As a finance officer at your company, you have been asked to conduct an analysis

Question

As a finance officer at your company, you have been asked to conduct an analysis of the possible impact on your corporation of the new currency, the euro, which started circulating on January 1, 2002, in 12 of the 15 European Union member countries. International sales are important to the company and are expected to increase continuously in the future. The prospects for substantial growth from international sales will depend on the correct management of European markets and finances. (Although the euro started circulating on January 1, 2002, it was launched on January 1, 1999 and so euro-denominated bonds and equity already existed on January 1, 2002 and are increasing.)

Explanation / Answer

Foreign sales are defined as all sales in geographic segments other than the domestic market. Euro area sales are defined as all sales in geographic segments of the countries participating in the Euro (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain). Europe sales are defined as all sales in the Euro area plus geographic segments of Denmark, Norway, Poland, Sweden, Switzerland, Turkey, UK and all geographic segments indicating Europe in general or any combination of European countries. If a geographic segment indicates sales in European and nonEuropean countries, the sales of this segment are included only in the total foreign sales variable.

Percentages of foreign sales are calculated by dividing the foreign sales in a geographic area by the corresponding value of total sales for the firm and year. We average these percentages across all years for which we have available data for each firm. If the sum of all reported geographic segment sales exceeds the reported value of total sales, percentages of foreign sales are calculated by dividing the foreign sales in the area by the sum of all geographic segment data for each firm and year. Percentages that – as a result of data errors, sales discounts, or other data problems – exceed 100% or are negative are excluded. Subsequently, averages of these values are calculated for each firm based on all data available. If only data on domestic sales is available, percentages of foreign sales are calculated as the difference between total sales and domestic sales. For the percentage of total foreign sales (but not for foreign Euro area sales and foreign sales in Europe), firms without geographic segment data are assumed to be operating in the domestic market only, as they are typically required to report any segments that are material.

The average firm in most European countries has high foreign sales in the Euro area, but there are also notable differences across European countries. Firms in Austria (38.5%), for example, have a high percentage of foreign Euro area sales, while these percentages are low in Finland (18.1%), Portugal (15.1%) and Spain (7.2%). There are also firms in Non-Euro Europe with a high fraction of foreign Euro area sales, such as in Switzerland (39.5%). Data on geographic segment sales in all of Europe are available for a larger number of companies – 2,495 companies versus only 607 companies with Euro-area sales data. Foreign sales in Europe are relatively low for firms in Japan (12.5%) and the United States (20.8%). At the same time, the differences across European countries in their foreign Europe sales are less dispersed with means in the range of 30% to 55%. Important exceptions include the UK (21.8%) and Luxembourg (60.9%).

The average Japanese and U.S. firm has low foreign sales (2.3% and 5.6%, respectively). Within Europe, firms in Switzerland (61.1%), Ireland (58.9%) and Luxembourg (54.2%) have a high level of foreign business, while Turkey (2.7%), Greece (4.5%) and Poland (10.6%) have lower average percentages of foreign sales. Because total foreign sales has the greatest coverage, another interesting feature of the data emerges; namely, the skewed distribution of firms with foreign sales. For example, in the U.S. the mean total foreign sales percentage of 5.6% is attributed to the highest quartile of firms, as the first three quartiles of the 5,150 firms have no foreign sales. The skewed distribution of total foreign sales across firms is similar among the 3,162 Japanese firms.

Finally, firm size is measured by the log of market capitalization in Euro as of January 1, 1999, which is obtained from Datastream. The statistics show that the size of firms differs substantially across countries, even though the sample has a wide coverage of firms. The average firm in the sample is large (on average, around €2 billion or $2.3 billion) in Spain, Switzerland, the Netherlands and the United States, while small (on average, less than €250 million or $325 million) in Turkey, Norway, Poland and Austria.

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