CHA
Current Multinational
Financial Challenges
‘The subjoct ofthis book then management of iostionl
MNES are tins—both for profit companies and noe pot oreming
‘eperationsin more than one coun. and conduct thee ioc tee
tes, ranches, or joint veatures wih host county fs
MINES at tugging to surive and penpet in ery diferent world han nthe es,
Todays MNEs depend not only onthe emerging marels for cheat labor iew en
. alo inreningl on th
ne 20th and early 21 coma wa taken
ia god ing Bathe saprome rh wa
‘Nevermind the fa dat nblance
1 the bigger sk mopar i
ntThe theme dominating global financial markets today isthe comple of rks soca
with nancial lbalizaton—far beyond wheter tsi good ot bad. but how ead aa
‘manage mulation! rms the apy moving markerpice
"The international monetary system, a eclectic mix of foting and manage xed
exchange ates today, is under constant sertiny The ie of the Chinese reamin
is eanging mach of the word's outlook fr cureney exchange reserve currencies,
land the roles of the dll and the eur 28e Chapter 3),
"Large seat defi plague most the major trading couse ofthe wor inching
{erent carozone criss complain fel and notary poise, nd ley
lntrest rats and exchange ates see Chapters and 3)
Many counties experience continuing balance of pnyments balance, nin some
aes, dangerously large dats and suples whether tbe the tin surpues
‘njoyed by China, be erent account surplus of Germany amidst sc fearon
‘eis othe coining current secon defi ofthe United Sate, lw nc
{ably moe exchange rte (oe Chapers and)
Ownership, contr) and governance changes radically aro the world. The pub
"ade company ino the drainant soba busines ogatztion the evel
‘or family-owned busines the prevalent strtareand ther gels and messes
‘of performance dle dramatically (oe Chapter),
5 Global capital markets tha aormaly provide the means to lower firm's eos of
capital, and even more ertcllyinreae the avlaity of cpital have fa many
vayssirunk in siz, opeaness, and acest by enany ofthe wort oepsniations
(see Chapters and 3).
Todays emerging markets are confonted wth anew dla the problem of being
the ceciients of too much capital sometimes, Financial globalization has eseed|
inthe lw of massive quanti of capt nto ad out of mea emerging markets,
complicating nancial sanagement (Caapers 6 9),
‘These ae uta sampling ofthe complet of topics, The Mini-Cas at the end ofthis
haper ine Dragons Paper and the 2009 Cre Criss highlights many ofthese MNE tates
emerging markets oday. As described in Global Finance in Practice 1, the global tet
‘ss ad its aftermath has damaged the Word's largest banks and ede the ate of exe
nomi growth worldwide, leading to higher eae of unemployment snd ping rial ps
‘reson government bodgets tom Gress a Ian to Portugal to Metco,
‘The Global Financial Marketplace
Basines—drnest, internation, global—involes the intceaction of nv ad nd
vidual organizations fo the exchange of products srrces and capital teh markets The
bal capital markets are eal forthe cond ofthis exchange The lob inne is
‘92008-2009 served aan istatio and a warning of how tight integrated and fe hit
‘marketplce ca be
‘Assets, Insitutions, and Linkages
Exhibit 1 provides a map tothe global capital markets, One way to characterize the plobal
‘inanil marketplace through ts se, sons. td ages,habe
Te treaty hee cae erp
a tras om 6 rou 207 he wots
enter eas prt nd abe
‘rare cponte—nonty aa #328 ee
reap Goon caph hve srt sau. Th TO
a a ori Yes Pea TE
(enw cern co. aes =e
ere aorta nfl Pods a
Moe we ari eo
‘sneciafonenwarest ratio ort
ean og meutmaen betes
Bao Sonn tr en eae ek n
‘Signa can ave bce er =
Fa elbow or pats Ow TEP
onslcoraee at 20 oe
hfe sues then fm the
“Galant like ban Joa, corporat
(OUI secant ats
ae
1+ carer mtr Francia Cater
‘Assets. The asets—the final scts—which
Aoi der secures sued by governments
‘ndatin for he eet
nds na cites (ck)
Global Capital Markets: Entering a New Era,
i a scan wi to
(eine cups rpepensoyers etcltuorl
Fran gh ro ots 0G Wat
Frcteveeresigo seco agen tint
i re amt Sor ha
rk oS es reer ene
ne tesa ath hres ed I
een at crn ovocrarmrea re Oe
ca canon a
theheart ofthe loa capita markets
$eansy Bou), These lows oF
ing, vaing and pesing of fhe fina
Farce yeas, numer ofddionl scares have been cea fom the existing secures deviates, whose valve
[based on marke value changes the uncerying seuss The heath and security of he
flobal nani sytem relies onthe quality of hee sets,
Inatiuens. The nsttutions of lob nnce ae the central banks, which create and control
‘ch cunty'smoney supply the commercial banks which take deposits and exten oars o
businesses, both local an global: an the multe f other financial insittions created to
trade secre and derivatives, These iniutons take many shapes sn are subject oman)
Siferent reglstory frameworks Te health an security the gba nancial sytem lcs
Linkages. The links Between the Sansa institutions, the asta vd oF medium for
aching, tie tank petri ang ren The end xcs cece
trading andthe lobal currency markets ae the largest maelsin he world, The exchange
‘of eurrendies, and he subsequent exchange ofl other eer global Via cuten. isthe
lnernationa interbank network. Tis nctwork, whose planar peice isthe London Interbank
(Otered Rate (LIBR), ithe core copanen ofthe global tania stem.
“The movement of cept sto borders and continents forthe conduct of business has
«existed many diferent forms fr thosands of years Yet sony within the past 50 ytre
{hat these capital movements ve started o move wth pace ofan electron eter ia +
phone call ran cml Aa it isony within the past 20 years tha th market hs ben able
foreach the mst distant corners he eth at any moment the dy. Ts market basse
tnexposionafimnovtve products and services he pest cae, one of which proved st
‘nth es ofthe 25-208 rss somewhat oxi t the oth
‘The Market for Currencies
The price of any one county’ curency in terms of another country's currency i called &
{oraiga curency exchange rate For example the exchange ate between the US. doa ($
(USD) andthe European euro (€ or EUR) maybe stated a “4868 dollar pe euro" or
Slpy abbreviated ae $1.45656. This the sme exchange ate a8 when sated "EURO
*=USD14345" Since mst international business activites reqie atleast one of the two
pares ina business ansation to iter pay or eceiv payment ima curency, which si
ferent from their cn, an understanding of exchange rates serial othe comdul a lbal
bones
A ick word about currency symbols. As noted, USD and EUR se often used s the
symbol forthe U.S dolar and te European Unions eure. These are the computer sy
bo (I90-4217 codes) sed toy onthe moras dpa networks The ld of ntrnatinal
pros, and avant of dlferent abbreviations are commonly tsed Fr example, the Bish
Pound sterling may be (te pound synol, GBP (Creat Brain pound), ST (Brtsh pound
Sering) Se (poundstelng) or URL (United Kingdom pound) This book wiles use the
Simpler common symbole § (dolar), the € (euro) the ¥ (en) tbe & (pound) but be
warned and wate when reading the business pres
Exchange Rate Quotations and Terminology. Eeibit 12 lists cuteny exchange rates for
Thursday, January 12,2012, a woul be quoted in New York or London. The exchange rate
sted stor a specie county's cureacy-for example, the Argealin peso agaist he US.
dbllar—Peso 297138, the European euro Peso 95176716, and the British pound Peso
{14786 The rated termed mk” ovate tithe mile average othe aes
orreny waders uy currency (bid at) and sl curreney (ole rate)[ESUSIEIRIEY seston ita cna chro tos
sent
geeager eke
aeCanon Mutnatenal rence Ging CHASTE n
The US. dallas bs been the focal point of most curency ting since the 1940s, As
rents mos ofthe word surences have been quoted aps the dll ~ Mesa psc pet
‘ota, Braan eal per dlr, ong Kong dolla er dla, et. This tation cnventon
Isao oliowed again the word's major currence sisted in Exhibit 12. Forex, the
Japenese Yen commenty quoted nx ¥8 200, ¥i08 41/6, 0 9128 04,
‘Quotation Convention. Several of the word's major curteney exchange rte, however fl
low aspecie quotation convention tat teres of tradition eodhory. The exhange st
Setneen th US dollar andthe euro is alway quoted us dolar per curo" (WE), $1366
listed in Exist 12 Simian, the exchange rte between the U.S dolar and ‘he Brith
pound is alvays quoted a 8, for example, the $1 SOAS ited under “United Staten
Eh 12 Many countries tht Were formery members ofthe Brith Commonwealth will
commonly be quoted spans th Glia IS. dallas per caveny the Attain ot
(Canadan dota)
Eurocurrencles and LIBOR
‘One ofthe major nkagesof lob! money and capital markets is the Euscuererey market
saudi intere rate known ss LIBOR.Eurocurences te domestic curence of on county
tn deposit in second country. Eurdollar ime Gepost maturities ange fog all money
tnd overnight funds to longer periods Ceriests of depos are sual for thee monte ot
or and ip milion-dollarneements. A Burdollar epost snot demand depot act
‘reated onthe bank's books by wring lane aginst required factional reserves in ca
not be aneferedby «check dawn on the bank Raving the deposit Eurodole depois ae
twansferte by wire or cae tasfr ofan underyng balance bet in 9 correspoment bask
Toeatod within the United Sate, In sos counties, domestic analogy would be ie enter
‘of deposits held in nonbank savings stccsaions, These ae transfered by the wsociation
‘wtng itso check on commerce bank
‘Ary convertible crrency ca exit in "Euro" frm. Noe that hit we of “Ear” should
not be confused with he new common European cucosey called the euo. The Euro
‘eney market incades Euoserng (Bish pounde deposited ouside the United Kingdom)
"rvocura (eurs on depen out the eurozone); Caroyen Uapanne yu deste ate
Japan) and Eurdellas (US. dolar deposited ouside te United Stats). The eset ie of
Ibe Eurourreney markets if to measure besus varies wth ly core ade by
‘epost abou where to hod rei transferable gud ond, ad partly cn whether
to epost dla within or oats the United Sates,
Eocuttency markets serve tw vluabe purposes: 1) Eorocarrency deposits at an eft
‘leat and eaneniemt money market device for holding exces corporate guid 2) the
Erocurency market sa major source of short-term bank loans onan eorporte working
‘copta ned, including the iancing of inp and exports
Banks in which Eurccurencies ate deposited are called Eurobonks, A Ewrbank is
financial intermediary that simultaneously bide fr time depois and make oan in 8
Eurteney other than tat of the crtency in which loved. Eurobanks are major Mord
banks that conduct a Eurocurreacy business in addon to all ther banking "unctions.
Thus, the Esocarreny operation that quails «bank forthe name Barcbanh isin fst
& department of lrg commercial bank, and he name springs fom the peeformance of
thi funtion.
The modern Eurocureney market was born shorty afer World War I. Eastern Euro
ean holders of ola, nslading the varios tate trading banks of the Soviet Union were
rid to deposit soir dolar oldng inthe United Stats besa these deposit igh be
‘ached by US, residents with clans aginst commbnist government Therefor, EsteCcawrren Cinnetnasratal Franck Calora
-Focpcan odes deposited thi dls in Wester Eope, pat wih te Soviet
Fore ee Nevany Hankin London, andthe Banque Comercle pour Europe
an Meeps Banks edepeited the funds in oter Ween banks pel
Bona in oa lor epost were received from various cena banks n Wester
ero eel par ofr ol eserves hormone: il
Fee ta laced tht dol blancs in the market bxause specie materies
ea cdi tbe Earodlar sae. Suc companies oui inncallyodvants
sa een delay esevain the her peking Erdal art, Various holders
Sf aernatona fae fonds als supplied nds
ee eae caae ofthe powth of the Eurourency marke re ecomom ef
enna entation events during he 190s and 196s helped is growth
tr 195, British monetary auborities responded 10 weakening of the pound by
eT igtconolson U.K tank ning in seingtoronresiens fhe Usted
iro raged bythe Bank of Eland, Ubon tarned to dt ending
Tam ernst would alo them to intin heir leading poston
owl nance For this they needed daar deposits
2 Aiough New York was “home base” forthe dllar anda age dome mone}
Alto ee otro rain the dla cested ia Landon bees of
td ap ron metry mates i Oy nie and
stanee to maorcostomers
alone! suport fora Buropesn-based dollar market came from the balance of
ats lalue ofthe U during he 1965, which temporary segmented the
US Somes capital mare,
timate, however the Eurocrrency market continae 1 thrive Decnut it ee
Fe nal eae fee fom governmental regulation and interference
‘Cveurrenoy intrest Rates: IBOR. Un the Eurocurreney parse the reference até of
coe OW the London Intvinnk Orfered Rate, LIBOR i now the most widely
ine cof restsedin standudaed uotations oan cement or Sandal dt
ser DOR trolly defined by te ritnh Banker, Associaton (BBA) For
a NE LIBOR & the mest of liatonal bens interbank fered oes
ral Voy the BBA a Axe London imein Londen, Slay, the BA cua the
See AOR cue OR aed oer corey LIBOR rts whe sae ine 9
[Landon fo semipes of ans.
om rate is nt, however, confined o London. Most major domes
Fee nrc theron interbank offered rts ot oral oa reemient
financier BOR (Pais Interbank Offered ate), MIBOR (Mads aterbonk
as aR (Singapore Intrtonk Ofleed Rats), anc FIBOR (Frank Inter-
Sank Offered Rate), to mame but fe
I Ofer Rae trating both depots and borrowesto the Erosureny fan mat
ene tne spread win tat market. The difernc eters depos andlou>
ae is trent spread inthe Eurocurency marke are sal for many
sates in oft a ats cnn beenee the Eurocrrency mathe is a wholesale markt
a oma aad ean are mae in mount of $9000 of more onan unsecured basi
were depos ay arg conporaions or government ents tha qualify fo Tow ats
aa eh stating and horaue the ansacton sz sarge. nado, overheat
estat wo tht Euroeureny operation by participating banks smal.
Peo etch i the Eurcarency market th 8 moe domestic cusreney
marca teats ine financial institutions offering Furocurreney activities ae aot sbjet £2‘many ofthe regutions and reserve requirements imposed on trains demesticbanks and
banking activites With these cons removed rates are subject to more compete preseies
epost ates arehgher, and oun rate ar lower. A second majoras of Ct avcided inthe
urocurrency mskes isthe paysea of dope insurance fees sch sn Federal Depost
Insurance Corprstion FDICy nd assesses pal on deposits inthe Und Sats.
The Theory of Comparative Advantage
Thetheory of compare avenags provide bis for ean a jutijingnterationa
tradename word smd oejoy fe tae, perf competion, aunty cot
Ic nfrtn td no govertertnrtrnc, Ti theey sori inh work of Aa
Sonith and paricny with seminal bok The Weath of None pine in 1776. Sth
sought to expe way the dvson of borin productive stiles, nd subsequent iter.
avon tae ose god, ress the gol a ioral itauneSith sed werk
nthe concep ofabnite Gamage, where every county shoud spain he production
Gfthat god was uniquely sated fo, More wouldve procure Tab each oy
Spesngn prod for which t posted sb avenae, oust Could pode
ore in ttl andetchange prods tadefor goods that were cheaper prc han these
‘Dad Rc, in is work On the Principles of Pde! Economy au Taxation pub
Use in 117, sagt tae he basses st down by Aca Sih few lop steps
further, Ricardo noted tat eve county poseted absolute advanaze in te pre:
tio of wo rod, at sl Be slat more efit he the thr county none
sus product an th other, Rcrdo teed thi comporav advantage Ech county
Would then poss comparative advantage inthe production af on of he two product
ind both counts would then benef by special completly none produ tn tra.
ing or he he.
‘Althogh imation trade might have aproathe the comparative advantage model
they are i etter positon than purely domestic
poets trough thei own tral information network
impertections a national makets for prot actors
he mart for products sansa 10
mene Detter able te exploit such
\Gagerat and technological experi, produet
ompaior In far MNES thrive
NINES have essed a physical prsenee abroad
bet these factor
to ently and isplement marksWhy Do Firms become Multinational?
Seategimorives rive the decision to aves abreadand become an MNE- These motives an
besummarzed uner the falling categories
Marketscelers produce in foreign maketeitherto sty local demand orto export
tomarkes other than thes home mael,U.S automo rms manvfotring a
Eaope for eal consunption sre an expe of musket seeking msivaton
2 Raw material seekers extract rt materi wherever they can be found ithe for
‘export for further proven andl inne country in wich hey ae fond the
host country. msi theo nine platon and fore ides al nt this
cxesey
3. Production fon sekers proce countries where one or more of the ator
cof produston are underpased reative tothe prot. Laborintensie produc
$n of electronic components in Taiwan, Malaysia, and Mexico an exanpie of this
44 Knovledgescckers operate in foreign couse to in acces to technology of man
ageial expertise. For example, German, Date, nd lapanes rmsaveporchised
US located electrons ims fr tel tstooogy
Pole safety seekers aequte or establish new operations in counties that ase
considered uniely to exproprineorinterfe wth private enterprise. For expe
Hong Kong Sms invested ew in the United States, United Kingdom, Canad
nd Ausra in antipstion ofthe consequenes of Chinas 197 takeover othe
Bri coony
These five types of sratepe consideration are not mutual excusive. Foret products
fms seeking wood Ser in Bra, for example, aya i ge Brava market fora
portion of ter output
Ts indusiries characterized by worlwide oligepoistie competition, each ofthe above
suatepie moves shouldbe subsided into prosetve and defensive invesimens. Proscive
Investments ae designed enhance the growth andprotabliy ofthe fim self Defensive
investments redesigned to dry growth an profitabity tthe rm's competitors Examples
ofthe later are investments that ry to preempt a market before competitors can get ea
lished init or capture rw materi ares and dent them to sompeiters
‘The Giobalization Process
Tridetis hypothetical U.Sased im that wil be used aa setve example tro
out the bok ta demonstrate te loblzaton proce. the stractrel and manage changes
{nd challenges experienced bya fin stones ts peratins fom domestic lob
Global Transition I: Trident Moves from the Comestic Phase
to the Intemational Trade Phase
“Trident i «youn. frm that manufactres and disibates an aay of telson
devices lis ial satey to develop a surnnabe compeiive advantage othe US. a
et Like many other young fms iti consrine ty te mall size, competitors, and lack
sss to cheap and pleniloures of etal. The top half of Exhibit 1 show Trident ia
is ery domes pase
Trident sess products in US. dollars to US customers and hays its mansfscturng
1 serve int rom US applets, paying US, llr The eedtworth of al suppliersLchaeren + Cuertthatond Fran Charon
RIIDRIET ern te Gobaton ose
£5
—a
coe secgeeaseett
sandbuye is etbised under domestic 1S. ratios and procedars, A poten ue for
A aye ne i tht although Trent soot international 0 pabal nis operations
Teen ae peta plies oe buyers maybe. This fen ie pets opus fem
Fase in ine fat wantin of the globalization proces, no international tide
lke Trident of oy umes Winston in Las Angeles in 1948 to ake tlecommunstions
Tin we Foe ljonned tases expanced showy but stabs over he flowing
Foe afeominoal technology inmesuseat in ite 5, bowever, equedhs
Fee eral eauity epi inode to compete. This ned led os nti pu
the po) ome Ate US-based publ ade company ox the New York Stock
i den’ management sought create ave for is sharehole
pec vibe and vate compstir inthe US ke. state oppor
yc ms marke reach by exporting roduc atd serves fo ore oe more
Nee eee Te Norh American Fee Trae Ares (NAFTA) made tide vith Mexico
arta ate. Thtseznd pase of he lbaliztion pres shown te lowe
raat aa Tite reopended to these lobalzation foes by importing apts rom)
fal fy and making export sas v Canadian buyers, Ne define thi stags of the
‘obatraon pres the Ineraonal Trade Phase
ae sporting proce an series eres the Jenn of nancial man
agent ineh and above the tana requirements of the donesti only busines: Fis
sree angi re mow bore hen Trent my aw need to qute res
ie na pe payment in foregn curtis of py supp in fregs
ire reef crtnces change trom minute omntei the aba markepee,
rae a vsporeac ignticnt rks rom the changing values wsociated wih these
foreign cureacy payments and rep
ia cory Diution ofthe creat quality of Fregn buyer and sellers sow mors
stopentthanevee Reducing the ort of n-payent for=xpors and non dlr of
sma turaes ane ef ro man nail manapement ass droge nterationa UeCurent Msinatona Pri erges 80 s
phase, This rei rsk management taki uch mre dif in international busines, as
buyers and supplies are new, subject fo dflering busines pasties and legal stems sad
generally more challenging to ses
Global Transition I: The Intorational Trade Phase tothe Multinational Phase
I Tridents succesful ints ntertonal tad activities, the ime wll come whea th le
ization proces wil prgzss othe next phase, Trieat wllsoon peed toe foreign sles
{and service ais. Tas step te followed by extn manaciring operations |
road or byliensng foreign ems to produce and service Tridente procs The mule
‘of us and activites associated with this vecond larger lobe anton the real fos of |
‘hi book
Triden’s continued globalization wil quiet to identi the sources ofits compete
sdvantage, and with that knowledge, expand is nteletal capital and psa proses
sobaly-A variety of states aernatve are avalable to Trent —theforcpnctet mere i
ment sequence~as showa i Exhitit 8, These alternates ncode the ceation af org
Siles oie, he easing ofthe company name and eveything ssociated wth andthe fi
‘manufacturing and dsriation of ts products to othe ira in foreign markers |
‘As Tident mows farther down ahd tothe right in Exit 1, the degree ofits phy ji
presence in foreign markets increase. It may now ob ts own datibaton ad preducion
facies, an ultimately, may want to acquire oer companies, Once Trident owns ees
and enterpises in foreign counties thas entered the mulsnational paseo is ohazaton
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I “rer Forget ester Sequence |
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