skyrocketed.

This is a remarkable reversal from just a few years ago.

All forms of advertising - both online and print - have been in decline in 2000-2. A survey conducted by the New Media Group of PricewaterhouseCoopers (PwC) - the Internet Ad Revenue Report sponsored by the Interactive Advertising Bureau (IAB) - found a 12 percent decline - to $7.2 billion - in Internet advertising in 2001. CMR, The Myers Report, and McCann Erickson have all recorded drops of between 12 and 14 percent in broadcast advertising and of c. 20 percent in radio spots in 2001.

The following year - 2002 - may have been the turning point. A March 2002 Nielsen NetRatings report registered a sharp turnaround in the first quarter of 2002. The number of unique online ads shot up by one third to 70,000. Jupiter Media Matrix predicted a 10 percent increase in online classified ads - to $1.2 billion in 2002. By 2007, it said, online ads will account for 7 percent of total advertising dollars - some $16 billion. Both IDC and INT Media Group spawned similar prognostications for the weaker Asia-Pacific market.

CMR forecast a 5.3 percent growth in online ad revenues in 2002 - compared to an overall average of 2.5 percent. This optimistic projection is based on expected performance in the - hopefully, more buoyant - third and fourth quarters of 2002.

Still, it was clear in early 2002 that ,even if this surge materializes, online advertising would be almost 7 percent below its level only two years before and vertiginously below projections touted by "professionals" as late as January 2001. Internet.com quoted another gloomy prediction, by Goldman Sachs analyst, Anthony Noto: "The likelihood of an online ad rebound remains questionable in the near term." Moreover, growth in advertising in local papers, radio spots, and TV spots was expected to outpace the recovery in online ads.

In hindsight, some advertising categories indeed didn't make it. Cable, syndication, consumer magazines, national newspapers, outdoor, and B2B magazines continued to post sharp decreases.

A sign of the times in 2002 may have been IAB's multi-million dollar advertising campaign. IAB is the online publishing and ad sales industry's largest trade association. In 2002, it tried to pitch the Internet to advertisers in what looked like a desperate effort to increase online ad spending.

Internet.com reviewed the campaign in a June 24, 2002 article:

They quoted IAB President and Chief Executive Greg Stuart as saying:

The collapse in Internet advertising had serious and, in some cases, irreversible implications.

In a report for eBookWeb.org I wrote:

"Most content dot.coms were based on ad-driven revenue models. Online advertising was supposed to amortize start-up and operational costs and lead to profitability even as it subsidized free access to costly content. A similar revenue model has been successfully propping up print periodicals for at least two centuries. But, as opposed to their online counterparts, print products have a few streams of income, not least among them paid subscriptions. Moreover, print media kept their costs down in good times and bad. Dot.coms devoured their investors' money in a self-destructive and avaricious bacchanalia."

Surprisingly, online advertising did not shrivel only or mainly due to its inefficacy - or avant-garde nature. In a survey conducted in early 2002 by Stein Rogan and Insight Express, an overwhelming four fifths of brand marketers and agency executives felt the the Internet is a mainstream medium and an integral part of the conventional marketing mix. Close to 70 percent rated their opinion regarding the effectiveness of online advertising as more positive now than it was 12 months before. A full sixty percent said that their clients are less resistant to interactive marketing than they were.

So, what went wrong?

According to classical thinking, advertising is concerned with both information and motivation. It imparts information to potential consumers, users, suppliers, investors, the community, or other stakeholders. It motivates consumers to consume, investors to invest, voters to vote, and so on.

Yet, modern economic signal theory allocates to advertising an entirely different - though by no means counterintuitive - role.

From the eBookweb.org report:

Online advertising dilutes this crucial signal and drowns it in noise. Advertisers stopped advertising online because the medium's noise to signal ratio rendered their ads ineffective or even repulsive. Internet users - a "captive audience" - not only became inured to the messages - both explicit and implicit - but found the technology irritating.

Many react with hostility to pop-up ads, for instance. They simply tune off or install ad-filtering software. All major Web browsers allow their users to avoid pop-up ads altogether. But banner ads and embedded ads are an integral part of the Web page and cannot be avoided easily.

Thus desensitized, users rebel.

There are two sources of noise in Internet advertising.

Free advertising misses a critical element in the aforementioned signal. Information about the purported financial health and future prospects of advertisers is conveyed only by paid ads. Free adverts tell us nothing about the advertiser. This simple lesson seems to be lost on the Internet which is swamped by free hoardings: free classifieds, free banner ads, free ad exchanges. Worse, it is often difficult to tell a paid ad from a free one.

Then there is the issue of credibility. Dot.coms - the leading online advertisers - are rarely associated with truth in advertising. Internet ads are still afflicted by scams, false promises, faulty products, shoddy or non-existent customer care, broken links, or all of the above. Users distrust Web advertising and ignore it.

The Internet is being appropriated by brick-and-mortar corporations and governments. Global branding will transform online ads into interactive renditions and facsimiles of offline fare. Revenue models are likely to change as well. Subscription fees and "author-pays" will substitute for ad revenues. The days of advertising-sponsored free content are numbered.

Investors, Classification of

In the not so distant past, there was little difference between financial and strategic investors. Investors of all colors sought to safeguard their investment by taking over as many management functions as they could. Additionally, investments were small and shareholders few. A firm resembled a household and the number of people involved – in ownership and in management – was correspondingly limited. People invested in industries they were acquainted with first hand.

As markets grew, the scales of industrial production (and of service provision) expanded. A single investor (or a small group of investors) could no longer accommodate the needs even of a single firm. As knowledge increased and specialization ensued – it was no longer feasible or possible to micro-manage a firm one invested in. Actually, separate businesses of money making and business management emerged. An investor was expected to excel in obtaining high yields on his capital – not in industrial management or in marketing. A manager was expected to manage, not to be capable of personally tackling the various and varying tasks of the business that he managed.

Thus, two classes of investors emerged. One type supplied firms with capital. The other type supplied them with know-how, technology, management skills, marketing techniques, intellectual property, clientele and a vision, a sense of direction.

In many cases, the strategic investor also provided the necessary funding. But, more and more, a separation was maintained. Venture capital and risk capital funds, for instance, are purely financial investors. So are, to a growing extent, investment banks and other financial institutions.

The financial investor represents the past. Its money is the result of past - right and wrong - decisions. Its orientation is short term: an "exit strategy" is sought as soon as feasible. For "exit strategy" read quick profits. The financial investor is always on the lookout, searching for willing buyers for his stake. The stock exchange is a popular exit strategy. The financial investor has little interest in the company's management. Optimally, his money buys for him not only a good product and a good market, but also a good management. But his interpretation of the rolls and functions of "good management" are very different to that offered by the strategic investor. The financial investor is satisfied with a management team which maximizes value. The price of his shares is the most important indication of success. This is "bottom line" short termism which also characterizes operators in the capital markets. Invested in so many ventures and companies, the financial investor has no interest, nor the resources to get seriously involved in any one of them. Micro-management is left to others - but, in many cases, so is macro-management. The financial investor participates in quarterly or annual general shareholders meetings. This is the extent of its involvement.

The strategic investor, on the other hand, represents the real long term accumulator of value. Paradoxically, it is the strategic investor that has the greater influence on the value of the company's shares. The quality of management, the rate of the introduction of new products, the success or failure of marketing strategies, the level of customer satisfaction, the education of the workforce - all depend on the strategic investor. That there is a strong relationship between the quality and decisions of the strategic investor and the share price is small wonder. The strategic investor represents a discounted future in the same manner that shares do. Indeed, gradually, the balance between financial investors and strategic investors is shifting in favour of the latter. People understand that money is abundant and what is in short supply is good management. Given the ability to create a brand, to generate profits, to issue new products and to acquire new clients - money is abundant.

These are the functions normally reserved to financial investors:

The financial investor is expected to take over the financial management of the firm and to directly appoint the senior management and, especially, the management echelons, which directly deal with the finances of the firm.

1. 
   To regulate, supervise and implement a timely, full and accurate set of accounting books of the firm reflecting all its activities in a manner commensurate with the relevant legislation and regulation in the territories of operations of the firm and with internal guidelines set from time to time by the Board of Directors of the firm. This is usually achieved both during a Due Diligence process and later, as financial management is implemented.
   

2. 
   To implement continuous financial audit and control systems to monitor the performance of the firm, its flow of funds, the adherence to the budget, the expenditures, the income, the cost of sales and other budgetary items.
   

3. 
   To timely, regularly and duly prepare and present to the Board of Directors financial statements and reports as required by all pertinent laws and regulations in the territories of the operations of the firm and as deemed necessary and demanded from time to time by the Board of Directors of the Firm.
   

4. 
   To comply with all reporting, accounting and audit requirements imposed by the capital markets or regulatory bodies of capital markets in which the securities of the firm are traded or are about to be traded or otherwise listed.
   

5. 
   To prepare and present for the approval of the Board of Directors an annual budget, other budgets, financial plans, business plans, feasibility studies, investment memoranda and all other financial and business documents as may be required from time to time by the Board of Directors of the Firm.
   

6. 
   To alert the Board of Directors and to warn it regarding any irregularity, lack of compliance, lack of adherence, lacunas and problems whether actual or potential concerning the financial systems, the financial operations, the financing plans, the accounting, the audits, the budgets and any other matter of a financial nature or which could or does have a financial implication.
   

7. 
   To collaborate and coordinate the activities of outside suppliers of financial services hired or contracted by the firm, including accountants, auditors, financial consultants, underwriters and brokers, the banking system and other financial venues.
   

8. 
   To maintain a working relationship and to develop additional relationships with banks, financial institutions and capital markets with the aim of securing the funds necessary for the operations of the firm, the attainment of its development plans and its investments.
   

9. 
   To fully computerize all the above activities in a combined hardware-software and communications system which will integrate into the systems of other members of the group of companies.
   

10. 
    Otherwise, to initiate and engage in all manner of activities, whether financial or of other nature, conducive to the financial health, the growth prospects and the fulfillment of investment plans of the firm to the best of his ability and with the appropriate dedication of the time and efforts required.
    

1. 
   To construct and implement credit risk assessment tools, questionnaires, quantitative methods, data gathering methods and venues in order to properly evaluate and predict the credit risk rating of a client, distributor, or supplier.
   

2. 
   To constantly monitor and analyse the payment morale, regularity, non-payment and non-performance events, etc. – in order to determine the changes in the credit risk rating of said factors.
   

3. 
   To analyse receivables and collectibles on a regular and timely basis.
   

4. 
   To improve the collection methods in order to reduce the amounts of arrears and overdue payments, or the average period of such arrears and overdue payments.
   

5. 
   To collaborate with legal institutions, law enforcement agencies and private collection firms in assuring the timely flow and payment of all due payments, arrears and overdue payments and other collectibles.
   

6. 
   To coordinate an educational campaign to ensure the voluntary collaboration of the clients, distributors and other debtors in the timely and orderly payment of their dues.
   

The strategic investor is uniquely positioned to plan the technical side of the project and to implement it. He is, therefore, put in charge of:

1. 
   The selection of infrastructure, equipment, raw materials, industrial processes, etc.;
   
2. 
   Negotiations and agreements with providers and suppliers;
   
3. 
   Minimizing the costs of infrastructure by deploying proprietary components and planning;
   
4. 
   The provision of corporate guarantees and letters of comfort to suppliers;
   
5. 
   The planning and erecting of the various sites, structures, buildings, premises, factories, etc.;
   
6. 
   The planning and implementation of line connections, computer network connections, protocols, solving issues of compatibility (hardware and software, etc.);
   
7. 
   Project planning, implementation and supervision.
   

1. 
   The presentation to the Board an annual plan of sales and marketing including: market penetration targets, profiles of potential social and economic categories of clients, sales promotion methods, advertising campaigns, image, public relations and other media campaigns. The strategic investor also implements these plans or supervises their implementation.
   

2. 
   The strategic investor is usually possessed of a brandname recognized in many countries. It is the market leaders in certain territories. It has been providing goods and services to users for a long period of time, reliably. This is an important asset, which, if properly used, can attract users. The enhancement of the brandname, its recognition and market awareness, market penetration, co-branding, collaboration with other suppliers – are all the responsibilities of the strategic investor.
   

3. 
   The dissemination of the product as a preferred choice among vendors, distributors, individual users and businesses in the territory.
   

4. 
   Special events, sponsorships, collaboration with businesses.
   

5. 
   The planning and implementation of incentive systems (e.g., points, vouchers).
   

6. 
   The strategic investor usually organizes a distribution and dealership network, a franchising network, or a sales network (retail chains) including: training, pricing, pecuniary and quality supervision, network control, inventory and accounting controls, advertising, local marketing and sales promotion and other network management functions.
   

7. 
   The strategic investor is also in charge of "vision thinking": new methods of operation, new marketing ploys, new market niches, predicting the future trends and market needs, market analyses and research, etc.