MAN 441: International Finance Instructor: M. Nihat Solakoglu Offıce: FA Office Phone: /5063

2 Why is IF important? Will GE India Unit Catch Eyes of Citi, B of A? By Will Wade American Banker, September 20, 2004 Bank of America Corp. and Citigroup Inc. may emerge as bidders for a big Indian outsourcing operation that General Electric Co. is said to be trying to sell..... The Wall Street Journal reported Friday that GE is hoping to sell all or part of GE Capital International Services, and that the price tag could reach $1 billion. The operation has 12,000 employees in India and 5,000 in Hungary, Mexico, and China.

3 Why is IF important? Goodyear Intends to Slice Costs By Up to $1 Billion Over 3 Years By TIMOTHY AEPPEL Staff Reporter of THE WALL STREET JOURNAL September 24, 2005; Page B6 Goodyear Tire & RubberGoodyear Tire & Rubber Co. said it will cut costs by as much as $1 billion over the next three years as it pushes ahead its turnaround plan, closing an unspecified number of factories and setting the stage for tough labor negotiations. Goodyear Tire & Rubber The tire maker, based in Akron, Ohio, said it also will save money by sourcing more tires from low-cost countries and boosting productivity...

4 Why is IF important? US Federal Reserve verdict to set markets tone By Chris Flood (Financial Tımes) Published: September :28 | Last updated: September :28 The central event for investors worldwide will be tomorrow’s meeting of the Federal Open Markets Committee, where US interest rates are widely expected to be increased to 1.75 per cent from 1.5 per cent. The central event for investors worldwide will be tomorrow’s meeting of the Federal Open Markets Committee, where US interest rates are widely expected to be increased to 1.75 per cent from 1.5 per cent. Philip Shaw of Investec, the banking group, said: “All eyes will be trained on the accompanying statement to see whether the FOMC hints at a rate pause before the end of the year.” Sterling slips on soft housing data By Steve Johnson in London (Financial Times) Published: September :28 | Last updated: September :28 Sterling weakened in European morning trade on Monday amid fresh signs that the UK housing market is slowing “This adds to the case for the Bank of England leaving rates unchanged for at least another month,” said James Knightley, economist at ING Financial Markets.

5 INTRODUCTION THE RISE OF THE MULTINATIONAL CORPORATION Today, companies operate within a global marketplace and faces with global competitors. I. The MNC A. Definition a company with production and distribution facilities in more than one country. Ordinarily, - a parent company at home country and - multiple foreign subsidiaries

6 THE RISE OF THE MULTINATIONAL CORPORATION Rise of multinational corporation was not anticipated by classical trade theory (Smith, Ricardo) Comparative Advantage - Each nation should specialize in the production and export of those goods that it can produce with highest relative efficiency and import those goods that other nations can produce relatively more efficiently. Underlying assumption: Goods and services can move ınternationally, but factors of production (e.g. Capital, land and labor) are relatively immobile.  Existence of MNCs is based on international mobility of certain factors of production.  Prime transmitter of competitive forces is the MNCs (E.g. China)

7 THE RISE OF THE MULTINATIONAL CORPORATION B. EVOLUTION OF THE MNC Reasons to Go Global: 1. Raw materials 2. More markets 3. Minimize costs of production

8 THE RISE OF THE MULTINATIONAL CORPORATION 1.RAW MATERIAL SEEKERS l exploit markets in other countries l historically first to appear l modern-day counterparts – Anaconda Copper – Standard Oil – Exxon- Mobil

9 THE RISE OF THE MULTINATIONAL CORPORATION 2.MARKET SEEKERS l produce and sell in foreign markets l heavy foreign direct investors l representative firms: – IBM – Nestle – Levi Strauss

10 THE RISE OF THE MULTINATIONAL CORPORATION 3.COST MINIMIZERS lSeek lower-cost production abroad lMotive: to remain cost competitive lRepresentative firms: –Texas Instruments –Intel –Motorola

11 THE RISE OF THE MULTINATIONAL CORPORATION D. THE MNC: A BEHAVIORAL VIEW Characterized by : - its state of mind and - not by its size and worldwide dispersion of its assets Distinguishing characteristıcs from other firms is its commitment to seeking out, undertaking and integrating manufacturing, marketing, R&D and financing opportunities on a global, not domestic, basis. Necessary complements to integration of worldwide operations are: - flexibility - adaptability - speed

12 THE RISE OF THE MULTINATIONAL CORPORATION Key to international competitiveness is the ability of management to adjust to change and volatility at an ever faster rate. “I am not here to predict the world. I am here to be sure I’ve got a company that is strong enough to respond whatever happens”. Jack Welch, ex-CEO of GE

13 THE RISE OF THE MULTINATIONAL CORPORATION E. THE GLOBAL MANAGER 1. Understands political and economic differences; economic differences; 2. Searches for most cost- effective suppliers; effective suppliers; 3. Evaluates changes on value of the firm.

14 PART II. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE I. THE MULTINATIONAL FINANCIAL SYSTEM A. Main Objective of MNC: Maximize shareholder wealth as measured by share price. Hence, make financing and investment decisions that add as much value as possible - Shareholders are the legal owners - Minimize (hostile) takeover risks - It is the best (or maybe the only) way to maximize economic benefits of all stakeholders

15 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE II. FUNCTIONS OF FINANCIAL MANAGEMENT A. Two Basic Functions: 1. Financing (Acquisition of funds) 2. Investing (Allocation of those funds over time so that shareholder wealth is maximized) B. Additional Factors Facing the MNC Executive 1. Political risk 2. Economic risk

16 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE III. THEORETICAL FOUNDATIONS A. Useful Concepts from Financial Economics: 1. Arbitrage 2. Market Efficiency 3. Capital Asset Pricing

17 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE Arbitrage: Definition: Purchase of assets or commodities on one markets for immediate resale in another in order to profit from a price discrepancy. e.g., Tax arbitrage - shifting of gains or losses from one tax jurisdiction to another

18 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE Market Efficiency: An efficient market is one in which the prices of traded securities readily incorporate new informatıon. Hence, one cannot rely on historical prices or publicly available information to consistently benefıts from trading.

19 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE Capital Asset Pricing Model (CAPM): - Refers to the valuation of securities based on expected risks and return. - Assumes a specific relationship between risk (measured by return variability) and required asset return. Two source of variability: Two source of variability: (a) Systematic (or non-diversifiable) risk: Marketwide influences that affect all sources (e.g. State of the economy) - relevant even for diversified investor - investor must be compensated for bearing that risk (b) Unsystematic (or diversifiable) risk: specific to given firm - irrelevant for diversified investor

20 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE Total risk is also important for the firm (not only systematic risk) 1. Adverse Impact on expected cash flow - lower sales and higher costs 2. Justifies hedging activities of MNC to reduce total risk 3. International diversification reduces total risk