international finance chapter-1- pp

8/4/2019 International Finance Chapter-1- Pp

1/47

by

Jeff MaduraFlorida Atlantic University

International

Financial Management7th Edition

PowerPointPresentationby

Yee-Tien FuNational Cheng-Chi University

Taipei, Taiwan

South-Western/Thomson Learning 2003


2/47

Multinational Corporation (MNC)

Foreign Exchange Markets

Product Markets Subsidiaries InternationalFinancial

Markets

DividendRemittance& FinancingExporting

& Importing

Investing

& Financing

Part IThe International Financial Environment


3/47

Multinational Financial Management:An Overview

1

Chapter

South-Western/Thomson Learning 2003


4/47

C1 - 4

Chapter Objectives

To identify the main goal of themultinational corporation (MNC) and

conflicts with that goal; To describe the key theories that justify

international business; and

To explain the common methods used toconduct international business.


5/47

C1 - 5

Goal of the MNC

The commonly accepted goal of an MNC isto maximize shareholder wealth.

We will focus on MNCs that are based inthe United States and that wholly own

their foreign subsidiaries.


6/47

C1 - 6

Conflicts Against the MNC Goal

For corporations with shareholders whodiffer from their managers, a conflict of

goals can exist - theagency problem. Agency costs are normally larger for MNCs

than for purely domestic firms.

The sheer size of the MNC. The scattering of distant subsidiaries.

The culture of foreign managers.

Subsidiary value versus overall MNC value.


7/47C1 - 7

Impact of Management Control

The magnitude of agency costs can varywith the management style of the MNC.

A centralizedmanagement style reducesagency costs. However, a decentralized

style gives more control to those

managers who are closer to the

subsidiarys operations and environment.


8/47C1 - 8

Centralized Multinational Financial Managementfor an MNC with two subsidiaries, A and B

FinancialManagersof Parent

Capital Expendituresat A

Inventory andAccounts

ReceivableManagement at A

CashManagement

at A

Financing at A

Capital Expendituresat B


ReceivableManagement at B

CashManagement

at B

Financing at B


9/47C1 - 9

Decentralized Multinational Financial Managementfor an MNC with two subsidiaries, A and B

FinancialManagers

of A

Capital Expendituresat A


ReceivableManagement at A

CashManagement

at A

Financing at A

Capital Expendituresat B


ReceivableManagement at B

CashManagement

at B

Financing at B

FinancialManagers

of B


10/47C1 - 10


Some MNCs attempt to strike a balance -they allow subsidiary managers to make

the key decisions for their respectiveoperations, but the decisions are

monitored by the parents management.


11/47C1 - 11


Electronic networks make it easier for theparent to monitor the actions and

performance of foreign subsidiaries. For example, corporate intranet or internet

email facilitates communication. Financial

reports and other documents can be sent

electronically too.


12/47C1 - 12

Impact of Corporate Control

Various forms of corporate control canreduce agency costs.

Stock compensation for board membersand executives.

The threat of a hostile takeover.

Monitoring and intervention by largeshareholders.


13/47C1 - 13

Constraints

Interfering with the MNCs Goal As MNC managers attempt to maximize

their firms value, they may be confronted

with various constraints. Environmental constraints.

Regulatory constraints.

Ethical constraints.


14/47C1 - 14

Why are firms motivated to expandtheir business internationally?

Theories of International Business

Theory of Comparative Advantage

Specialization by countries can increase

production efficiency.

Imperfect Markets Theory The markets for the various resources

used in production are imperfect.


15/47C1 - 15

Why are firms motivated to expandtheir business internationally?

Theories of International Business

Product Cycle Theory

As a firm matures, it may recognize

additional opportunities outside its home

country.


16/47C1 - 16

Firm exportsproduct toaccommodateforeign demand.

Firm createsproduct toaccommodatelocal demand.

The International Product Life Cycle

Firmestablishesforeignsubsidiary

to establishpresence inforeigncountryand

possibly toreducecosts.

a. Firmdifferentiatesproduct from

competitorsand/or expandsproduct line inforeign country.

b. Firmsforeign

businessdeclines as itscompetitiveadvantages areeliminated.

or


17/47C1 - 17

International

Business Methods

International trade is a relativelyconservative approach involving

exporting and/or importing.

The internet facilitates international tradeby enabling firms to advertise and manage

orders through their websites.

There are several methods by which firmscan conduct international business.


18/47C1 - 18

International

Business Methods Licensing allows a firm to provide its

technology in exchange for fees or some

other benefits. Franchising obligates a firm to provide a

specialized sales or service strategy,

support assistance, and possibly an initial

investment in the franchise in exchange

for periodic fees.


19/47C1 - 19

International

Business Methods Firms may also penetrate foreign markets

by engaging in a joint venture (joint

ownership and operation) with firms thatreside in those markets.

Acquisitions of existing operations inforeign countries allow firms to quickly

gain control over foreign operations as

well as a share of the foreign market.


20/47C1 - 20

International

Business Methods Firms can also penetrate foreign markets

by establishing new foreign subsidiaries.

In general, any method of conductingbusiness that requires a direct investment

in foreign operations is referred to as a

direct foreign investment (DFI).

The optimal international businessmethod may depend on the characteristics

of the MNC.


21/47C1 - 21

Degree of International Business by MNCs

26%

62%58%

33%

47%50%

66%

12%

46% 40%

0%

10%

20%

30%

40%

50%

60%

70%

Campbell's

Soup

Dow

Chemical

IBM Motorola Nike

Foreign Sales as a % of Total SalesForeign Assets as a % of Total Assets


22/47

C1 - 22

Online Application

Check out the following international tradepromotion sites.


23/47

C1 - 23

http://www.tradenet.gov
http://www.tradenet.gov/http://www.tradenet.gov/


24/47

C1 - 24

http://www.business.gov/busadv/index.cfm
http://www.business.gov/busadv/index.cfmhttp://www.business.gov/busadv/index.cfmhttp://www.business.gov/busadv/index.cfmhttp://www.business.gov/busadv/index.cfm


25/47

C1 - 25

http://www.export.gov

http://www.trade.gov
http://www.export.gov/http://www.export.gov/http://www.trade.gov/http://www.trade.gov/http://www.export.gov/http://www.export.gov/


26/47

C1 - 26

International Opportunities

Investment opportunities - The marginalreturn on projects for an MNC is above

that of a purely domestic firm because ofthe expanded opportunity set of possible

projects from which to select.

Financing opportunities - An MNC is alsoable to obtain capital funding at a lower

cost due to its larger opportunity set of

funding sources around the world.


27/47

C1 - 27

Marginal

Return onProjects

PurelyDomesticFirm

MNC

Asset Level

of Firm

InvestmentOpportunities

International OpportunitiesCost-benefit Evaluation for

Purely Domestic Firms versus MNCs

AppropriateSize for PurelyDomestic Firm

AppropriateSize for MNC

X Y

MarginalCost of

Capital

PurelyDomesticFirm MNC

FinancingOpportunities


28/47

C1 - 28


Opportunities in Europe The Single European Act of 1987.

The removal of the Berlin Wall in 1989. The inception of the euro in 1999.

Opportunities in Latin America

The North American Free TradeAgreement (NAFTA) of 1993.

The General Agreement on Tariffs and

Trade (GATT) accord.


29/47

C1 - 29


Opportunities in Asia The reduction of investment restrictions by

many Asian countries during the 1990s. Chinas potential for growth.

The Asian economic crisis in 1997-1998.


30/47

C1 - 30

Online Application

For more information on the Asian crisis,check out the following sites:

http://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.html

http://www.asienhaus.org/navigat/english/a

sienhau.htm
http://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.htmlhttp://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.htmlhttp://www.asienhaus.org/navigat/english/asienhau.htmhttp://www.asienhaus.org/navigat/english/asienhau.htmhttp://www.asienhaus.org/navigat/english/asienhau.htmhttp://www.asienhaus.org/navigat/english/asienhau.htmhttp://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.htmlhttp://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.html


31/47

C1 - 31

Exposure to International Risk

exchange rate movements Exchange rate fluctuations affect cash

flows and foreign demand.

foreign economies

Economic conditions affect demand.

political risk

Political actions affect cash flows.

International business usually increases anMNCs exposure to:


32/47

C1 - 32

Exposure to International Risk

$130,000

$135,000

$140,000

$145,000

$150,000

$155,000

$160,000

$165,000

Jan Mar May Jul Sep Nov Jan Mar May

2000 2001

U.S. Firms Cost of Obtaining 100,000


33/47

C1 - 33

Visit FRED, Fed's economic time-seriesdatabase, at http://www.stls.frb.org/fred for

numerous economic and financial timeseries, e.g., balance of payment statistics,

interest rates, foreign exchange rates.

Visit http://www.ita.doc.gov/td/industry/otea(Office of Trade and Economic Analysis)

for an outlook of international trade

conditions for each of several industries.

Online Application
http://www.stls.frb.org/fredhttp://www.ita.doc.gov/td/industry/oteahttp://www.ita.doc.gov/td/industry/oteahttp://www.stls.frb.org/fred


34/47

C1 - 34

Overview of an MNCs Cash Flows

Profile A: MNCs focused on International Trade

U.S. Businesses

Foreign Importers

U.S. Customers

Foreign Exporters

U.S.-basedMNC

Payments for products

Payments for supplies

Payments for exports

Payments for imports


35/47

C1 - 35


Profile B: MNCs focused on International Trade andInternational Arrangements

U.S. Businesses

Foreign Importers

U.S. Customers

Foreign Exporters

Foreign Firms

U.S.-basedMNC

Fees for services

Costs of services






36/47

C1 - 36


Profile C: MNCs focused on International Trade, InternationalArrangements, and Direct Foreign Investment

U.S. Businesses

Foreign Importers

U.S. Customers

Foreign Exporters

Foreign Firms

Foreign Subsidiaries

U.S.-basedMNC

Funds remitted

Funds invested

Fees for services

Costs of services






37/47

C1 - 37

Managing for Value

Like domestic projects, foreign projectsinvolve an investment decision and a

financing decision. When managers make multinational

finance decisions that maximize the

overall present value of future cash flows,

they maximize the firms value, and hence

shareholder wealth.


38/47

C1 - 38

n

ttt

k1=$,

1CFE=Value

E (CF$,t) = expected cash flows to be received at

the end of period tn = the number of periods into the futurein which cash flows are received

k = the required rate of return byinvestors

Valuation Model for an MNC

Domestic Model


39/47

C1 - 39

n

tt

m

j

tjtj

k1=

1

,,

1

ERECFE

=Value

E (CFj,t) = expected cash flows denominated in currencyj

to be received by the U.S. parent at the end ofperiod t

E (ERj,t) = expected exchange rate at which currencyjcanbe converted to dollars at the end of period t

k = the weighted average cost of capital of the U.S.

parent company


Valuing International Cash Flows


40/47

C1 - 40


An MNCs financial decisions include howmuch business to conduct in each country

and how much financing to obtain in eachcurrency.

Its financial decisions determine itsexposure to the international environment.


41/47

C1 - 41


Impact of New International Opportunitieson an MNCs Value

Exchange Rate Risk

n

t t

m

j

tjtj

k1=

1

,,

1

ERECFE

=Value

Political Risk

Exposure toForeign Economies


42/47

How Chapters Relate to Valuation

Backgroundon

InternationalFinancialMarkets

(Chapters2-5)

Exchange RateBehavior

(Chapters 6-8)

Long-TermInvestment andFinancingDecisions

(Chapters 13-18)

Short-TermInvestment and

FinancingDecisions

(Chapters 19-21)

Exchange RateRisk Management

(Chapters 9-12)

Risk andReturn of

MNC

Value andStock Price

of MNC


43/47

C1 - 43

Chapter Review

Goal of the MNC Conflicts Against the MNC Goal

Impact of Management Control Impact of Corporate Control

Constraints Interfering with the MNCs

Goal

Theories of International Business Theory of Comparative Advantage

Imperfect Markets Theory

Product Cycle Theory


44/47

C1 - 44

Chapter Review

International Business Methods International Trade

Licensing Franchising

Joint Ventures

Acquisitions of Existing Operations

Establishing New Foreign Subsidiaries


45/47

C1 - 45

Chapter Review

International Opportunities Investment Opportunities

Financing Opportunities Opportunities in Europe

Opportunities in Latin America

Opportunities in Asia


46/47

C1 - 46

Chapter Review

Exposure to International Risk Exposure to Exchange Rate Movements

Exposure to Foreign Economies Exposure to Political Risk


Managing for Value


47/47

Chapter Review

Valuation Model for an MNC Domestic Model

Valuing International Cash Flows Impact of Financial Management and

International Conditions on Value

How Chapters Relate to Valuation

international finance chapter-1- pp

Documents