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Team assignment 4 (5 points) Charlotte, USLuxembourg CityTampere, Finland Sales US$5 million or US$...
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Transcript of Team assignment 4 (5 points) Charlotte, USLuxembourg CityTampere, Finland Sales US$5 million or US$...
Team assignment 4 (5 points)
Charlotte, US Luxembourg City Tampere, Finland
Sales US$5 millionor
US$ 5 million ÷ $1.5/€ = €3.33 million
€15 million €15 million
Costs of sales US$ 5 million €3.33 million €15 million
Profit 0 €15 million - €3.33 million = €11.67 million
0
Tax rate (effective) 40% 10% 25%
Net profit 0 (1-10%) * €11.67 million = €10.50 million
0
• How would you price intra-firm exports of intermediate goods manufactured in Charlotte of US to the next production stage in Tampere, Finland, for maximizing total net profit? The exchange rate was $1.5/€ on the day when Charlotte-Luxembourg transaction was made. All profits should be translated into €. Fill the question marks in the table (3.5 points in total).
Team assignment 4 (5 points)
•Assuming no hedging techniques had been used, what would be the total net profit if the exchange rate on the day of Charlotte-Luxembourg transaction was $1.25/€? All profits should be translated into € (0.5 point).
Charlotte, US Luxembourg City Tampere, Finland
Sales US$5 millionor
US$ 5 million ÷ $1.25/€ = €4 million
€15 million €15 million
Costs of sales US$ 5 million €4 million €15 million
Profit 0 €15 million - €4 million = €11 million
0
Tax rate (effective) 40% 10% 25%
Net profit 0 (1-10%) * €11 million = €9.9 million
0
Team assignment 4 (5 points)
• In an effort to hedge foreign currency risk, you had previously bought a forward call option of $1.3/€ at an ignorable cost. The option can be exercised on the day of Charlotte-Luxembourg transaction, when the spot rate was $1.5/€. What would be the total net profit (0.5 point)? What would be the total net profit if the spot rate was $1.25/€ (0.5 point)? All profits should be translated into €.
• First, calculate the potential net profit under the call option rate if the option was exercised.
• When the spot rate was $1.5/€, the two alternative profit would be:• 1) exercise the option and use the call option rate of $1.3/€, the total profit would be €10.04 million;• 2) do not exercise the option and follow the spot rate of $1.5/€, the total profit (as calculated in question 1)
would be €10.50 million.• In order to make a higher profit, we should choose not to exercise the option.
• When the spot rate was $1.25/€, the two alternative profit would be:• 1) exercise the option and use the call option rate of $1.3/€, the total profit would be €10.04 million;• 2) do not exercise the option and follow the spot rate of $1.25/€, the total profit (as calculated in question 1)
would be €9.9 million.• In order to make a higher profit, we should choose to exercise the option.
Charlotte, US Luxembourg City Tampere, Finland
Sales US$5 millionor
US$ 5 million ÷ $1.3/€ = €3.85 million
€15 million €15 million
Costs of sales US$ 5 million €3.85 million €15 million
Profit 0 €15 million - €3.85 million = €11.15 million
0
Tax rate (effective) 40% 10% 25%
Net profit 0 (1-10%) * €11.15 million = €10.04 million
0
Sources:
Mark Gordon and Sabastian V. Niles, 2012, “Sovereign wealth funds: An overview”, in Karl P. Sauvant, Lisa E. Sachs, Wouter P.F. Schmit Jongbloed (eds.), Sovereign investment: Concerns and policy reactions, pp. 24-56. Oxford, UK: Oxford University Press.
Shai Bernstein, Josh Lerner and Antoinette Schoar, 2013, “The investment strategies of sovereign wealth funds”, Journal of Economic Perspectives, 27(2), pp. 219-237.
William L. Megginson, Miao You and Liyan Han, 2013. “Determinants of sovereign wealth fund cross-border investments”, Financial Review, 48(4), pp. 439-572.
Emerging phenomenon in international finance:
The rise of sovereign wealth funds (SWFs)
SWFs (cont’d)
SWFs are investment vehicles established by governments to invest a portion of their excess foreign exchange reserves in search of higher returns than are typically earned on official reserves.
They are generally invested in safe, low-return instruments such as U.S. Treasury bonds,
The primary economic purposes of these funds include: diversification of national wealth, revenue stabilization, sharing of national wealth across generations, and achieving equity-like investment returns.
SWFs (cont’d)
billion
Hedge funds: $2.1 trillion
SWFs (cont’d)
Skyrocketing: They increased ten-fold in the last two decades from $500 billion in 1990 to
more than $6 trillion today (largely due to rising price of petroleum and appreciation of local currency such as Chinese RMB).
Unclear and myriad corporate objectives: First, as a source of capital for future generations Second, as a stabilizer by reducing the volatility of government revenues Finally, as holding companies, in which the government places its strategic
investments
SWFs (cont’d)
Largest exporter
12th largest exporter
SWFs (cont’d) SWFs played an important role by providing emergency liquidity to major U.S.
and European financial institutions at the outset of the recent financial crisis.
Selected Infusions of SWFs into the U.S. financial institutions during the global financial crisis 2007-09
For political concerns, SWFs typically did not receive special governance rights (e.g., board membership) although their ownership might be greater than many other owners.
Date Target company SWF(s) Investment size in billions of US$ (% in target)
2009/06/032007/12/19
Morgan Stanley China Investment Corporation (CIC) 1.2 (9.9%)5 (9.9%)
2008/07/282007/12/24
Merrill Lynch Temasek (Singapore) 3.4 (13.8%)4.4 (9.4%)
2008/02/01 JC Flowers China Investment Corporation (CIC) 4
2008/01/15
2007/11/27
Citigroup GIC (Singapore), KIA (Kuwait), Prince Alwaleed bin Talal (Saudi Arabia)
12.9 (9.3%)
7.5 (4.9%)
2007/05/22 Blackstone China Investment Corporation (CIC) 3 (9.7%)
SWFs (cont’d) Their cross-border investment strategies
Megginson et al (2013) studied a sample 1,590 investments in 78 target countries by 15 major SWFs during 1985-2011 and found that SWFs are purely, or primarily, commercially driven. More transactions came from SWFs from strong economic
performance, high degrees of openness to trade, and less developed local capital markets
SWFs are more likely to invest in countries with high levels of investor protection, strong economic performance, and well developed local capital markets
SWFs are more likely to invest in countries sharing the same culture and engaging in bilateral trade
All these findings are similar to other private foreign institutions
Country-specific advantages Country-specific advantages
International business environmentRegional vs. global
Triad and IB activitiesPolitics, culture, trade and finance
International business environmentRegional vs. global
Triad and IB activitiesPolitics, culture, trade and finance
Firm-specific advantages and firm managementOrganizationProductionMarketing
International HRMPolitical risk management
International financial management
Firm-specific advantages and firm managementOrganizationProductionMarketing
International HRMPolitical risk management
International financial management
Locational choice and regional management European Union, North America, Japan, and Emerging
Markets
Locational choice and regional management European Union, North America, Japan, and Emerging
Markets
Course structure
Classes 1-4
Classes 5-9
Class 10
Classes 11-14
The diamond model: Porter’s explanation of determinants of national competitiveness
From Mike Porter’s The competitive advantage of nations.
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
CSAs in certain industries/products
The diamond model: Porter’s explanation of determinants of national competitiveness
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
Human resources Quality, skills, and cost
Physical resources Land, water, mineral deposits, timber, hydro
power sources, and fishing grounds
Knowledge resources Scientific, technical, and market knowledge
Capital resources Amount, type, and cost of financial resources
Infrastructures Transportation, communications, health-care,
etc.
The diamond model: Porter’s explanation of determinants of national competitiveness
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
Composition of the home demand Various niches, buyer sophistication
The size and growth of the home demand
Internationalization of domestic demand
The diamond model: Porter’s explanation of determinants of national competitiveness
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
Competitive downstream industries through efficient, early, or rapid access to cost-effective inputs;
Competitive related industries that can coordinate and share activities in the value chain
Competing products/services Complementary products/services
The diamond model: Porter’s explanation of determinants of national competitiveness
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
The ways in which firms are managed and choose to compete
The motivations of companies and their employees and managers
The competition intensity in the respective industry
The diamond model: Porter’s explanation of determinants of national competitiveness
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
Chance events are occurrences that are outside of control of a firm
New inventions Political decisions by foreign governments Wars Significant shifts in world financial markets or
exchange rates Discontinuities in input costs such as oil shocks Surges in world or regional demand Major technological breakthroughs
The diamond model: Porter’s explanation of determinants of national competitiveness
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
Government influences
Subsidies Education policies The regulation or deregulation
of capital markets The establishment of local
product standards and regulations
The procurement of goods and services
Tax laws Antitrust regulation
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
CSAs: Cluster-specific advantages
CSAs in certain industries/products
Clustering: Interconnection and Concentration of All These Factors
An example: CSAs for American ICT multinationals such as Google.
ChanceChance
Factor Conditions DemandConditions
Structure of firms and rivalry
CSA for ICT industries/products
Factor conditions:•Plenty of high-quality computer sciences and engineering graduates•Abundant VC capital network
Chance events:•PC revolution•WWW revolution
Supporting industries and institutions:•HR intermediaries: e.g., Smart Valley Inc.•High-standard universities: e.g., Stanford•Information sharing networks: e.g., Enterprise Network; Software Industry Coalition.•Collective lobbyists for deregulation and low tax: e.g., Regulatory Forum; Council on Tax and Fiscal Policy
Structure of firms and rivalry:•Information sharing across IT researchers is common•Risk-taking and entrepreneurship is a local culture embedded in the wild west California style
Demand conditions:•Relatively richer consumers•Sophisticated buyers located in the founding district of ICT industries
Government:•Public R&D funding: e.g.,
SBIR, DARPA, etc.•Public VCs: e.g., CalPERS•Tax exempt for selected VC
activities.
An example: CSAs for American ICT multinationals such as Google.
Silicon Valley
Limitations of the Diamond ModelThe rise of the Great Lakes area as a cluster of auto industry
An example: North Am auto industry Canadian railways and ports of entry/exist serving the US markets
LA-Long BeachLA-Long Beach
Asia’s pacific ports
Up to 58 hours closer
5 days
An example: North Am auto industry (cont’d):Oil reserves in Canada; Oil pipelines between Canada and US; Auto
industry in the US.
GDP US$15 trillion
3 billion bbl per year just for running vehicles, not including production etc.
GDP US$15 trillion
3 billion bbl per year just for running vehicles, not including production etc.
GDP US$1.7 trillion
GDP US$1.7 trillion
An example: North Am auto industry (cont’d)Free-trade agreement
FTA since Jan 1988NAFTA since Jan 1994
The double diamond: Regional integration of multiple countries
e.g., oil reserves
e.g., the largest vehicle market with high purchasing power
e.g., a decent market with high purchasing power
Prince Rupert and Vancouver in British Columbia as ports of entryCN and CP railways as inter-state transportation
e.g., skilled labor
Pacific gateway initiative
Keep the border open
(NA)FTA since 1988
Chance events
Chance events
An extension: Multiple diamond model
The Finnish miracle: Nokia
Source: Anil Hira, 2012, “Secrets behind the Finnish miracle: the rise of Nokia”. International Journal of Technology and Globalization, 6(1/2), pp. 38-64.
The Finnish miracle: Nokia
Nokia 2/3 of the Information and
Communications Technology (ICT) sector in Finland
1/5 of exports 3–4% of GDP 45% of business sector R&D (research
and development), and 1/3 of national R&D
conducts 60% of its research in Finland employs 20,000 in Finland, half of whom
are in R&D The Finnish ICT cluster includes 6000
firms, of which 200 are first-tier subcontractors of Nokia. ICT constitutes 10% of GDP (up from 4% in 1990).
The Finnish miracle: Nokia
The story of Nokia is compelling because Finland was not the context (in regard to natural comparative advantage) in which one would expect to see leadership as an international R&D hub.
Finland is an odd place for the emergence of a global competitor in IT. a small domestic population of 5.2 million a relatively remote location a traditional economy based on natural resources
(lumber, pulp, and paper) Yet, there were signs of previous Finnish capacity to
develop globally competitive products requiring high value-added and levels of skill, e.g., The School of Decorative Arts and the Society of Crafts and Design in Helsinki.
The Finnish miracle: Nokia
A double diamond model between Finland and the Soviet Union (SU) from 1950 and 1990 The Soviet Union’s demand for reparations as a
result of Finnish alliance with the Germans in WWII – $300 million (75% in telecom-related production, etc.).
Lack of foreign exchange led to increase in efficiency
Not eligible for the European Marshall Plan aid for tech transfers, motiving Nokia to build proprietary tech capacity
The SU accounted for 15-25% of Finnish foreign trade in 1950s some 40% in 1990, when the SU collapsed.
The Finnish miracle: Nokia
In 1967, with the encouragement of the government, the Nokia Corporation, including FCW, FRW, and the original Nokia wood mill activities, was officially launched.
Industry structure: Good cooperation
1964-71, Nokia – Salora Oy on radio and phone 1975, Nokia – Salora on branding and promotion activities 1979, Nokia – Solora built a joint venture of Mobira Oy (mobile radio), precursor
of today’s Nokia Telecommunications (NTC)
Expanding military and public sector 1969, expansion of highway traffic led to construction of a nationwide mobile
network based on manual Car Mobile Telephone (CMT) technology 1972, Post, Telephone and Telegraph public agency (PPT) offered the first
mobile phone services on the CMT network However, there was still significant gap in supply-demand. Private players such
as Televa Oy entered into the business, which was taken over by Nokia in 1981.
The Finnish miracle: Nokia
The Nordic quadruple diamond model The Nordic Mobile Telephone Group (Nordisk Mobil Telefon or
NMT), including both private and public partners from Finland, Sweden, Norway, and Denmark, was established in 1969 to develop a new mobile telephone system. Full automatic operation and charging System and terminal compatibility among all four countries Full roaming capability among all four countries Mobile-to-mobile calls High reliability Similar use and same facilities as conventional fixed phone Privacy protection Open specs, with no exclusive supplier rights
By 1980s, the Nordic countries constituted the largest world market in terms of mobile phone subscribers.
By taking over Mobira, another Finnish mobile phone manufacturer, and Finland’s largest electrical wholesaler, and Swedish Ericsson Group’s data divison, Nokia became the largest IT group in Scandinavia.
Ericsson’s data division
Mobira
The Finnish miracle: Nokia
The European multiple (>4) diamond model
Nokia’s successful expansion in the Nordic countries led to Nokia’s shift of focus on the entire Europe It started sourcing external finance in Switzerland In 1982, promoted by the Nordic countries and the
Netherlands, the European Conference of Postal and Telecommunications Administrations (CEPT), formed a new standards group, Groupe Special Mobile (GSM), to standardize the emerging wireless industry across Europe.
In 1987, Nokia joined the forces with France’s Alcatel and West Germany’s AEG to promote GSM as an European standard.
In 1988, the European Economic Community (EEC), the precursor of EU, as an European standard, which would become an international standard.
Finland became one of the earliest adopter of this pan-European standard by building nationwide GSM.
The SU
The SU-Finland double diamond 1950-90
Finnish Government
The SU government
Finnish industry structure and supporting institutions
Finland-based resources
The SU-based resources The SU customers
The rise of Nokia and wireless
industry
Finnish customers
The SU industry structure and supporting institutions
Swedish, Norwegian, and Danish
The Nordic quadruple diamond since 1969s
Finnish Government
Swedish, Norwegian, and Danish governments
Finnish industry structure and supporting institutions
Finland-based resources
Swedish, Norwegian, and Danish resources
The Swedish, Norwegian, an Danish customers
The rise of Nokia and wireless
industry
Finnish customers
Swedish, Norwegian, and Danish industry structure and supporting institutions
Europe
The European multiple (>4) diamond since 1980s
Finnish Government
European government
Finnish industry structure and supporting institutions
Finland-based resources
European resources European customers
The rise of Nokia and wireless
industry
Finnish customers
European industry structure and supporting institutions
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