International Finance

Essentials of Corporate Finance

Chapter 18

Materials Created by Glenn Snyder – San Francisco State University

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Materials Created by Glenn Snyder – San Francisco State University 2

Topics

International Financial Analysts Why is International Finance Different?

Time Zones / Communication Currency Culture Global Political Implications Markets Language Foreign Laws and Restrictions Foreign Accounting Strategies

Career Advice for an International Financial Analyst

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International Financial Analysts An International Financial Analyst typically works in the corporate

headquarters, internally supporting and analyzing the company’s international operations.

An International Financial Analyst is different from other Internal Financial Analysts by: Currency Culture Global Political Implications Market Complexities

Sophistication of the Consumers Language Foreign Laws and Restrictions Foreign Accounting

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Currency

Currency fluctuations can change the value and importance of an international operation

Currency 1/3/00 (in USD) 1/1/07 (in USD) % ChangeCanadian Dollar 1.4465 1.1652 19%

Euro 0.984736 0.757748 23%

Japanese Yen 103.90 119.02 (15%)

Brazilian Real 1.805 2.1342 (18%)

Chinese Yuan 8.2798 7.8041 6%

South Korean Won 1128 930 18%

South African Rand 6.126 7.0375 (15%)

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Time Zones / Communications Communicating with international offices is

not just difficult because of language and cultural differences, but time zones as well If a San Francisco based company wants to talk

with a subsidiary in India at 1:30 pm Indian local time, the San Francisco employee must call India at 1:00 am Pacific Standard Time

If a New York based company wants to talk with a subsidiary in Japan at 9:00 am Japanese local time, the New York employee must call Japan at 7:00 pm Pacific Standard Time

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Culture

An International Financial Analyst must understand the differences between cultures In Italy, employees have a minimum of 5 weeks of vacation

per year In many Asian cultures, it is customary to drink and go to

bars after work In many Middle Eastern cultures, women must be dressed

from head to toe These customs and cultures are important when

communicating (email or phone) or visiting the international office

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Global Political Implications

An International Financial Analyst must understand what is going on in world politics and the implications on their company India and Pakistan testing nuclear weapons North Korea testing nuclear weapons Venezuela cutting off access for American oil

companies Iraq war Riots in Paris in 2005 Subway bombings in Madrid and London

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Markets

An International Financial Analyst must understand the complexities and trends of the international market place Sophistication of Consumers

Financial Services Industry – Many consumers in emerging market countries don’t understand equities and derivatives

Telecommunications – In countries like Brazil, most of the population does not have home phone lines

Automotive Industry – Europe has gasoline prices close to 4 times the price of the U.S., with smaller roads and fewer parking spaces

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Language

An International Financial Analyst must be able to communicate clearly with members of the international offices In Japan, it is a sign of respect to add “san” to the

end of a person’s last name

Chevy Nova example Chevrolet marketed their Nova vehicle to Latin

America, without changing the name In Spanish, “No Va” means No Go

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Foreign Laws and Restrictions Most countries have laws and restrictions

very different to those of the United States China requires at most 33% foreign ownership

U.S. Companies must enter China through joint ventures U.S. Companies do not have control of their China

operations

When a company opens an office in another country, it must set up a new legal entity in that country The local country will want to receive tax revenue

for any income earned in that country

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Foreign Laws and Restrictions Tax Havens

Tax Havens are countries with very low or no corporate income tax

Examples are: The Bahamas Grand Cayman Singapore Luxembourg

Income earned in tax havens cannot be repatriated into the United States without paying U.S. taxes

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Foreign Accounting

Differences in Accounting Standards Different countries offer different tax incentives.

German firms tend to stretch the definition of a liability and tend to understate inventory for tax purposes.

Sweden offers accelerated depreciation and inventory write-offs, which differ from the U.S. accounting standards.

Most countries have only one set of reports used for both taxes and public reporting. The U.S. reports these differently.

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Foreign Accounting

Each foreign office typically keeps two sets of books One is for local reporting and taxes One is based on the company’s chart of accounts

for consolidation purposes

Foreign offices must have their financial statements translated and merged into the home country’s financials to produce consolidated financial statements

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Strategies

An International Financial Analyst must take into account all of the previous items when Developing a strategic plan of an international

office Analyzing budget variances Analyzing impacts to consolidated financials Analyzing strategic projects or international

expansion Evaluating management, efficiency, or production

levels

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Career Advice for an International Financial Analyst Understand cultural differences Be open minded, the U.S. way is not always the

best Learn foreign languages

At least learn a few phrases in many different languages Stay current with global politics and happenings Most people are not hired into international

positions, they begin their careers in a domestic position for a global organization, then transfer when they’ve gained specific expertise