BBMF3123
INTERNATIONAL
FINANCE
1
International Finance
Main references supporting the course:
1. Alan C. Shapiro; Paul Hanouna, 2019, Multinational
Financial Management, 11th edn, Wiley.
2.Cheol Eun and Bruce R, 2021, International financial
management, 9th edn, Mcgraw Hill
Additional references supporting the course:
1. Jeff Madura, 2021, International Financial
Management, 14th edn, Cengage Learning.
2. Eiteman D Stonehill A and Moffett M.H., 2019,
Multinational business finance, 15th edn, Pearson.
International Finance
ASSESSMENT METHOD
• Coursework
CW1 – Individual Test
30%
CW2 – Written assignment
70%
 Group report (45.5%)
 Individual report (24.5%)
• Final Exam
50%
50%
100%
IMPORTANT DATES
• Week 8
Coursework 1 (Midterm Test)
• Week 9
Submission of Written Assignment
TOPIC 1
Theories of
International
Business
5
Learning Goals
1. Distinguish multinational financial management
from domestic financial management
2. Compare the goals of multinational financial
management
3. Describe the key theories that justify
international business
4. Explain the common methods used to conduct
international business
5. Recognise the Globalisation Process
6
Multinational Corporation (MNC)
A multinational corporation (MNC) is a company
• engaged producing and selling goods or services
in more than one country.
• has production and sales operations
(subsidiaries, branches or affiliates) in other
countries.
Multinational Corporations
• MNCs emphasise group performance over performance of
individual parts.
• Firms merely exporting products and importing raw materials are
not MNC.

What differentiates MNCs from other firms engaged in
international business is the globally coordinated allocation
of resources by a single centralised management.
8
International Financial Management
Also important to companies with no
international business
WHY?
 movement in exchange rates,
 foreign interest rates
 labour cost
 Inflation
(All affecting cost of production & pricing policies)
Multinational vs. Domestic
Financial Management
• There are significant differences between multinational and
domestic financial management:
– Cultural issues
– Corporate governance issues
– Foreign exchange risk
– Political risk
– Modification of domestic finance theories
– Modification of domestic financial instruments
10
Comparison
Concept
Domestic
International
Culture, history
and institutions
Each country has a
known base case
Each foreign country is
unique and always
understood by MNC
Corporate
Government
Each country has a
known base case
Foreign countries’
regulation and
institutional practices are
all uniquely different
Foreign exchange
risk
FX risk from import and
foreign competition
MNCs face foreign
exchange risk
Comparison
Concept
Domestic
International
Political risk
Negligible political risk
Face political risk.
Modification of
domestic theories
Traditional finance
theory applies
MNC must modify
finance theories like
capital budgeting and cost
of capital because of
foreign complexities
Modification of
financial
instruments
Limited use of financial
instrument and
derivatives
MNC utilise modified
financial instruments such
as options, futures, swaps
and letter of credit
Goals Of A Firm
• Goals - maximise shareholder wealth / value
(share price) - funds to support operations.
Applicable to both domestic and international
business
Return = Capital Gain + Dividend
SWM = maximise share price & minimise risk
• Additional goals for MNCs
 satisfying their respective governments, creditors
or employees
When a corporation’s shareholders differ from its
manager- conflict of MNC goal
 Agency problem
Agency cost
 A type of internal cost that arises from, or must be paid
to, an agent acting on behalf of a principal.
• Agency costs can be either:
1. the costs incurred if the manager use company's
resources for his own benefit; or
2. the cost of techniques that shareholder use to
prevent the manager from prioritising his interests
over the shareholders’.
 Cost will be higher for MNCs as compared to purely
domestic market.
Higher Agency costs for MNCs
1. Distance of subsidiaries in foreign countries
2. Different cultures of foreign subsidiary managers
3. Sheer size of larger MNC
4. Inconsistency in MNC goal.
Financial managers may make decision that maximise
the values of respective subsidiaries and objective may
not coincide with maximising the value of overall MNC
Management Control (Structure)
1. Centralised control
 parent direct control
2. Decentralised control
 categorise their business department into
divisions – finance division, HR division depending on the responsibility of the
division managers of the department.
Centralised MNCs
Financial Managers of
Parent MNC
Subsidiary A
Subsidiary B
Cash management A
Cash management B
Stock and debtor
management A
Stock and debtor
management B
Finance A
Finance B
Investment A
Investment B
Decentralised MNCs
Financial Managers of
Parent MNC
Subsidiary A
Subsidiary Financial
Managers of A
Subsidiary B
Subsidiary Financial
Managers of B
Cash management A
Cash management B
Stock and debtor
management A
Stock and debtor
management B
Finance A
Finance B
Investment A
Investment B
Management Control
 Management structure would affect the larger or smaller agency
cost
 Centralised control
 Advantage : can reduce agency cost- reduce power of
subsidiary managers
 Disadvantage: managers of parent may make poor decisionsif not as informed about local conditions
 Decentralised control
 Advantage: Subsidiary managers may be more effectivecontrol to managers who are closer to subsidiary’s operation
and environment
 Disadvantage: higher agency cost- subsidiary managers not
focused on maximising the value of entire MNC
Catalysts for Globalisation
•
Massive deregulation
•
Collapse of Communism
•
Worldwide sale of state-owned firms in privatisations
•
Revolution in information technologies
−
•
Rise in the market for corporate control
−
•
Improvements in distribution logistics and communications
External corporate control
Replacement of statist policies by free-market policies in many Third-World
economies
−
Statism to Capitalism
21
Implications of Globalisation for Businesses
• Intense competition.
− must be able to quickly adapt their policies to respond to new global
market opportunities and challenges.
• international mobility of capital has provided more financial options
− increasing complexity
• Free trade allocates resources to their highest valued use.
• Fosters creative destruction – continuous change-out with the old, in with
the new;
– Some industries advance, others recede, Jobs are gained and lost;,
Businesses boom and go bust; and Some workers must change jobs and
occupations.
• Consumers benefit
− Lower prices and expanded choices.
• Globalisation enables nations to get richer together (i.e., expands the
economic pie for all parties).
22
The Rise of MNCs
1.
2.
3.
4.
5.
6.
Search for Raw material
Market seeking
Cost minimisation
Knowledge seeking
Keeping domestic customers
Exploiting Financial Market Imperfections.
The Rise of MNCs
1. Search for raw materials
• MNCs aim to exploit raw materials found in foreign countries.
2. Market Seeking
• Goes overseas to produce and sell in foreign markets
• Save costs: economies of scale, transportation cost
– Exploitation of foreign markets may be possible at considerably lower costs.
– Foreign markets provide opportunities for MNCs to achieve economies of scale and
exploit premiums associated with strong brand names.
3.
Cost Minimisation.
• Costs can be minimised by combining production and integration of the firm’s
global manufacturing facilities;
24
The Rise of MNCs
4.
Knowledge Seeking.
• Some firms enter foreign markets to gain information and experience to use in
other markets.
5.
Keeping Domestic Customers.
• MNC suppliers follow customers abroad to guarantee them a continuing
product flow and reduce the risk that their customers will find an alternative
local supplier.
6.
Exploiting Financial Market Imperfections.
• Operating in numerous countries with different economic cycles reduces
systematic risk and risk relating to exchange rate fluctuations, currency
controls, expropriation, and other foreign government interventions
(“diversification effect”).
25
6 International Business Methods
1.
International trade
2.
Licensing
3.
Franchising
4.
Joint Ventures
5.
Acquisitions of existing operations
6.
Establishing new foreign subsidiaries/ Green Field
Investment
International trade
•
Initial step to enter foreign market:
– penetrate markets (by exporting)
– obtain supplies at a low cost (by importing).
•
As increased communication with customers reduces uncertainty,
the firm might establish its own sales subsidiary.
International trade
o Advantages
1. Low capital requirements and start-up costs
2. Low risk- if experience decline in export or import, reduce or discontinue.
3. Immediate profits
4. Market Information - Learn about present and future market conditions, local
competition, distribution channels, payment conventions, financial institutions,
and financial techniques.
o Disadvantages
1.Inability to realise full sales potential
2.Socio barriers - Difference in language and culture creates socio barriers
Licensing

Obligates a firm to provide its technology
(copyrights, patents, trademarks, or trade
names) in exchange for fees or some other
specified benefits.
Licensing

Advantages
1.
Minimal investment- Allows firms to use their technology in
foreign markets without a major investment and without
transportation costs that result from exporting
2.
Faster market-entry time
3.
Fewer financial and legal risks

Disadvantages
1.
Cash flow relatively low
2.
Risk of product quality problems- difficult to ensure quality
control in foreign production process
3.
Difficulty controlling exports by the licensee; licensee may
become a competitor
Franchising

Obligates firm to provide a specialised sales or
service strategy, support assistance, and possibly
an initial investment in the franchise in exchange
for periodic fees.

Allows penetration into foreign markets without
a major investment in foreign countries.

Lower risk
Franchising

Advantages
1.
Minimal investment
2.
Faster market-entry time
3.
Higher level of control

Disadvantages
1.
Risk of product quality problems
2.
Difficulty controlling exports by the franchisee ; franchisee
may become a competitor
Joint Ventures
•
Jointly owned and operated by two or more firms.
•
A firm may enter the foreign market by engaging in a
joint venture with firms that reside in those markets.
•
Allows two firms to apply their respective
cooperative advantages in a given project.
Acquisition
• Acquiring of firms in foreign countries
• full control and quickly obtain large portion of
foreign market share
• higher risk- larger investment (higher losses).
• Liquidation may be difficult if operate poorly
(difficult to sell at reasonable price).
Establishing New Foreign
Subsidiaries
• Direct establish a new subsidiary in foreign
country.
• High risk - Require large investment
• Operation can be tailored exactly to firm’s needs
• May not reap any rewards until subsidiary is built
and customer established.
The Globalisation Process
• The Globalisation process is the structural and
managerial changes and challenges experienced by
a firm as it moves from domestic to global in
operations.
Domestic
Global
The Globalisation Process
Phase One: Domestic Operations
Malaysian Suppliers
(domestic)
Payments in Malaysian Ringgit;
Credit risk under Malaysian law
Maggi Corporation
(Malaysia)
Domestic
Malaysian Buyers
(domestic)
The Globalisation Process
Domestic
Exporting
• In Phase One, Maggi Corp is not itself international
or global in its operations.
• However, some of its competitors, suppliers or
customers may be.
• This is one of the key drivers pushing Maggi Corp
into Phase Two, the first transition of the
Globalisation process
• This is the Global Transition I: The Domestic
Phase to The International Trade Phase
The Globalisation Process
Phase Two: Expansion into International Trade
Maggi Corporation
(Malaysia)
Thailand Suppliers
Are Thailand suppliers dependable?
Will Maggi pay MYR or Thai Baht?
Singaporean Buyers
Are Singaporean buyers creditworthy?
Will payment be made in MYR or S$?
Maggi Corp: Phases Combined
Malaysian Suppliers
(domestic)
Payments in Malaysian Ringgit;
Credit risk under Malaysian law
Malaysian Buyers
(domestic)
Trident
Maggi Corporation
(Los Angeles,
USA)
(Malaysia)
Thailand Suppliers
Are Thailand suppliers dependable?
Will Maggi pay MYR or Thai Baht?
Singaporean Buyers
Are Singaporean buyers creditworthy?
Will payment be made in MYR or S$?
Phase Two: Expansion into International Trade
The Globalisation Process
• If Maggi is successful in its international trade activities, it will
soon need to establish foreign sales and service affiliates.
• This step is often followed by establishing manufacturing
operations abroad
• This is the Global Transition II: The International Trade
Phase to The Multinational Phase
Exporting
Sales Subsidiary
Service facilities
Production
overseas
The Globalisation Process
• OR:
• If Maggi is successful in its international trade activities, it
will enter foreign market by licensing foreign firms to
produce and service Maggi’s products.
• This is the Global Transition II: The International Trade
Phase to The Multinational Phase
Exporting
Licensing
Typical Foreign Expansion Sequence
Licensing
Domestic
Exporting
Sales
Subsidiary
Service
facilities
Production
overseas
The Globalisation Process
• Maggi’s continued Globalisation will require it to
identify the sources of it competitive advantages.
• This variety of strategic alternatives available to
Maggi is called the foreign direct investment which
include the creation of foreign sales offices, licensing
agreements, manufacturing plants, etc.
• Once Maggi owns assets and enterprises in foreign
countries it has entered the Multinational Phase of
Globalisation.
• Domestic  International Trade  MNC
Foreign Direct Investment Sequence
Maggi and its
Competitive Advantage
Change
Competitive Advantage
Greater Foreign Presence
Exploit Existing Competitive
Advantage Abroad
Production at Home:
Exporting
Production Abroad
Licensing/ Franchising
Management Contract
Greater
Foreign
Investment
Joint Venture
Greenfield
Investment
Control Assets
Abroad
Wholly-Owned
Subsidiary
Acquisition of a
Foreign Enterprise