Introduction to International Finance

International Finance (MB 74)

Introduction to International Finance

Meaning of International FinanceMultinational FirmInternational Finance versus Domestic FinanceWhy Companies go Global?Modes of International BusinessCourse Sequence

Meaning of International Finance?

What is International Finance?A study of the institutions, policies, and practices that govern • global financial management and/or• financial aspects of global business

Multinational Financial Management?Multinational/Transnational Corporation

Why Study International Finance?

Exchange Rate Cross-border Barriers that include

Economic barriersCultural barriersPolitical and Legal barriersEthical Issues

Financing Opportunities in Global Market

Exchange Rate Risk

Changing value of U.S. dollar versus other currencies since 1973Declining dollar good for U.S. exporters, but bad for importsRising dollar good for U.S. imports/outsourcing, but bad for exports

Economic Barriers

Tariffs, Import Duties, Quota RestrictionsRestrictions on remittance of profits and repatriation of capitalRestrictions on foreign equity participationTrading blocks

Cultural Barriers

LanguageExamples of Language Barriers

“Please leave your values at the desk” (France)“The manager has personally passed all the water served here”

(Mexico; to assure safety of drinking water at the hotel)“You are invited to take advantage of the chambermaid” (Japan)“Ladies are requested not to have children in the bar” (Norway)“Because of the impropriety of entertaining guests of the

opposite sex in the bedroom, it is suggested that the lobby be used for this purpose” (Switzerland)

“We will execute customers in strict rotation.” (Greece)

Cultural Barriers Contd…

Hand GesturesReligion

HinduismIslamJudaismChristianityBuddhism

Significance of Religion and ValuesCustoms/Traditions

ULTRA CLEANLAUNDRY

USE SURFDIRTYLAUNDRY

N O AIRPORT

Political/Legal Barriers

Political IdeologyOpinions of Political LeadershipCivil disorderExternal relationsAttitude towards foreign capitalLegal System

Ethical Barriers

Definition of “Ethics” in your country versus definition of “Ethics” in a foreign countryEthics and the society

Firm’s role in educationFirm’s role in health care

Ethics and the environment

Who should study international finance?

A company that engages in global business

A pure domestic company

Why Firms go Global?

To maximize shareholder wealth through maximization of market value bymaximizing the cash flows of the firm

Why companies go global?

To seek raw materialTo seek new marketsTo minimize cost

Overall Goal

Overall goal, shareholder wealth maximizationSeparation of ownership from management and Corporate Governance

Corporate Governance

MeaningGoal of Corporate GovernanceComparative Corporate GovernanceCorporate Governance and Emerging MarketsCorporate Governance and Multinational Financial Management

MeaningCorporate governance is about the exercise of power over corporate entities. Governance issues arise when a corporate entity acquires a life of its ownWhenever ownership of an enterprise is separated from its managementThe relationship among stakeholders used to determine and control the strategic direction and performance of an organization is termed corporate governance

Goal

Corporate governance is, in essence, the method by which an organization establishes order among the various stakeholders to ensure that decisions are made and interests are represented in line with the firm’s stated objectives

Protect shareholders’ rightsEquitable treatment of all shareholders including minority and foreign shareholdersRecognize the rights of stakeholders as established by law and encourage active cooperation between corporations and stakeholders in creating wealth and jobs and the sustainability of financially sound enterprisesDisclosure and transparency including financial situation, performance, ownership, and governanceEffective monitoring of management by the board, and the board’s accountability to the company and to the shareholders

Comparative Corporation Governance

Origins of the need for corporate governance

Separation of ownership from managementVarying views by culture of who the stakeholders are

Corporate governance practices differ across culture

Market BasedEfficient equity markets; dispersed ownershipU.S., U.K., Canada, Australia

Family BasedManagement & Ownership is combinedFamily/majority and minority shareholdersHong Kong, Indonesia, Malaysia, Singapore, Taiwan, France

Bank BasedGovernment influence in bank lendingLack of transparency, family controlKorea, Germany

Government AffiliatedState ownership of enterpriseLack of transparency, no minority influenceChina and Russia

Modes of International Business

International TradeLicensingFranchisingJoint VenturesDirect Foreign Investment

Focus of this Course

Foreign Exchange Markets and Exchange Rate DeterminationTheories of Exchange Rate DeterminationExchange Rate RegimesForeign Exchange Rate Risk—Measurement and ManagementCapital Budgeting Analysis in a Global Environment