1. Globalization & the Multinational Firm
Understand why it is important to study international finance.
Distinguish international finance from domestic finance.
1. Foreign Exchange Risk
2. Political Risk
3. Market Imperfections
4. Expanded Opportunity Set

2. Foreign Exchange Risk
The risk that foreign profits and wealth may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.
Suppose $1 = ¥100 and you buy 10 shares of Toyota at ¥10,000 per share.
One year later the investment is worth ten percent more in yen: ¥110,000
But, if the yen has depreciated to $1 = ¥120, your investment has actually lost money in dollar terms.

3. Political Risk
Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders, and legislation of taxation.
Sovereign governments laws sometimes change in unexpected ways.
Sovereign government and civil instability

4. Market Imperfections
Legal restrictions on movement of goods, people, and money; e.g. tariffs.
1. Farley, NCB entries in Europe
Transactions costs
Shipping costs
Tax arbitrage

5. Expanded Opportunities
Markets, new and growing
Intellectual capital
Capital markets
Taxation
Economies of scale
R&D
Cheaper labor
Lower prices
Employment
Technology
Wealth

6. Primary Goal for International Corporate Financial Management
Maximization of shareholder wealth?
Other stakeholders
1. Employees
2. Suppliers
3. Customers

7. Keiretsu
In Japan, managers have typically sought to maximize the value of the keiretsu—a family of firms to which the individual firms belongs.

8. Corporate Governance Corporate scandals 1. Enron 2. Tyco 3. WorldCom
4. Madoff
Managers may pursue their own private interests at the expense of shareholders when they are not closely monitored.
These catastrophic corporate events have painfully reinforced the importance of corporate governance; - the financial and legal framework for regulating the relationship between a firm’s management and its shareholders.
Has SOX worked? Can we regulate behavior?
Emerging and transitional economies legal protection of shareholders is weak or virtually non-existing.

9. Globalization of the World Economy Major Trends
Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
Privatization

10. Emergence of the Euro as a Global Currency
Currently more than 300 million Europeans in 22 countries are using the common currency on a daily basis.
The transaction influence of the euro may become larger than the U.S. dollar’s in the near future.

11. Euro Area

12. Global Economic Integration
Over the past 50 years, international trade increased about twice as fast as world GDP.
In more recent years there has been a change in the attitudes of many of the world’s governments who are abandoning mercantilist and centralized views and embracing free trade as the most effective route to prosperity for their citizenry.
The highest affect for prosperity in free trade being derived from manufacturing.

13. Liberalization of Protectionism
The General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)
The North American Free Trade Agreement
(NAFTA)
For Mexico, the ratio of export to GDP has increased dramatically from 2.2% in 1973 to 28.7% at the beginning of the 21st century.

14. Privatization
The selling off of state-run enterprises to investors for the purpose of establishing a free market economy and the increase of individual wealth through business profits.
Privatization increases the efficiency of the enterprise.
Privatization typically accelerates a tremendous increase in cross-border investment.

15. Multinational Corporations
A company that has incorporated in one country and has production and sales operations in other countries.
Many MNCs obtain raw materials from one country, financial capital from another, produce goods with labor and capital equipment in a third country and sell their output in various other national markets.

16. Top 10 MNCs
Who ?

17. Top 10 MNCs
1.  Royal Dutch Shell $458 billion – Oil (Netherlands)
2. Exxon Mobil $443 billion - Oil
3. Wal-Mart $406 billion - Retail
4. BP $357 billion - Oil
5. Chevron $263 billion - Oil
6. Total $235 billion - Oil (French)
7. ConocoPhillips $231 billion - Oil
8. ING Group $227 billion – Bank (Netherlands)
9. Sinopec $208 billion - Oil (China)
10.Toyota $204 billion - Automobile

18. The Theory of Comparative Advantage
Gains From Trade
Definition: a comparative advantage exists when one party can produce a good or service at a lower opportunity cost than another party.

19. The Geometry of Comparative Advantage
There are two countries, A and B, who can each produce only food and textiles.
Initially they do not trade with one another.

20. Globalization Criticisms of globalization
Offshoring of business services jobs to lower-wage countries (Outsourcing)
Growing trade deficits
Slow wage growth
Environmental and social impacts

21. Europe Emergence of the EU as an operational economic union
Economic linkages between the EU and newly emerging Central and Eastern European countries
Foreign MNCs gain foothold in EU by
Acquisitions
Alliances
Cooperative R&D efforts
Challenge is to absorb former communist-bloc countries
Privatization of traditionally nationalized industries

22. Central and Eastern Europe
Perestroika—economic and political restructuring
Dismantling of Russian price controls
Privatization
Inflation
Membership in International Monetary Fund (IMF)
Crime
Political uncertainty

23. Asia Japan Phenomenal economic success in 1970s and 1980s
Ministry of International Trade and Industry (MITI)
Keiretsus
Vertically integrated industries
Holdings provide assistance needed in providing goods and services to end users
Decade long recession in 1990s
Bank loans backed by real estate or projected revenues
By 2000, most major banks had billions of dollars in uncollectible loans
International competition has increased

24. Asia The Four Tigers South Korea Hong Kong
Chaebols (large family-held Korean conglomerates)
Affected by declining economies of South east Asia in 1990s)
Hong Kong
Now part of People’s Republic of China
Uncertainty about role the Chinese government intends to play in local governance

25. Asia Singapore Least hurt by economic downturn of 1990s Taiwan
Progression from labor-intensive economy to one dominated by technologically sophisticated industries (banking, electricity generation, petroleum refining and computers)

26. Asia
China
Annual real economic growth of 10 percent during the 1980s and early 1990s
More recent growth of 8 percent
Healthy and growing economy
GDP growth of 91 percent in 2003
Attractive to foreign investors despite major political risk
Product pirating is major problem
Complicated and high-risk venture

27. Developing and Emerging Country
India
Low per capita GDP
Recent trend of locating software and high value-added services to this country
Attractive to U.S. and British investors (well educated, English speaking, technologically sophisticated workers)