Post on 03-Apr-2018
7/29/2019 1 Globalization and the Multinational Firm
1/27
INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Fifth Edition
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
7/29/2019 1 Globalization and the Multinational Firm
2/27
Chapter Objectives:
Understand why it is important to study
international finance.
Distinguish international finance from domestic
finance.
1Chapter OneGlobalization and the
Multinational Firm
1-1
7/29/2019 1 Globalization and the Multinational Firm
3/27
Whats Special about International Finance?
Goals for International Financial Management
Globalization of the World Economy Multinational Corporations
Organization of the Text
Summary
Chapter One Outline
1-2
7/29/2019 1 Globalization and the Multinational Firm
4/27
Whats Special about
International Finance?
Foreign Exchange Risk
Political Risk
Market Imperfections Expanded Opportunity Set
1-3
7/29/2019 1 Globalization and the Multinational Firm
5/27
Whats 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 $1 = 100 and you buy 10 shares of Toyota at
10,000 per share.
One year later the investment is worth ten percent more
in yen: 110,000
But, if the yen has depreciated to $1 = 120, your
investment has actually lostmoney in dollar terms.
1-4
7/29/2019 1 Globalization and the Multinational Firm
6/27
Whats Special about
International Finance?
Political Risk
Sovereign governments have the right to regulate the
movement of goods, capital, and people across their
borders. These laws sometimes change in unexpectedways.
1-5
7/29/2019 1 Globalization and the Multinational Firm
7/27
Market Imperfections
Legal restrictions on the movement of goods,
people, and money
Transactions costs
Shipping costs
Tax arbitrage
Whats Special about
International Finance?
1-6
7/29/2019 1 Globalization and the Multinational Firm
8/27
The Example of Nestls Market Imperfection
Nestl used to issue two different classes of
common stock bearer shares and registered
shares.
Foreigners were only allowed to buy bearer shares.
Swiss citizens could buy registered shares.
The bearer stock was more expensive.
On November 18, 1988, Nestl lifted restrictionsimposed on foreigners, allowing them to hold
registered shares as well as bearer shares.
1-7
7/29/2019 1 Globalization and the Multinational Firm
9/27
Nestls Foreign Ownership Restrictions
12,000
10,000
8,000
6,000
4,000
2,000
0
11 20 31 9 18 24
Source:Financial Times, November 26, 1988 p.1. Adapted with permission.
SF
Bearer share
Registered share
1-8
7/29/2019 1 Globalization and the Multinational Firm
10/27
The Example of Nestls Market Imperfection
Following this, the price spread between the twotypes of shares narrowed dramatically. This implies that there was a major transfer of wealth
from foreign shareholders to Swiss shareholders. Foreigners holding Nestl bearer shares were
exposed to political risk in a country that iswidely viewed as a haven from such risk.
The Nestl episode illustrates both the importanceof considering market imperfections and the perilof political risk.
1-9
7/29/2019 1 Globalization and the Multinational Firm
11/27
Expanded Opportunity Set
It doesnt make sense to play in only one
corner of the sandbox.
True for corporations as well as individual
investors.
Whats Special about
International Finance?
1-10
7/29/2019 1 Globalization and the Multinational Firm
12/27
The focus of the text is to equip the reader with the
intellectual toolbox of an effective global
managerbut what goal should this effective
global manager be working toward?
Maximization of shareholder wealth?
or
Other Goals?
Goals for International Financial
Management
1-11
7/29/2019 1 Globalization and the Multinational Firm
13/27
Maximize Shareholder Wealth
Long accepted as a goal in the Anglo-Saxon
countries, but complications arise.
Who are and where are the shareholders? In what currency should we maximize their
wealth?
1-12
7/29/2019 1 Globalization and the Multinational Firm
14/27
Other Goals
In other countries shareholders are viewed as merely one
among many stakeholders of the firm including:
Employees
Suppliers Customers
In Japan, managers have typically sought to maximize the
value of the keiretsua family of firms to which the
individual firms belongs.
1-13
7/29/2019 1 Globalization and the Multinational Firm
15/27
Other Goals
As shown by a series of recent corporate scandalsat companies like Enron, WorldCom, and GlobalCrossing, managers may pursue their own private
interests at the expense of shareholders when theyare not closely monitored.
These calamities have painfully reinforced theimportance ofcorporate governance i.e. the
financial and legal framework for regulating therelationship between a firms management and itsshareholders.
1-14
7/29/2019 1 Globalization and the Multinational Firm
16/27
Other Goals
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.
No matter what the other goals, they cannot be
achieved in the long term if the maximization ofshareholder wealth is not given due consideration.
1-15
7/29/2019 1 Globalization and the Multinational Firm
17/27
Globalization of the World Economy:
Major Trends
Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
Privatization
1-16
7/29/2019 1 Globalization and the Multinational Firm
18/27
Deregulation of Financial Markets
coupled with
Advances in Technology
have greatly reduced information andtransactions costs, which has led to:
Financial Innovations, such as
Currency futures and options
Multi-currency bonds Cross-border stock listings
International mutual funds
Emergence of Globalized Financial Markets
1-17
7/29/2019 1 Globalization and the Multinational Firm
19/27
Emergence of the Euro as a Global Currency
A momentous event in the history of world
financial systems.
Currently more than 300 million Europeans in 15
countries are using the common currency on a dailybasis.
In May 2004, 10 more countries joined the
European Union and adopted the euro. The transaction domain of the euro may become
larger than the U.S. dollars in the near future.
1-18
7/29/2019 1 Globalization and the Multinational Firm
20/27
Euro Area
Austria,
Belgium,
Cyprus, Finland,
France,
Germany,
Greece,
Ireland,
Italy,
Luxembourg, Malta,
The Netherlands,
Portugal,
Slovenia, Spain
1-19
7/29/2019 1 Globalization and the Multinational Firm
21/27
Value of the Euro in U.S. Dollars
1-20
http://www.advfn.com/p.php?pid=charts&symbol=FX%5EEURUSD7/29/2019 1 Globalization and the Multinational Firm
22/27
Economic Integration
Over the past 50 years, international trade
increased about twice as fast as world GDP.
There has been a sea change in the attitudes of
many of the worlds governments who haveabandoned mercantilist views and embraced free
trade as the surest route to prosperity for their
citizenry.
1-21
7/29/2019 1 Globalization and the Multinational Firm
23/27
Liberalization of Protectionist Legislation
The General Agreement on Tariffs and Trade
(GATT) a multilateral agreement among member
countries has reduced many barriers to trade.
The World Trade Organization has the power toenforce the rules of international trade.
On January 1, 2005 the end of the era of quotas
on imported textiles ended. This is an event of historic proportions.
1-22
7/29/2019 1 Globalization and the Multinational Firm
24/27
NAFTA
The North American Free Trade Agreement(NAFTA) calls for phasing out impediments totrade between Canada, Mexico and the United
States over a 15-year period beginning in 1994. For Mexico, the ratio of export to GDP has
increased dramatically from 2.2% in 1973 to 29%in 2006.
The increased trade has resulted in increasednumbers of jobs and a higher standard of livingfor all member nations.
1-23
7/29/2019 1 Globalization and the Multinational Firm
25/27
Privatization
The selling off 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-borderinvestment.
1-24
7/29/2019 1 Globalization and the Multinational Firm
26/27
Multinational Corporations
A firm that has incorporated on one country and
has production and sales operations in other
countries.
There are about 60,000 MNCs in the world.
Many MNCs obtain raw materials from one
nation, financial capital from another, produce
goods with labor and capital equipment in a thirdcountry and sell their output in various other
national markets.
1-25
7/29/2019 1 Globalization and the Multinational Firm
27/27
Top 10 MNCs
1 General Electric United States
2 Vodafone Group PLC United Kingdom
3 General Motors United States
4 British Petroleum Co. PLC United Kingdom
5 Royal Dutch/Shell Group UK/Netherlands
6 ExxonMobile Corporation United States
7 Toyota Motor Corporation Japan
8 Ford Motor Company United States
9 Total France
10 Elctricit de France France
1-26