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Falling sterling: Advantages and disadvantages

Over the last three years the euro has gone up in value by 30% against sterling, whilst the dollar has risen by 20%. This fall in the value of the pound has been picked up in three articles which I have been reading over the weekend.

 

The first, published in the Telegraph online this morning, supplies some good news. In quoting data supplied by the Royal Bank of Scotland it says that exports rose by £723m between the second and third quarters of last year, and that this was largely due to the weak pound.

 

In fact, the average value of goods exported per company rose by £63,086 and the average value of goods sold per UK exporter was £1.1m. The full article can be accessed here.

 

 

On the other hand, an article published in The Observer yesterday, written by Richard Wachman, suggests that the fall in the pound is going to entice more foreign companies to bid for UK ones. The full article is available here.

 

A third article written by Spencer Drury is called UK for Sale and is about to be published by Anforme Limited as part of our International Trade and Globalisation: The Cutting Edge photocopiable. Watch our home page at www.economics.ac for upcoming details.

 

Drury publishes the following graph from figures published by the ONS to show that 40% of the shareholding of all UK companies is owned by parties overseas.

 

Source: ONS

Source: ONS

 

Why are overseas companies so interested in acquiring British ones? Wachman suggests that the weakness of the pound will cause more companies to follow Kraft’s initiative of bidding for Cadbury.

 

On top of this, the UK has a very liberal attitude to open markets. Virtually anything is “buyable” in the UK, as opposed to some other countries where restrictions are placed on the purchase of crucial firms and industries. Drury cites the example in July 2005 in France when Francois Loos, industry minister, declared yogurt to be a ‘strategic’ business after it appeared that a potential takeover of Danone by the US company Pepsico might be in the offing.

 

 

 

A third current factor, mentioned by Wachman, is that many companies are now experiencing subdued growth after the recession, and one way to achieve a step-change in growth is to buy another business.

Finally, we need to remember that a lot of money is sloshing around in the sovereign funds of various countries such as several in the Middle East and China.

 

Of course, foreign ownership of UK companies need not be a negative event, if it leads to greater economies of scale, including managerial economies. Larger corporations may have greater global reach and may also be able to raise the productivity of UK workers. As Drury points out, look how the UK car industry bounded ahead in productivity terms after Nissan, Honda and Toyota moved into the UK.

 

The current sterling weakness will have a positive impact on export sales but a negative impact on imported costs and inflation. But, we will probably have to wait until all our industries are foreign-owned before we know the complete repercussions.

 

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Posted in Inflation, International Trade, mergers and takeovers, productivity

1 Comment on Falling sterling: Advantages and disadvantages

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