Multinational Financial Management Chapter 1 Finance for Multinational
- Slides: 20
Multinational Financial Management Chapter 1
Finance for Multinational Companies v What is international finance? Ø International Macro Economics Ø Financial Management of Multi-national Companies ü Where in the world should we build our plants, sell our products, raise capital, and hire personnel? v Why do we have to study international finance? 2
What’s special about “International” Finance? v v Foreign Exchange Risk Country Risk Market Imperfections (Ex. Regulation Difference) Expanded Opportunity Set
What’s Special about “International” Finance? v Foreign Exchange Risk Ø The risk that foreign currency profits may evaporate in your own currency terms due to unanticipated unfavorable exchange rate movements. Ø Suppose $1 = ¥ 100 and you buy 10 shares of Toyota stock for ¥ 100, 000 (=$1, 000) Ø One year later, your investment profit is worth ten percent more in yen: ¥ 110, 000 Ø But, if the yen has depreciated to $1 = ¥ 120, your investment has actually lost money in dollar terms. Ø 110, 000/120=916($)
What’s Special about “International” Finance? v Country risk Ø A sovereign government has the right to regulate the movement of goods, capital, and people across their borders. The laws sometimes change in unexpected ways. Ø Possibility of War or Military Coup D’eta Ø Economic Instability: high inflation, currency crisis and deep recession of economy v General Definition Ø Risk involved with economic losses of foreign company due to a country’s economic, military or political instability.
What’s Special about “International” Finance? v Market Imperfections Ø Legal restrictions on movement of goods, people, and money (tariff or quota) Ø Transactions & shipping costs Ø Different tax scheme v Market imperfection is risky to the multinational companies. v Ex. Big Mac Index Ø Because of market imperfection, the price of Big Mac is different across countries. Ø Big Mac Index is used to measure the purchasing power of every currency.
The Big Mac Index v The Economist invented the Big Mac Index in 1986 Ø Big Mac is the most famous product in Mac. Donald. Ø As of January 2015, the average price of Big Mac was $4. 8 in US, while it was $2. 8 in China. ü The equivalent Yuan of $2. 8 at the market rate allows you to purchase Big Mac in China. ü Big Mac is cheaper in China than in US, which means you have more purchasing power in China with the same money than in US. 7
Example of Nestlé’s Market Imperfection and Political Risk v Nestlé used to issue two different classes of common stocks: bearer shares and registered shares. Ø Foreigners were only allowed to buy bearer shares. Ø Swiss citizens could buy registered shares. Ø The price of a bearer stock was higher. v On November 18, 1988, Nestlé lifted restrictions imposed on foreigners, allowing them to hold registered shares as well as bearer shares.
Nestlé’s Foreign Ownership Restrictions (Nov. 18, 1988) SF 12, 00 0 10, 00 0 8, 000 Bearer share 6, 000 4, 000 Registered share 2, 000 0 11 20 31 9 18 24 Source: Financial Times, November 26, 1988 p. 1. Adapted with permission.
The Example of Nestlé’s Market Imperfection v Following this, the price spread between the two types of shares narrowed dramatically. Ø This implies that there was a major transfer of wealth from foreign shareholders to Swiss shareholders. v Foreigners holding Nestlé bearer shares were exposed to political risk in a country. v The Nestlé episode illustrates both the importance of considering market imperfections and the peril of political risk. v In China, A shares are traded exclusively by Chinese Citizens, B shares are by both Chinese Citizens and Foreign Investors.
What’s Special about “International” Finance? v Expanded Opportunity Set Ø It doesn’t make sense to play in only one corner of the sandbox. Ø True for corporations as well as individual investors. v Expansion of Market, Moving for Production (Cost Minimizing) and Regulation Free Zone
Multinational Corporations v A firm that owns or controls production of goods or services in one or more countries other than the home country v According to the UNCTAD(United Nations Conference on Trade and Development), 900, 000 MNC in the World as of 2009. v Many MNCs obtain raw materials from one nation, financial capital from another, produce goods with labor and capital equipment in a third country and sell their output in various other national markets.
Top 10 (2010): Fortune R Name Revenue ($) Headquarter 1 Wal-Mart Stores 408 billion United States 2 Royal Dutch Shell 285 billion Netherlands/ UK 3 Exxon Mobile 284 billion United States 4 BP 246 billion United Kingdom 5 Toyota Motor 204 billion Japan 6 Japan Post Holdings 202 billion Japan 7 Sinopec Group 187 billion China 8 State Grid 184 billion China 9 AXA 175 billion France 10 China National Petroleum 165 billion China
Top 10 (2014) by Revenue (Wikipedia) R Name Industry Revenue (US $) Headquarter 1 Sinopec Group Oil & Gas 486 billion China 2 Wal-Mart Stores Retail 476 billion United States 3 China National Petroleum Oil & Gas 455 billion China 4 Royal Dutch Shell Oil & Gas 451 billion Netherlands / UK 5 Exxon Mobile Oil & Gas 438 billion United States 6 BP Oil & Gas 379 billion UK 7 Saudi Aramco Oil & Gas 365 billion Saudi Arabia 8 State Grid Electric Utility 338 billion China 9 Vitol Oil & Gas 307 billion Netherlands 10 Volkswagen Group Automobile 263 billion Germany
The Rise of the Multinational Corporations v Reasons to Go Global: Ø Ø More raw materials New markets Minimize costs of production Cheap capital 15
The Rise of the Multinational Corporation v Raw material seekers Ø historically first to appear (Colonial Period) ü Exploit the raw materials and labor Ø modern-day counterparts üOil and Gas: British Petroleum, Exxon Mobile üMineral: International Nickel, Anaconda Copper, 16
The Rise of the Multinational Corporation v Market Seekers Ø Produce and sell in foreign markets Ø Have heavy foreign direct investment Ø Represented today by firms such as: üIBM, Volkswagen üConsumer Products Companies: Mac. Donald’s , Nestle, Levi Strauss, Unilever, Proctor & Gamble, Coca-Cola 17
The Rise of the Multinational Corporation v Cost Minimizers Ø seek lower-cost production abroad Ø Their motive: to remain cost competitive Ø Represented today by firms such as: üElectronic Companies: Texas Instruments, Intel, Seagate Technology, Dell (Phone Customer Service in India) 18
The Rise of the Multinational Corporation v What is the MNC from a Behavioral View? v it’s a state of mind committed to globally Ø Ø producing, undertaking investment (FDI), marketing, and financing. 19
The Rise of the Multinational Corporation v Global Manager should Ø Understand political, economic and cultural differences across countries; Ø Search for most cost- effective suppliers; Ø Evaluate changes in the firm’s value caused by foreign currency risk or political risk. 20
- Interest rate parity example
- The commonly accepted goal of the mnc is to:
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