1 Globalization and the Multinational Firm

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INTERNATIONAL

FINANCIAL

MANAGEMENT

EUN / RESNICK

Fifth Edition

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin


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Chapter Objectives:

Understand why it is important to study

international finance.

Distinguish international finance from domestic

finance.

1Chapter OneGlobalization and the

Multinational Firm

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Whats Special about International Finance?

Goals for International Financial Management

Globalization of the World Economy Multinational Corporations

Organization of the Text

Summary

Chapter One Outline

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Whats Special about

International Finance?

Foreign Exchange Risk

Political Risk

Market Imperfections Expanded Opportunity Set

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Whats Special about


Foreign Exchange Risk

The risk that foreign currency profits 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 lostmoney in dollar terms.

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Whats Special about


Political Risk

Sovereign governments have the right to regulate the

movement of goods, capital, and people across their

borders. These laws sometimes change in unexpectedways.

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Market Imperfections

Legal restrictions on the movement of goods,

people, and money

Transactions costs

Shipping costs

Tax arbitrage

Whats Special about


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The Example of Nestls Market Imperfection

Nestl used to issue two different classes of

common stock bearer shares and registered

shares.

Foreigners were only allowed to buy bearer shares.

Swiss citizens could buy registered shares.

The bearer stock was more expensive.

On November 18, 1988, Nestl lifted restrictionsimposed on foreigners, allowing them to hold

registered shares as well as bearer shares.

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Nestls Foreign Ownership Restrictions

12,000

10,000

8,000

6,000

4,000

2,000

0

11 20 31 9 18 24

Source:Financial Times, November 26, 1988 p.1. Adapted with permission.

SF

Bearer share

Registered share

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The Example of Nestls Market Imperfection

Following this, the price spread between the twotypes of shares narrowed dramatically. This implies that there was a major transfer of wealth

from foreign shareholders to Swiss shareholders. Foreigners holding Nestl bearer shares were

exposed to political risk in a country that iswidely viewed as a haven from such risk.

The Nestl episode illustrates both the importanceof considering market imperfections and the perilof political risk.

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Expanded Opportunity Set

It doesnt make sense to play in only one

corner of the sandbox.

True for corporations as well as individual

investors.

Whats Special about


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The focus of the text is to equip the reader with the

intellectual toolbox of an effective global

managerbut what goal should this effective

global manager be working toward?

Maximization of shareholder wealth?

or

Other Goals?

Goals for International Financial

Management

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Maximize Shareholder Wealth

Long accepted as a goal in the Anglo-Saxon

countries, but complications arise.

Who are and where are the shareholders? In what currency should we maximize their

wealth?

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Other Goals

In other countries shareholders are viewed as merely one

among many stakeholders of the firm including:

Employees

Suppliers Customers

In Japan, managers have typically sought to maximize the

value of the keiretsua family of firms to which the

individual firms belongs.

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Other Goals

As shown by a series of recent corporate scandalsat companies like Enron, WorldCom, and GlobalCrossing, managers may pursue their own private

interests at the expense of shareholders when theyare not closely monitored.

These calamities have painfully reinforced theimportance ofcorporate governance i.e. the

financial and legal framework for regulating therelationship between a firms management and itsshareholders.

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Other Goals

These types of issues can be much more serious in

many other parts of the world, especially emerging

and transitional economies, such as Indonesia,

Korea, and Russia, where legal protection of

shareholders is weak or virtually non-existing.

No matter what the other goals, they cannot be

achieved in the long term if the maximization ofshareholder wealth is not given due consideration.

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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

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Deregulation of Financial Markets

coupled with

Advances in Technology

have greatly reduced information andtransactions costs, which has led to:

Financial Innovations, such as

Currency futures and options

Multi-currency bonds Cross-border stock listings

International mutual funds

Emergence of Globalized Financial Markets

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Emergence of the Euro as a Global Currency

A momentous event in the history of world

financial systems.

Currently more than 300 million Europeans in 15

countries are using the common currency on a dailybasis.

In May 2004, 10 more countries joined the

European Union and adopted the euro. The transaction domain of the euro may become

larger than the U.S. dollars in the near future.

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Euro Area

Austria,

Belgium,

Cyprus, Finland,

France,

Germany,

Greece,

Ireland,

Italy,

Luxembourg, Malta,

The Netherlands,

Portugal,

Slovenia, Spain

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Value of the Euro in U.S. Dollars

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http://www.advfn.com/p.php?pid=charts&symbol=FX%5EEURUSD


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Economic Integration

Over the past 50 years, international trade

increased about twice as fast as world GDP.

There has been a sea change in the attitudes of

many of the worlds governments who haveabandoned mercantilist views and embraced free

trade as the surest route to prosperity for their

citizenry.

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Liberalization of Protectionist Legislation

The General Agreement on Tariffs and Trade

(GATT) a multilateral agreement among member

countries has reduced many barriers to trade.

The World Trade Organization has the power toenforce the rules of international trade.

On January 1, 2005 the end of the era of quotas

on imported textiles ended. This is an event of historic proportions.

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NAFTA

The North American Free Trade Agreement(NAFTA) calls for phasing out impediments totrade between Canada, Mexico and the United

States over a 15-year period beginning in 1994. For Mexico, the ratio of export to GDP has

increased dramatically from 2.2% in 1973 to 29%in 2006.

The increased trade has resulted in increasednumbers of jobs and a higher standard of livingfor all member nations.

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Privatization

The selling off state-run enterprises to investors is

also known as Denationalization.

Often seen in socialist economies in transition to

market economies.

By most estimates this increases the efficiency of

the enterprise.

Often spurs a tremendous increase in cross-borderinvestment.

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Multinational Corporations

A firm that has incorporated on one country and

has production and sales operations in other

countries.

There are about 60,000 MNCs in the world.

Many MNCs obtain raw materials from one

nation, financial capital from another, produce

goods with labor and capital equipment in a thirdcountry and sell their output in various other

national markets.

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Top 10 MNCs

1 General Electric United States

2 Vodafone Group PLC United Kingdom

3 General Motors United States

4 British Petroleum Co. PLC United Kingdom

5 Royal Dutch/Shell Group UK/Netherlands

6 ExxonMobile Corporation United States

7 Toyota Motor Corporation Japan

8 Ford Motor Company United States

9 Total France

10 Elctricit de France France

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