Transcript Globalization and the Multinational Firm

FN 313: International Financial
Management
Semester 1/2008
1-0
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
FN 313
Lecture Time: Saturdays, 13:00 – 16:00
Texts:
Eun, Cheol S. and Bruce G. Resnick (2007), International Financial
Management (Fourth Edition), McGraw-Hill.
Instructor:
Aj. Nasha Ananchotikul
[email protected]
Course website:
http://ajnasha.wordpress.com/
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
FN 313
Grading Policy:
Midterm Examination
Final Examination
Attendance & Participation
Assignments & Quizzes
1-2
30%
50%
10%
10%
(Saturday, October 4)
(Tuesday, December 2)
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Course Outline
Part 1: Introduction to International Finance
 Globalization and the multinational firm
 International monetary system
 Balance of payments
Part 2: Foreign Exchange and Derivatives
 FX market
 FX determination and forecasting
 FX futures and options
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Course Outline
Part 3: Foreign Exchange Exposure and Management
 Transaction exposure
 Economic exposure
 Translation exposure
Part 4: World Financial Markets and Institutions
 Banking and money market
 Bond market
 Equity market
 Interest rate and currency swaps
 International portfolio investment
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Course Outline
Part 5: Multinational Financial Management
 FDI and cross-border acquisition
 International capital structure and the cost of capital
 International capital budgeting
 International trade finance
 International tax environment
 Corporate governance around the world
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
INTERNATIONAL
FINANCIAL
MANAGEMENT
Fourth Edition
EUN / RESNICK
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Globalization & the
Multinational Firm
1
Chapter One
Chapter Objectives:
Understand why it is important to study
international finance.
Distinguish international finance from domestic
finance.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter One Outline
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What’s Special about “International” Finance?
Goals for International Financial Management
Globalization of the World Economy
Multinational Corporations
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
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Foreign Exchange Risk
Political Risk
Market Imperfections
Expanded Opportunity Set
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Foreign Exchange Risk

The risk that foreign currency profits may evaporate in dollar
terms due to unanticipated unfavorable exchange rate movements.
Suppose an American invests in a Thai stock:
Price of the stock
Exchange rate
Buy 1 share
Sell 1 share
in 2007
in 2008
฿ 330
Increased to
฿ 340
฿ 33/$
฿ depreciated to
฿ 35/$
Pay $ 10
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Receive $ 9.7
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Political Risk
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Sovereign governments have the right to regulate the
movement of goods, capital, and people across their
borders. These laws sometimes change in unexpected
ways.
Political uncertainty also affects investor confidence
about the direction of the economic and investment
policy.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Market Imperfections
 Legal restrictions
 Transactions costs
 Shipping costs
 Discriminatory taxes
 Information asymmetry
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Expanded Opportunity Set
 By expanding business internationally, firms
can benefit from greater economies of scale,
lower cost of capital, cheaper labor and raw
materials, lower risks and higher potential
returns from diversification.
 True for corporations as well as individual
investors.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Goals for International Financial
Management

International financial management is designed to
provide financial managers with an understanding
of the fundamental concepts and the tools
necessary to reach the goal of shareholder wealth
maximization, i.e. firm value maximization.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Other Goals
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In other countries shareholders are viewed as merely
one among many “stakeholders” of the firm including:
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Employees
Suppliers
Customers
In Japan, managers have typically sought to maximize
the value of the keiretsu—a family of firms to which the
individual firms belongs.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Other Goals
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As shown by a series of recent corporate scandals at
companies like Enron and WorldCom managers may
pursue their own private interests at the expense of
shareholders when they are not closely monitored.
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These calamities have painfully reinforced the importance
of corporate governance (CG) i.e. the financial and legal
framework for regulating the relationship between a firm’s
management and its shareholders.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Other Goals
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These types of issues can be much more serious in many
other parts of the world, especially emerging and
transitional economies, such as Indonesia, Korea, and
Russia, where legal protection of shareholders is weak or
virtually non-existing.

Shareholders are the owners of the business. It is important
to strengthen CG so that shareholders receive fair returns
on their investments.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Globalization of the World Economy:
Major Trends
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Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
Privatization
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Emergence of Globalized
Financial Markets
Factors contributing to increased financial globalization:
 Deregulation of Financial Markets
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Advances in Technology have greatly reduced
information and transactions costs, which has led to:
Financial Innovations, such as
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Currency futures and options
Multi-currency bonds
Cross-border stock listings
International mutual funds
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Emergence of the Euro as a Global Currency
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A momentous event in the history of world financial
systems.
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Currently more than 320 million Europeans in 15
(Eurozone) + 5 (w/ formal agreement) + 6 (w/o formal
agreement) countries are using the common currency.
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The “transaction domain” of the euro may become larger
than the U.S. dollar’s in the near future.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Euro Area
Countries participating in the euro:
Eurozone
With formal agreements:
 Austria
 Mayotte
 Belgium
 Monaco
 Cyprus
 Saint Pierre and Miquelon
 Finland
 France
 San Marino
 Germany
 Vatican City
 Greece
Without formal agreements:
 Ireland
 Akrotiri and Dhekelia
 Italy
 Luxembourg  Andorra
 Malta
 Kosovo
 Netherlands
 Montenegro
 Portugal
 Saint-Martin
 Slovenia
 Spain
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Value of the Euro in U.S. Dollars
Jan 4, 1999 to Aug 11, 2008
USD/Euro
1.8
max = 1.599
(Jul 15, 2008)
1.6
1.4
1.2
1
0.8
0.6
min = 0.8252
(Oct 26, 2000)
0.4
0.2
0
Jan-99
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Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
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Jan-06
Jan-07
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
The US dollar as the dominant global
currency
Key factors:
- dominant size of the U.S. economy
- mature and open capital markets
- price stability
- political and military power of the U.S.
Advantages to the U.S.:
- can run large trade deficits without having to
hold large reserves
- little exchange rate risk in int’l transactions
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Economic Integration
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The virtue of international trade is based on the theory of
comparative advantage
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Over the past 50 years, international trade increased about
twice as fast as world GDP.
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There has been a sea change in the attitudes of many of
the world’s governments who have abandoned
protectionist views and embraced free trade as the surest
route to prosperity for their country.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Liberalization of
Protectionist Legislation
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The General Agreement on Tariffs and Trade (GATT) a
multilateral agreement among member countries has
reduced many barriers to trade.
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The World Trade Organization (WTO) has the power to
enforce the rules of international trade.
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China and India implemented market-oriented economic
reforms. The huge supplies of labor in these countries–
together with their demands for natural resources, capital
goods, technologies—will profoundly alter the pattern of
international trade and investment.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Privatization
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The selling of state-run enterprises to investors is
also known as “Denationalization”.
Often seen in socialist economies in transition to
market economies.
By most estimates this increases the efficiency of
the enterprise.
Often spurs a tremendous increase in cross-border
investment.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What is a Multinational Corporation?
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A firm that has incorporated on one country and
has production and sales operations in several
other countries.
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There are about 60,000 MNCs in the world.
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FDI by MNCs is also a major force driving
globalization of the world economy.
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Top 10 MNCs by foreign assets (2007)
1
General Electric
US
Electrical & electronic equipment
2
Vodafone Group PLC
UK
Telecommunications
3
General Motors
US
Motor vehicles
4
British Petroleum Co. PLC
UK
Petroleum expl/ref/distr
5
Royal Dutch/Shell Group
UK
Petroleum expl/ref/distr
6
ExxonMobil
US
Petroleum expl/ref/distr
7
Toyota Motor Corporation
8
Ford Motor
9
Total
France
Petroleum expl/ref/distr
10
Electricite de France
France
Electricity, gas and water
Japan
Motor vehicles
US
Motor vehicles
Source: United Nations Conference on Trade and Development (UNCTAD)
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Top 10 MNCs by market cap (June 2008)
1
Exxon Mobil
US
Oil and gas
2
Petrochina
China
Oil and gas
3
Gazprom
Russia
Oil and gas
4
Petrobras
Brazil
Oil and gas
5
China Mobile
China
Telecom
6
General Electric
US
Conglomerate
7
Royal Dutch Shell
Netherlands Oil and gas
8
Microsoft
US
Software industry
9
Industrial and Commercial Bank of China
China
Banking
10
BHP Billiton
Australia
Mining
Source: Financial Times
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Why do firms “go global”?
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To benefit from economies of scale
To broaden their markets
To seek raw materials
To seek new technology
To seek production efficiency
To avoid political and regulatory hurdles
To diversify
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
MNCs vs. Domestic firms
What makes financial management of MNCs more
complicated than that of domestic firms?
Because of the differences in:
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Currency denominations
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Role of governments
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Economic and legal systems
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Political risk
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Language and culture
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Corporate governance
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Who else might need to know international
financial management?
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Exporters/Importers
Individuals or corporations that borrow or lend in
foreign currencies (through banks or bond market)
International portfolio investors
Financial service providers (mainly banks)
Financial regulators
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
End Chapter One
Homework:
- Read Chapter 1
- Write your info on the provided sheet
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.