Finance 3616 Notes

1 Found helpful • 141 Pages • Complete Study Notes • Year: Pre-2021

Chapter 1: An Introduction to Multinational Finance  1.1 INTRODUCTION OF INTERNATIONAL BUSINESS FINANCE  1.1.1 Three Phases In the Evolution of a Firm • Domestic Phase: Operations are confined w/in boundaries of 1 country • International Trade Phase: Firm imports materials and or exports its product • Multinational Phase: Firm establishes operations o/s  1.1.2 Objectives of International Business Finance • Develops framework for evaluating the opportunities, costs & risks of operating in the world’s markets for g/s & financial assets  1.2 INTRO TO MULTINATIONAL CORPORATIONS  1.2.1 Structure of MNCs •  1.2.2 Goals of MNCs • Mainly to please stakeholders (anyone w/ an interest in the firm), i.e. shareholders, suppliers, customers, debt holders, employees and society • Objectives of shareholders can clash w/ other stakeholders • Agency Costs: arise when managers have a conflict of interest i.e. their own objectives aren’t the same as those of equity/ other stakeholders  Incl. costs of contracting & monitoring between the various stakeholders to reduce potential conflicts of interest  1.2.3 Claims on Revenues of a MNC •  VExpenses = Operating Expenses, determined by suppliers & employee wages • VGovt = Taxes, tariffs & cost of compliance w/ local laws & regulations • VDebt = Interest & Capital gains • VEquity = Dividends and capital gains  1.3 CHALLENGES OF MULTINATIONAL OPERATIONS • Financial Risk • Political Risk • Cultural Risk  1.3.1 Financial Risk • Risk of unexpected change in the financial/ economic enviro of a host country • Currency/FX Risk: risk of an unexpected change in the value of the firm due to an unexpected change in XR,  If severe this can potentially wipe out profits • Interest Rate Risk: Risk of unexpected change in the value of the firm due to unexpected change in IR  1.3.2 Political Risk • Risk that a host govt will change policies and relative legislations • Sources of political risk incl: unexpected changes in the bus. enviro arising from taxes, local content & employment regulations, restrictions on foreign ownership, business & bankruptcy laws, FX controls & expropriation  1.3.3 Cultural Risk  Cultural Risk: Risk of dealing w/ an unfamiliar culture  Each culture differs in their language, body language as well interpretation of actions, it is essential that MNCs understand the cultures of the countries they are trying to market in  E.g. eye contact in western & Asian countries  Differences in Cross-Border Operations:  It is essential to be aware of the differences in: • Legal, Acct & Tax systems:  E.g. different tax benefits in the form of tax holidays as an investment incentive • Personnel Management • Marketing:  E.g. Disneyland not selling alcohol in their theme parks in Europe • Distribution:  E.g. groceries- US enjoys large chains e.g. Costco, other cultures enjoy more local and smaller grocers • Financial Markets:  Financial market operations vary across countries, the most obvious diff are in liquidity & volume of trade  Other differences incl. banking practices e.g. Islamic bankincg customs: depositors don’t receive a set IR but share in the profits & losses of the bank. • Corporate Governance  1.4 OPPORTUNITIES OF MULTINATIONAL OPERATIONS  Theoretical Support for Multinational Operations: • Theory of Comparative Advantage: Country should produce & export goods it can produce w/ relative efficiency & import goods from other nations which can produce them more efficiently E.g. Australia: mining & ag industries, India – IT industry, Japan/ Germany: manufacturing etc.  1.4.1 Multinational Investment Opportunities  Investment Opportunity Set: set of investments available to the corporation  Objective of firm is to choose the set of investments that maximizes the PV of expected future operating CF  Three Main Investment Opportunities: • Enhancing Revenues • Reducing Operating Costs • Multinational Business Strategy  1.4.1.1 MNC Opportunities to Enhance Revenues  Revenue-enhancing advantages that MNCs enjoy over domestic firms • Global Branding • Marketing Flexibility o MNCS can easily shift sales efforts towards markets willing to pay higher prices for their products o e.g. if Ford’s Jaguar is in high demand in US, then Ford can shift its marketing efforts toward the US and away from regions of lower demand • Advantages of Scale & Scope: o MNCS can exploit their competitive advantages on a larger scale & across a broader range of markets & products  E.g. Nike swoosh is promoted across intl markets & product lines  1.4.1.2 MNC Opportunities to Reduce Operating Costs  Since MNCs operate globally, they can essentially find the cheapest resources as well as exploit opportunities of economies of scale • Low-cost Raw Materials • Low-cost Labour: o The threat of low-cost foreign labour is a major fear of organised labour in industrialized countries, but MNCs don't have to worry abut this • Flexibility in Global Site Selection: o MNCs can use the different tax incentives of each country to their advantage and pick the one that's most appealing to conduct their operations in • Flexibility in Sourcing & Production:

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