MULTINATIONAL BUSINESS FINANCE

Click to edit Master subtitle style An Introduction

11

JSGabinera

4/19/12

Why is International Finance Important?

22

JSGabinera

4/19/12

v Companies (and individuals) can raise funds. We need to know how to JSGabinera identify these risks and then 4/19/12 to control how . v With these increased opportunities comes 33 additional risks.Why is International Finance Important? v In previous finance courses you have been taught about general finance concepts that apply to domestic or local settings. invest money. produce goods and sell products and services overseas. BUT we live in an international world. buy inputs.

The Multinational Enterprise (MNE) v A multinational enterprise (MNE) is defined as one that has operating subsidiaries. branches or affiliates located in foreign countries. v The ownership of some MNEs is so dispersed internationally that they are known as transnational corporations. 44 v The transnationals are usually managed JSGabinera 4/19/12 from a global perspective rather than from .

components and services v Licensing of foreign firms to conduct their foreign business domestic market JSGabinera v Exposure to foreign competition in the 55 4/19/12 . purely domestic firms also often have significant international activities: v Import & export of products.Multinational Business Finance v While multinational business finance emphasizes MNEs.

mining and oil companies v Market Seekers Ø Post-WWII MNEs Ø Expand production and sales into foreign markets Ø Big name companies – IBM. v Cost Minimisers Ø More recent MNEs Ø Seek out lowest production cost countries JSGabinera 4/19/12 66 . McDonalds etc.Types of Multinational Enterprises v Raw Material Seekers Ø First type of MNEs Ø Exploit raw materials found overseas Ø Trading.

Global Financial Management v There are significant differences between international and domestic financial management: v Cultural issues v Corporate governance issues v Foreign exchange risks v Political Risk v Modification of domestic finance theories 77 v Modification of domestic financial instruments JSGabinera 4/19/12 .

What is different? 88 JSGabinera 4/19/12 .

v Management owns only a small proportion of stock in their own firms. stock markets are characterized by widespread ownership of shares. v In the rest of the world. Government (such as privatized . ownership is usually characterized by controlling shareholders.S. and U. Typical controlling shareholders are: 99 JSGabinera 4/19/12 1.K.Separation of Ownership from Management v The U.

1010 JSGabinera 4/19/12 . the universal truths of finance become culturally determined norms. In this context.The Goal of Management  There are basic differences in corporate and investor philosophies globally.

as measured by the sum of capital gains and dividends. level of risk to shareholders for a given rate of return. a firm should strive to maximize the return to shareholders.Shareholder Wealth Maximization  In a Shareholder Wealth Maximization model (SWM). for a given level of risk. the firm should minimize the 1111 JSGabinera 4/19/12 . Alternatively.

the best 1212allocators of capital JSGabinera 4/19/12 in the macro economy. quickly incorporating new information into the share price. Share prices are. An equity share price is always correct because it captures all the expectations of return and risk as perceived by investors.Shareholder Wealth Maximization The SWM model assumes as a universal truth that the stock market is efficient. in turn. .

JSGabinera 4/19/12 1313 . should not be of concern to investors (unless bankruptcy becomes a concern) because it can be diversified.Shareholder Wealth Maximization The SWM model also treats its definition of risk as a universal truth. or operational risk. Risk is defined as the added risk that a firm’s shares portfolio. bring to a diversified Therefore the unsystematic.

Shareholder Wealth Maximization  Agency theory is the study of how shareholders can motivate management to prescriptions of the SWM model. “arms-length”) the discipline of the capital markets 1414could effect the same outcome through a takeover. the board of directors should replace them. JSGabinera 4/19/12  If the board of directors is too weak (or not at . accept the  Liberal use of stock options should encourage management to think more like shareholders.  If management deviates too extensively from SWM objectives.

JSGabinera 4/19/12 This point of debate is often referred to a . investments and 1515operations to result in earnings). Short-term actions taken by management that are destructive over the long-term have been labeled impatient capitalism. firm’s investment horizon (how long it takes for a firm’s actions.Shareholder Wealth Maximization Long-term value maximization can conflict with short-term value maximization as a result of compensation systems focused on quarterly or near-term results.

1616 have focused on mainstream firms that grow slowly and steadily. This focuses on long-term SWM. Many investors. such as Warren Buffet.Shareholder Wealth Maximization In contrast to impatient capitalism is patient capitalism. JSGabinera 4/19/12 . rather than latching on to high-growth but risky sectors.

the local community. JSGabinera 4/19/12 In 1717 .Corporate Wealth Maximization In contrast to the SWM model. labor. suppliers. continental European and Japanese markets are characterized by a philosophy that a corporation’s objective should be to maximize corporate wealth (the CWM model). creditors and even the government. such as management. a firm should treat shareholders on a par with other corporate interest groups. this context.

marketable securities and lines of credit). Corporate technical. marketing and JSGabinera 4/19/12 This . 1818technological proficiencies. wealth includes market and human resources. measure goes beyond financial reports to include the firm’s market position.Corporate Wealth Maximization The definition of corporate wealth is much broader than just financial wealth (cash. employee knowledge base and skill sets. manufacturing processes.

not transient portfolio investors. are either efficient or In fact. market efficiency does not matter as the firm’s financial goals are exclusively shareholder-oriented.Corporate Wealth Maximization The CWM model does not assume that equity markets inefficient. not This model assumes that long-term “loyal” shareholders should influence corporate 1919 JSGabinera 4/19/12 strategy. .

variability than by short-term variation in 2020 4/19/12 earningsJSGabinera and share price.Corporate Wealth Maximization The CWM model assumes that total risk. operating and financial risk. In the CWM model. does count. Risk is measured more by product market . it is a corporate objective to generate growing earnings and dividends over the long run with as much certainty as possible given the firm’s mission statement and goals.

Corporate Wealth Maximization Although the CWM model avoids the impatient capitalism as seen in the SWM. which management tries to influence through written and oral disclosures and complex compensation systems. JSGabinera 4/19/12 . it has its own flaw in that management is tasked with meeting the demands of multiple stakeholders. This leaves management without a clear 2121 signal about the tradeoffs.

Failures in Corporate Governance There are clear examples of the failure of Corporate Governance in the United States: Enron – lack of full disclosure of off-B/S debt WorldCom 2222 – capitalizing costs should have been expensed JSGabinera 4/19/12 that .

security analysts urged investors to buy the shares of firms they knew to be highly risky (or even close to bankruptcy). presumably because of lucrative consulting relationships or other conflicts of interest. In executives themselves were 2323 JSGabinera 4/19/12 responsible for mismanagement and still Top .Failures in Corporate Governance In each case. addition. prestigious auditing firms missed the violations or minimized them.

Regulation of Corporate Governance The corporate regulatory “pyramid” in the United States is as follows: US Congress Securities and Exchange Commission (SEC) 2424 New York Stock JSGabinera 4/19/12 .

and signed by President George W.The Sarbanes-Oxley Act This act was passed by the US Congress. Bush during 2002 and has three major requirements:  CEOs of publicly traded companies must vouch for the veracity of published financial statements drawn from independent directors can no corporate directors longer  Corporate boards must have audit committees  Companies make loans to Penalties have been spelled out for various 2525 levels of failure. JSGabinera 4/19/12 .

and of course management as 2626businesses look toward the future. there has been substantial reflection on business in the early days of the 21st century. Rights. and the Future Clearly. Issues such as sustainable development. JSGabinera 4/19/12 .Governance. environmentalism and corporate social responsibility are emerging as concerns for society.

WS^TSZW_.

W U` O _ SU` cS_ \S__WV T `W  [ZY^W__ SZV _YZWV T ^W_VWZ` W[^YW  a_ Va^ZY #### SZV S_ `^WW S[^ ^W]a^WWZ`_ O .

_ [X \aTU `^SVWV U[\SZW_ a_` b[aU X[^ `W bW^SU` [X \aT_WV XZSZUS _`S`WWZ`_ O [^\[^S`W T[S^V_ a_` SbW SaV` U[``WW_ V^ScZ X^[ ZVW\WZVWZ` V^WU`[^_ O [\SZW_ USZ Z[ [ZYW^ SW [SZ_ `[ U[^\[^S`W V^WU`[^_ O WZS`W_ SbW TWWZ _\WWV [a` X[^ bS^[a_ WbW_ [X XSa^W O [_` [X `_ `W^_ S^W S\\^[\^S`W X[^ `W  _`aS`[Z Ta` _[W `W^_ V[ U[ZXU` c` \^SU`UW_ Z [`W^ U[aZ`^W_ #  STZW^S .

[bW^ZSZUWY`_SZV`W a`a^W O WS^ `W^WS_TWWZ_aT_`SZ`S^WXWU`[Z [ZTa_ZW__Z`WWS^ VS _[X`W##_` UWZ`a^  O __aW__aUS__a_`SZSTWVWbW[\WZ` WZb^[ZWZ`S_SZVU[^\[^S`W_[US ^W_\[Z_T` S^WWW^YZYS_U[ZUW^Z_X[^ _[UW` SZV[XU[a^_WSZSYWWZ`S_ Ta_ZW__W_[[`[cS^V`WXa`a^W #  STZW^S .

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.