Foreign exchange: rate risk not key investment criteria.

Foreign exchange (FX) rate issues have become more important in recent years, especially in emerging markets, but businesses appear to look through exchange rate volatility to focus on key market opportunities. So finds a new, far-ranging study released by The Conference Board in conjunction with The Group of Thirty, a private nonprofit, international group dedicated to increasing understanding of critical global economic and financial issues.

Global businesses take exchange rates into consideration in making investment decisions, but market opportunity, political risk and the legal environment are all more important for foreign investment decisions than exchange rate risks, the study found.

Global markets are important to growth, and few firms in any geography, including emerging markets, forgo foreign investment because of exchange rate volatility. Exchange rate risk may come into play when assessing market opportunity; but it does not appear to be, in and of itself, a deterrent to investment, except in the case of outright currency crises.

This study, based on a survey of nearly 400 CEOs and CFOs in 38 countries in every major region of the world, examined an array of business investment drivers to identify the relative role of exchange rates. Over 80 percent of the responding companies indicated that market opportunity was "very important," over 60 percent cited political risk and 50 percent cited the legal environment, whereas only 20 percent said that exchange rate risk/volatility was "very important" to foreign investment decisions.

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"Many of the traditional methods of coping, like financial hedging and/or adjusting prices for exchange rate changes, have significant costs and are undoubtedly a management headache but do not seem to shape the global presence, even of emerging market companies, in a major way," said Maria von N. Whitman of the University of Michigan, who chaired the academic panel that advised The Conference Board on the survey.

Sixty-two companies indicated that they use exchange rate management as a strategic competitive advantage--and about 40 percent of these are in emerging markets (compared to 25 percent of the responses in the overall survey). These firms are twice as likely to use financial hedges as other firms and appear somewhat more aggressive in managing their balance sheets, but there are relatively few differences with respect to other possible strategies--especially using operational decisions like pricing and production to address FX issues.