International Business, 8th Edition Griffin & Pustay Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objectives Analyze the advantages and disadvantages of the major forms of payment in international trade Identify the primary types of foreign- exchange risk faced by international businesses Describe the techniques used by firms to manage their working capital Evaluate the various capital budgeting techniques used for international investments Discuss the primary sources of investment capital available to international businesses Copyright © 2015 Pearson Education, Inc.

Financial Issues in International Trade Choice of Currency: Which currency to use Credit Checking: When and how to check credit Method of Payment: Which form of payment to use Financing Trade: How to arrange financing Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Methods of Payment Payment in Advance Open Accounts Documentary Collection Letters of Credit Credit Cards Countertrade Copyright © 2015 Pearson Education, Inc.

Method of Payment: Open Account Importer’s Perspective Exporter’s Perspective Expedites the Receipt of Goods Offers Short-Term Financing Eliminates Fees for Bank Services Requires Less Paperwork Increases Risk of Non-Payment Waives Expertise of Bankers Lacks Supporting Documentation Requires Use of Working Capital Copyright © 2015 Pearson Education, Inc.

Method of Payment: Documentary Collection Commercial banks serve as agents to facilitate the payment process A Draft/Bill of Exchange Payment is demanded from the buyer at a specified time Bills of Lading A Contract for Transportation A Title to the Goods Copyright © 2015 Pearson Education, Inc.

Method of Payment: Documentary Collection Copyright © 2015 Pearson Education, Inc.

Method of Payment: Documentary Collection Sight Draft Time Draft Date Draft Trade Acceptance Banker’s Acceptance Sold without Recourse Sold with Recourse Copyright © 2015 Pearson Education, Inc.

Method of Payment: Letters of Credit Letter of Credit Issued by a bank Contains promise to pay the exporter Required Documentations Application Invoice Customs Documents Bill of Lading Packing List Proof of Insurance Export Licenses Certificates of Product Origin Inspection Certificates Copyright © 2015 Pearson Education, Inc.

Method of Payment: Letters of Credit Advised Letter of Credit Confirmed Letter of Credit Irrevocable Letter of Credit Revocable Letter of Credit Copyright © 2015 Pearson Education, Inc.

Method of Payment: Countertrade Barter Counterpurchase Buy-back Offset Purchase Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Financing Trade Exporting Firms Banks and Lenders Government Sponsors In most industries standard financing arrangements exist, and an international firm must be ready to offer those terms to its foreign customers. In many emerging markets, capital markets are often not well developed, and local lenders may charge extremely high interest rates, especially to smaller borrowers. Thus, exporters with access to low-cost capital can gain a competitive advantage by offering financing to foreign customers who lack access to cheaper financing. Of course, before deciding to extend credit, the exporter must examine the trade-off between the benefits of increased sales and the higher risks of default. Banks and other commercial lenders often are willing to finance accounts receivable of exporters by purchasing letters of credit and time drafts, or factoring open accounts at a discount from face value. Many developed countries supplement the services of these commercial lenders with government-supported financing programs to promote exports. Copyright © 2015 Pearson Education, Inc.

Managing Foreign Exchange Risk Foreign-Exchange Exposure Transaction Translation Economic Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Transaction Exposure Copyright © 2015 Pearson Education, Inc.

Management of Working Capital Corporate Financial Goals Minimizing Working Capital Balances Minimizing Currency Conversion Costs Minimizing Foreign-Exchange Risk Copyright © 2015 Pearson Education, Inc.

International Capital Budgeting Net Present Value Risk Adjustment Currency Selection Choice of Perspective Internal Rate of Return Payback Period Copyright © 2015 Pearson Education, Inc.

Sources of International Investment Capital External Sources of Investment Capital Investment Banks Stock Markets Borrowed Funds Swap Market Copyright © 2015 Pearson Education, Inc.

Internal Sources of Investment Capital Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Tax Havens Minimal Corporate Income Tax Stable Political and Business Climate Efficient Court System Sophisticated Banking and Communications Industries Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Tax Haven (Cont.) Government Response Arm’s Length Testing Advance Pricing Agreement Copyright © 2015 Pearson Education, Inc.