International Finance Essentials of Corporate Finance Chapter 18 Materials Created by Glenn Snyder – San Francisco State University

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 2 Topics International Financial Analysts Why is International Finance Different?  Time Zones / Communication  Currency  Culture  Global Political Implications  Markets  Language  Foreign Laws and Restrictions  Foreign Accounting  Strategies Career Advice for an International Financial Analyst

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 3 International Financial Analysts An International Financial Analyst typically works in the corporate headquarters, internally supporting and analyzing the company’s international operations. An International Financial Analyst is different from other Internal Financial Analysts by:  Currency  Culture  Global Political Implications  Market Complexities Sophistication of the Consumers  Language  Foreign Laws and Restrictions  Foreign Accounting

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 4 Currency Currency fluctuations can change the value and importance of an international operation Currency1/3/00 (in USD) 1/1/07 (in USD) % Change Canadian Dollar % Euro % Japanese Yen (15%) Brazilian Real (18%) Chinese Yuan % South Korean Won % South African Rand (15%)

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 5 Time Zones / Communications Communicating with international offices is not just difficult because of language and cultural differences, but time zones as well  If a San Francisco based company wants to talk with a subsidiary in India at 1:30 pm Indian local time, the San Francisco employee must call India at 1:00 am Pacific Standard Time  If a New York based company wants to talk with a subsidiary in Japan at 9:00 am Japanese local time, the New York employee must call Japan at 7:00 pm Pacific Standard Time

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 6 Culture An International Financial Analyst must understand the differences between cultures  In Italy, employees have a minimum of 5 weeks of vacation per year  In many Asian cultures, it is customary to drink and go to bars after work  In many Middle Eastern cultures, women must be dressed from head to toe These customs and cultures are important when communicating ( or phone) or visiting the international office

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 7 Global Political Implications An International Financial Analyst must understand what is going on in world politics and the implications on their company  India and Pakistan testing nuclear weapons  North Korea testing nuclear weapons  Venezuela cutting off access for American oil companies  Iraq war  Riots in Paris in 2005  Subway bombings in Madrid and London

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 8 Markets An International Financial Analyst must understand the complexities and trends of the international market place  Sophistication of Consumers Financial Services Industry – Many consumers in emerging market countries don’t understand equities and derivatives Telecommunications – In countries like Brazil, most of the population does not have home phone lines Automotive Industry – Europe has gasoline prices close to 4 times the price of the U.S., with smaller roads and fewer parking spaces

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 9 Language An International Financial Analyst must be able to communicate clearly with members of the international offices  In Japan, it is a sign of respect to add “san” to the end of a person’s last name Chevy Nova example  Chevrolet marketed their Nova vehicle to Latin America, without changing the name In Spanish, “No Va” means No Go

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 10 Foreign Laws and Restrictions Most countries have laws and restrictions very different to those of the United States  China requires at most 33% foreign ownership U.S. Companies must enter China through joint ventures U.S. Companies do not have control of their China operations When a company opens an office in another country, it must set up a new legal entity in that country  The local country will want to receive tax revenue for any income earned in that country

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 11 Foreign Laws and Restrictions Tax Havens  Tax Havens are countries with very low or no corporate income tax  Examples are: The Bahamas Grand Cayman Singapore Luxembourg  Income earned in tax havens cannot be repatriated into the United States without paying U.S. taxes

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 12 Foreign Accounting Differences in Accounting Standards  Different countries offer different tax incentives. German firms tend to stretch the definition of a liability and tend to understate inventory for tax purposes. Sweden offers accelerated depreciation and inventory write-offs, which differ from the U.S. accounting standards. Most countries have only one set of reports used for both taxes and public reporting. The U.S. reports these differently.

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 13 Foreign Accounting Each foreign office typically keeps two sets of books  One is for local reporting and taxes  One is based on the company’s chart of accounts for consolidation purposes Foreign offices must have their financial statements translated and merged into the home country’s financials to produce consolidated financial statements

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 14 Strategies An International Financial Analyst must take into account all of the previous items when  Developing a strategic plan of an international office  Analyzing budget variances  Analyzing impacts to consolidated financials  Analyzing strategic projects or international expansion  Evaluating management, efficiency, or production levels

February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 15 Career Advice for an International Financial Analyst Understand cultural differences Be open minded, the U.S. way is not always the best Learn foreign languages  At least learn a few phrases in many different languages Stay current with global politics and happenings Most people are not hired into international positions, they begin their careers in a domestic position for a global organization, then transfer when they’ve gained specific expertise