82,3 Million Germans
Hi there ...
1,28 Billion Chinese People
Where I‘m from
- Hi there ...
Vita
1943 Born in Lindlar (near Cologne), Germany
1970 Diploma in Business Administration University of Cologne
1976 Doctor of Economics
1976/86 Institut der deutschen Wirtschaft
1985 Consultant Kienbaum International
Since 1989 Professor at Cologne University of Applied Sciences
The job: International Finance and Investment
Agenda
(1) Management
(2) Corporate Finance and Investment
(Sole Proprietorships, Partnerships, Corporations --> Separation of Ownership &
Control)
(3) International Finance and Investment
(4) Lessons Learned
How to ...?
- Corporate (managerial) Perspective
- Keep it short and simple
- Asking questions and giving answers
Management: What does it mean?
- Getting things done with people
Or
- Reaching goals with effective and efficient use of resources
Which Management-Functions must be performed?
- Planning
- Organizing
- Staffing
- Leading/Actuating
- Controlling
The Leadership Engine. How to get Energy out of everyone?
- A sense of urgent need ...
- A mission that is inspiring ...
- Goals that stretch people's abilities
- A spirit of teamwork
- A realistic expectation that the team members can meet the
goals.
Which Roles should be taken?
- Entrepreneur
- Disturbance Handler
- Resource Allocator
- Leader
- Monitor
- Negotiator  Relations  Information  Decision
What is a Decision?
Decision Making is Problem Solving by Finding a Way out of a
Mess. May be more rational, may be more intuitive.
Six Steps af a Rational Decision
(1) Classifying the Problem
(2) Defining the problem. What are we dealing with?
(3) Specifying the answers to the Problem. What are the boundary
conditions?
(4) Deciding what is "right", rather than what is acceptabel, in
order to meet the boundary conditions
(5) Building into the decision the action to carry it
(6) Testing the validity and effectiveness of the decision against
the actual course of events.
Intuitive Decision Making
Intuition means Problem Solving by Recognition. If You have
already Experience with a Problem or a Job deliberate
consciousness is not necessary to find the way out. You find it
more or less automatically.
Gary Klein & Intuition
generates
Situation
Cues
using your
to effect the
that let you recognize
Mental
Simulation
which you
assess by
Mental
Models
Patterns
Action
Scripts
that activate
Managerial Decision Making
Managing Uncertainty:
The higher the Position or
the more relevant the
Problem, the more
Uncertainty You have to
take!
Believe it or not!
Behavioural Finance
- Financial management
is more than applying rules and procedures. It explores the
behaviour of markets, firms and individuals... Behavioural
finance is the study of psychological traits that investors and
managers display that prevent them acting in a purely rational
manner." (see Pike & Neale, 2006, p. 672)
- Building Intuition
"It is our experience that students who have a strong
conceptual understanding of finance theory better understand
how things really work and are better problem solvers and
decision makers than students who focus primarily on
computational skills." (see Kidwell & Parrino, 2009 - Preface)
Fundamentals: Balance Sheet
Uses of Funds
Assets
- current
- fixed
What have you
done with your
purchasing power?
Sources of Funds
Ownership
Equity ("owns")
Investment
Liabilities ("owes" / "debt")
- current
- long term
Investment
Finance
(„capital allocation“ /
„capital budgeting“)
(„optimal mix“)
De-Investment
Where does the
purchasing power
come from?
Financial Management
The Finance Function: “to plan, raise and use funds in an efficient
manner to achieve corporate financial objectives.” (see Pike & Neale,
2006, pp 5)
depending on the position of the source
- internal financing (e.g. profit or restructuring the assets)
- external financing (e.g. credit)
depending on the legal status of the source
- equity financing (e.g. silent partnership or capital increased)
- debt financing (e.g. suppliers or clients)
depending on the location of the fund supplier
- domestic markets
- foreign markets
Financial Management Decisions
- Capital Budgeting:
Long Term Assets
- Financing Decisions:
Capital Structure/Financial Structure: Long Term Equity/Long
Term Debt
- Working Capital Management Decisions:
Current Assets/Current Liabilities
(Ross et al. 2008, pp 2, see Parrino & Kidwell, 2009, pp 4)
Financing Decisions / Capital Structure Criteria / Restructuring
Leverage:
% Equity financed resp. % Debt financed (Debt to Equity: D/E)
Equity/Fixed Assets ec.
Financial Ratios (1/2)
- e.g. Return on Capital Employd (ROCE),
Capital Gearing (CG = LTL/Shareholders’ Funds),
Return on Equity
- Working Capital: Current Assets less Current Liabilities.
Horizontal Key Ratios vs. Vertical Key Ratios
- Optimal Capital Structure? Financial Distress?
Financial Ratios (2/2)
- Restructuring -
Corporate Restructuring means changing the Ownership
Structure of a Firm to improve the Value of the Firm, e.g.
through Share Repurchase, Leveraged Buy Outs, Substitution
of Debt for Equity
Business Restructuring means changing the Mission of the
Company, e.g. through MBOs, Sell-Offs, Mergers
Asset restructuring means changing the ownership of assets,
e.g. sale and lease back (see Pike & Neale, 2006, pp 576).
Basic Forms of Investment: A Plunge into the Unknown (1/3)
Investment Decision 1:
How much should the Firm invest?
- Short-term Choices (“Working Capital Management”)
- Long-term Choices (fixed)Assets/Capital Budgeting Decisions
- Real Assets (tangible vs. intangible) vs. Financial Assets
Basic Forms of Investment: A Plunge into the Unknown (2/3)
Investment Decision 2:
In which Projects should the Firm invest?
- Internal vs. external Investments (= Acquisitions) +
- Investment in Working Capital (inventories), Replacement
Investment, New Investment in Fixed Assets (Capital Budgeting
Decisions)
- Domestic Investments vs. Cross Border Investments
Basic Forms of Investment: A Plunge into the Unknown (3/3)
Investment Rule
Invest in a Project if the Cost you incur today is less than or
equal to the Present Value of the future Payments from the
Project.
See: O’Sullivan & Sheffrin, 2006, p 609
Valuation Criteria / Investment Appraisal / Capital Rationing
- Static Capital Budgeting,
e.g. Comparison of Profits or Costs, Cash Flow Analysis
- Dynamic Capital Budgeting,
e.g. Present Value or Annuity Method
- Risk Assessment Methods,
e.g. Expected Net Present Value (ENPV), Sensitivity Analyses,
Best/Worst Case Analyses
- Hard vs. Soft Rationing
(see Pike & Neale, 2006, p. 134)
International Finance and Investment: Outlook
 Characteristics of Intern. Finance and Investment
 Differences (domestic vs. intern.)
 Globalization
 Motives: Why become a MNC?
 Intern. Monetary System (Currency, Balance of Payments, Exchange Rate)
 Intern. Flow of Money and Capital/Entry Modes
 Int. financial Environment
 Derivatives & Hedging
 Multinational Capital Budgeting
 CB Risk Management
 DFIs
 MNCs & Transfer Pricing
 Scams and Swindles
International Financial Management and Investments
Specific characteristics of International Financial Management:
- Foreign Exchange (Currencies) and Political Risks
- Accounting Rules
- Stakeholders
- Legal, Regulatory and Institutional Framework
- Language
- Taxation
- Market Imperfections
- Expanded Opportunity Set
- Intellectual Property Rights (see: Connally, 2007 pp1)
- Main goal of Financial Management? Managing for Value resp.
Shareholder wealth maximation!
(see: Eun & Resnick 4th ed. 2007, p. 5)
What is different about International Financial Management? (1/4)
Concept
International
Domestic
Culture, history and
institutions
Each foreign country is
unique and not always
understood by MNE
management
Each country base an
known base case
Corporate governance
Foreign countries’
regulations and
institutional practices are
all uniquely different
Regulations and
institutions are well
known
Foreign exchange risk
MNEs face foreign
exchange risks because
of their foreign
subsidiaries and high
profile
Foreign exchange risks
from import / export and
foreign competition (no
subsidiaries)
see Eitemann et al., 2007, p.3
What is different about International Financial Management? (2/4)
Concept
International
Domestic
Political risk
MNEs face political risks
because of their foreign
subsidiaries and high
profile
Negligible political risks
Modification of domestic
finance theories
MNEs must modify
Traditional financial
finance theories like
theory applies
capital budgeting and
cost of capital because of
foreign complexities
Modification of domestic
financial instruments
MNEs utilize modified
financial instruments
such as options, futures,
swaps, and letters of
credit
Limited use of financial
instruments and
derivatives because of
fewer foreign exchange
and political risks
see Eitemann et al., 2007, p.3
What is different about International Financial Management? (3/4)
Finance Concepts and
Procedures
Differences between Domestic and International Operations
Business Risk
Foreign exchange and country risk must be taken into account
Form of business
organization
Varies with countries’ legal system
Ethical Norms
Differ with countries’ cultural norms
Nominal rate of interest
Affected by the rate of inflation in a given country
Accounting standards
Vary by country
Financial statement
analysis
Financial statements must be adjusted for cross-country
comparisons
Tax codes
Vary by country
Concept of cash flows
Cash is cash, but monetary units are different
Goal of maximizing
shareholders’ wealth
Proper goal for U.S.-based firms, but may vary by country
Parrino & Kidwell, 2009, p 699
What is different about International Financial Management? (4/4)
Finance Concepts and
Procedures
Differences between Domestic and International Operations
Time value of money
No difference
Bond valuation
Basic valuation concepts are the same, but market conditions differ
Valuation of equity
Basic valuation concepts are the same, but market conditions differ
Cost of debt and equity
Basic concepts are the same, but market conditions and tax
systems differ
Weighted average cost
of capital
Basic concepts are the same, but market conditions and tax
systems differ
Optimal capital structure Basic concepts are the same, but market conditions and tax
systems differ
Dividend policy
Basic concepts are the same, but tax systems differ
Working capital
management
Basic concepts are the same, but market conditions differ
Business valuation
Basic concepts are the same, but market conditions and tax
systems differ
Parrino & Kidwell, 2009, p 699
International Corporate Finance:
„The basic principles of corporate finance still apply to
international corporations: like domestic companies, these firms
seek to invest in projects that create more value for the
shareholders than they cost and to arrange financing that raises
cash and the lowest possible cost . In other words , the net
present value principle holds for both foreign and domestic
operations. Although it is usually more complicated to apply the
NPV rule for foreign exchange.”
Ross et al., 2007, p 726
Basic Principles Remain the Same:
“In today’s globalized environment. Financial managers must be
prepared to handle international transactions and all the
complexities that those transactions involve. Fortunately, the
basic principles of finance remain the same whether a
transaction is domestic or international. The time value of money
for example, is not affected by whether a business transaction is
domestic or international. Likewise, we use the same models for
valuing capital assets, bonds, stocks, and entire firms.”
Parrino & Kidwell, 2009, p 698
Globalization: Trends and Problems (1/3)
Trends:
-
Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
Privatization
(see: Salvatore, 2004, pp v-vi)
Globalization: Trends and Problems (2/3)
Problems:
-
Trade Restrictions/Protectionism
Destabilizing effects of globalized capital markets (see Subprime
Crisis)
Financial and economic Crisis of emerging Economies
Unemployment and slow Growth in Europe
Increased international Competition causing job insecurity
Restructuring of eastern Europe and former Russia
Poverty and Inequality e.g. in Africa and South America
Corruption
(see: Salvatore, 2004, pp v-vi)
Globalization: Trends and Problems (3/3)
“International Business consists of business transactions
between parties from more than one country”
See: Griffin & Pustay, 2005, p 5
(see: Salvatore, 2004, pp v-vi)
Theories and Motives for International Business. Gains from Trade and
Capital Flows? (1/2)
- Absolute Advantage means, that Country I is more efficient at
Product A than II, but less efficient at Product B. The gains:
Importing B, exporting A.
- Comparative Advantage means that even if Country I is less
efficient at A and B than II, it realizes a gain when it specializes
and exports A where the disadvantage is smaller than with B,
so the loss is smaller.
- Opportunity Costs: “The theory that the cost of a commodity is
the amount of a second commodity that must be given up to
release just enough resources to produce one more unit of the
first commodity.” (Salvatore, 2005, p458)
Theories and Motives for International Business. Gains from Trade and
Capital Flows? (2/2)
Motives?
- Economic Conditions:
Supply Factors
(e.g. favourable Performance, Production Costs, Logistics,
Availability of Natural Sources, Access to Key Technology)
vs. Demand Factors
(e.g. Customer Access, Marketing Advantages, Exploitation of
Competitive Advantages, Customer Mobility) see Griffin & Pustay2005, pp167.
- Exchange Rate Expectations
- International Diversification
Assessing international opportunities
- Investment opportunities
- Financing opportunities,
e.g. interest rates
- Political opportunities,
e.g. removal of the Berlin Wall, BRI
- Regional Opportunities,
e.g. in Asia
Madura, 2003, pp 13
Why Do Firms Become Multinational?
-
Market Seekers
Raw Material Seekers
Production efficiency Seekers
Knowledge Seekers
Political safety seekers
(see: Eitemann et al., 2007, pp 532 )
-
To leverage Core Competencies,
to acquire Resources and Supplies,
to seek new Markets,
to better compete with Rivals (“Building Global Skills”),
Environmental Change, Internet Age
(see: Griffin & Pustay, 2006, pp 12)
Attributes of the “Ideal” Currency
If the ideal currency existed in today’s world, it would possess
three attributes, often referred to as the impossible trinity:
1. Exchange rate stability
The value of the currency would be fixed in relationship to other major
currencies, so traders and investors could be relatively certain of the foreign
exchange value of each currency in the present and into the near future.
2. Full financial integration
Complete freedom of monetary flows would be allowed, so traders and
investors could willingly and easily move funds from one country and currency
to another in response to perceived economic opportunities or risks.
3. Monetary independence
Domestic monetary and interest rate policies would be set by each individual
country to pursue desired national economic policies, especially as they might
relate to limiting inflation, combating recessions and fostering prosperity and
full employment.
(see: Eitemann et al., 2007, p.46)
The Impossible Trinity
Full Capital Controls
Monetary Independance
Increased
Capital Mobility
Pure Float
Full Financial Integration
Exchange Rate Stability
Monetary Union
Economic and financial theory clearly states that a country cannot be on all
three sides of the triangle at once. It must give up one of the three “attributes”
if it is to achieve one of the states described by the corners of the triangle.
(see: Eitemann et al., 2007, p.46)
The International Monetary System
-
-
“The rules, customs, instruments, facilitations, and organizations for
effecting international payments.” (see Salvatore, 2005, pp 419)
Classification: Fixed exchange rate system with a narrow band of
fluctuation vs. a wide band of fluctuation, adjustable peg system,
crawling peg system, managed floating vs. freely floating. Or: gold
standard vs. fiduciary system (e.g. pure $) vs. a combination of both.
1947 IMF, SDRs, “firm surveillance”
The After War Monetary System since 1973 is a Managed Floating
Regime
1976 Jamaica Accords. $ Reserves.
1979 EMS, 1999 EMU (€)
‘Hard Peg’ vs. Fully Floating: Which Exchange Rate System is best?
Criteria: Adjustment, Liquidity, Confidence (see Pilbeam 2006, pp 289) or:
Exchange rate stability, Full financial integration, monetary
independence (see Eitemann et al., 2007, p.46).
Balance of Payments and Exchange Rates (1/2)
Balance of Payments:
“A summary statement of all the international transactions of the
residents of a nation with the rest of the world during a
particular period of time, usually a year.” (Salvatore 2005, pp 447/8)
Informs about the (Dis)Equilibrium of International Debit or
Credit-Transactions, about Deficits or Surplusses.
Balance of Payments and Exchange Rates (2/2)
Exchange Rate:
is “the domestic currency prise of the foreign currency.”
(see: Salvatore, 2005, p 452)
•
•
•
•
Flexible vs. fixed Exchange Rates vs. Optimum Currency Area (bloc)
Adjustable Pegs, Crawling Pegs, Managed Floating
Currency Board Arrangements (CBAs) and Dollarization
Spot and Forward Exchange Rates: “The spot rate of exchange is the
exchange rate for an immediate transaction. The forward rate is is
the exchange rate for a forward transaction … at a specified future
date.”
(see: Brealy & Myers & Marcus, 2004, p 632)
• Foreign Exchange Futures and Option
Flow of Capital / Flow of Funds. International Business Methods.
Types of Foreign Investments resp. Entry Modes (1/3)
- Trade Flows (visible trade- goods - vs. invisible trade –
services-)
- Portfolio Investments (no active Management or Control of the
Securities in the host Country)
- Direct Investments (DFI) with active Controlling of the
securities in the host country
(see: Salvatore, 2005, pp 225; Griffin & Pustay, 2005, pp 8)
Flow of Capital / Flow of Funds. International Business Methods.
Types of Foreign Investments resp. Entry Modes (2/3)
-
Licensing
Franchising
Joint Venture
Acquisition of existing foreign firms/operations
Establishing new foreign subsidiarities
(see: Madura, 7 th ed., 2003, S. 10 ff.)
- Takeover
- Cross Border M&As
- Horizontal Integration vs. Vertical Integration vs. Conglomerate
Integration
- Financing a Bid: Cash, Share Exchange, Other
(see: Pike & Neale, 2006, pp 541)
Flow of Capital / Flow of Funds. International Business Methods.
Types of Foreign Investments resp. Entry Modes (3/3)
Entry Modes
-
Exporting
Licensing
Patents
Spot Transactions
Long Term Contracts
Exporting with foreign agent
(see: Pike & Neale, 2006, pp 632)
International Business Activities
- Importing/Exporting
- International Investments (FDI, Portfolio Investments)
- Licensing
- Franchising
- Managed Contract
- Multinational Corporation (MNC)
(see: Griffin & Pustay, 2005, pp 7)
Alternative Modes of Market Entry
TRANSACTIONS
Exporting:
Spot
Transactions
Exporting:
Long-term
Contracts
Exporting:
With foreign
distributor
/agent
Licensing
Technology
and
trademarks
Franchising
VERSUS
DIRECT INVESTMENT
Joint
venture
Marketing and
distribution
only
Fully
integrated
Wholly owned
subsidiary
Marketing and
sales only
Fully
integrated
(see Pike & Neale, 2006, p 633 )
Financial System / International Financial Environment / Sourcing Debt and
Equity Globally (1/2)
- Lenders/Savers transfer Purchasing Power across the border
to Borrowers/Spenders
- Direct Financing (e.g. Investment Banks, Stocks, Bonds) vs.
Indirect Financing (Financial Intermediation, e.g. Commercial
Banks)
- Primary Market (Company to Investor) vs. Secondary Market
(Investor to Inv.)
- Organized Markets (“Exchanges”) vs. Over The Counter (OTC)
Markets
- Money Markets (Short Term) vs. Capital Markets (e.g. Treasury
Notes, Bonds)
- Private Markets vs. Public Markets
Financial System / International Financial Environment / Sourcing Debt and
Equity Globally (2/2)
-
Spot Markets vs. Forward Markets (Futures, Options, Swaps)
Interbank Markets vs. Client Markets (see Eiteman 200)
International Stock Markets
Sourcing Equity (Global Registeres Shares GRSs) or Debt
(e.g. Eurobonds) globally
- Equity Markets/Private Equity/Hedge Funds (see Solnik & McLeavey, 2003,
pp398)
- International Portfolio Investments (see Eun & Resnick, 2007, pp 266)
- Dealer vs. Auction Markets (see Ross et al. 2008, pp 14)
- MBOs, Leveraged Buy Outs
Currency Derivatives
-A double edged sword.-
”Derivative: Financial Instrument whose value derives from an
underlying asset.” (see Pike & Neale, 2006, p 25)
-
Why? Hedging (Volatility) or speculative Purposes
Forward Contracts
Currency Futures Market
Currency Options Market / Option Valuation
Currency Call Options
Currency Put Options
Swap Transactions
(see: Pilbeam, 2006, pp 323)
Hedging / Financial Engineering
Hedging means the avoidance of a foreign exchange risk (vs.
Speculation) or to insulate a firm from exposure to exchange
rate fluctuations.
Hedging Techniques:
- Futures Hedge
- Forward Hedge
- Money Market Hedge
- Currency Option Hedge (see Madura, 2003, p 335)
Alternative Hedging Techniques:
- Leading and Lagging
- Cross-Hedging
- Currency Diversification (see Madura, 2003, pp 357)
Multinational Capital Budgeting (“Investment Decision and Appraisal”)
Calculate/quantifying whether long term investments are worth pursuing.
Ranking investments/projects according to the chosen criteria, e.g. rate of
return.
Factors to consider
-
Initial investment
Consumer demand
Price
Cost
Project lifetime
Salvage (liquidation) value
-
Restrictions on fund transfers
(vs. Capital Mobility,
Capital Flight)
see Eitemann et al., 2007, pp88
-
Tax laws
Exchange rate fluctuation
Required rate of return
Inflation
Risk assessment
(see Madura, 2003, pp 416)
Cross-Border Financial Risk Management / Foreign Exchange Exposure
(1/2)
- Exposure to Exchange rate movements
- Exposure to foreign economics
- Exposure to political risk
”Foreign Exchange Exposure is a Measure of the Potential that
a Firm’s Profitability, Cash Flow, and Market Value will change
because of a Change in Exchange Rates”: (see: Eitemann et al., 2007, pp251)
- Transaction Exposure
- Economic / Operating Exposure
- Translation Exposure / Accounting Exposure
(see: Madura, 2003, pp 302 & Eun & Resnick, 2007, pp 192)
Cross-Border Financial Risk Management / Foreign Exchange Exposure
(2/2)
Risk (vs. Uncertainty) means that you can assign Probabilities to
your Alternatives!
Risk Management includes the Knowledge and Processes to
manage Exposure to Risk, esp. Credit Risk and Market Risk,
Inflation, Corruption, Volatility, Exchange Rate, Foreign
Exchange, Country Risk ec. To identify, assess risks and
develop plans to address them.
Conceptual Comparison of Transaction, Operating, and Translation Foreign
Exchange Exposure
Moment in time when
exchange rate changes
Translation exposure
Operating exposure
Changes in reported owners’ equity in
consolidated financial statements
caused by a change in exchange rates
Change in expected cash flows arising
from an unexpected change in
exchange rates
Transaction exposure
Impact of settling outstanding obligations entered into before change
in exchange rates but to be settled after change in exchange rates
Time
(see: Eitemann et al., 2007, p 254 )
Country Risk Analysis (1/2)
Political Risk Factors:
- Attitude of Consumers in
the host Country
- Actions of the Host
Government
- Blockage of Fund
Transfers
- Currency Inconvertibility
- War
- Bureaucracy
- Corruption (see Madura, 2003, pp 478)
Financial Risk Factors:
- Interest Rates
- Exchange Rate Volatility
- Inflation
Country Risk Analysis (2/2)
Deviations from the Optimal Finance Structure: Availability of
Capital, Diversification of Cash Flows, Foreign Exchange Risk,
Expectations of International Portfolio Investors.
(see Eitemann 2007, pp 435)
Industry Risks
-
Market Competition (e.g. Predatory Pricing)
Value Chain Competition (e.g. Co-opetition)
Rivalry Intensity
Substitutes
Buyer/Supplier Power
New Entrants
Government Participation (see: Solnik & McLeavey, 2003, pp268)
DFIs: Why?
DFIs are investments in real assets. They may be be motivated by:
- Attract new sources of Demand / Customer Access
- Enter markets where superior profits are possible / Marketing
Advantages
- Fully Benefit from economies of Scale
- Use foreign Factors of Production
- Use foreign Raw Materials
- Use foreign Technology
- Exploit monopolistic Advantages
- React to Exchange Rate movements
- React to trade Restrictions / Avoidance of Trade Barriers
- Diverse internationally
(see Madura, 2003, p 395)
DFIs: Barriers?
Barriers against DFIs:
- Protection of local Firms or Consumers
- Restriction of Ownership
- “Red Tape” Barriers (i.e. paperwork)
The FDI Sequence: Foreign Presence and Foreign Investment
The Firm and its
Competitive Advantage
Greater Foreign
Presence
Change Competitive Advantage
Exploit Existing Competitive
Advantage Abroad
Production at Home:
Exporting
Production Abroad
Licensing Management Contract
Control Assets Abroad
Joint Venture
Greater Foreign
Investment
Greenfield Investment
Wholly Owned Subsidiary
Acquisition of a Foreign
Enterprise
(see: Eitemann et al., 2007, p 540 )
Multinational Corporations (MNCs) and Transfer Pricing (1/2)
- “The multinational enterprise (MNE) is defined as one that has
operating subsidiarities, branches, or affiliates located in foreign
countries. It also includes forms in service activities …”
(Eitemann et al., 2007, p 2)
- MNCs are characterized by a strong separation of Ownership
and Management (see Agency Theory, see Corporate
Governance CG)
- The CG Framework should protect the shreholders rights and
ensure disclosure on all relevant aspects of the firm including
the financial situation (vs. Black Box).
see Pike & Neale, 2006, pp 631
Multinational Corporations (MNCs) and Transfer Pricing (2/2)
- Transfer Pricing: “The setting of Prices to be charged by one
Unit (such as a foreign Subsidiarity) of a multiunit Corporation
to another Unit (such as the Parent Corporation) for Goods or
Services sold between such related Units.” (see Eitemann et
al., 2007, p EM-48). TP is a sensitive matter because of
government regulations with two effects: Fund Positioning
Effect and Income Tax Effect. Three Methods of setting TPs:
Comparable uncontrolled price method, Resale Price Method,
Cost-plus Method.
Tax systems differ world wide.
see Pike & Neale, 2006, pp 631
Scams & Swindles
-
Carlo Ponzi Schemes 1919: Notes with no underlying Assets
Parmalat Fraud: Repayment of Debt with new Debt ec.
Managing Other Peoples’ Money: ENRON, WorldCom …
Retention Bonuses
Insider Trading
Abusive Tax Schemes
Undisclosed Executive Compensation (“Agency Problem”)
Derivative Scandals
Backdating Option Grants
(see Connoly, 2007, pp 160)
Lessons Learned – 20 Questions:
1. Main Functions of Management?
2. Rational Decision Making vs. Intuitive Decision Making?
3. Three Types of a Firm?
4. Is Financial Mgt. a pure computational Affair?
5. What is the Balance Sheet?
6. Three Types of Financial Mgt. Decision?
7. Barriers to Globalization?
8. International Business and Comparative Advantage?
9. Exchange Rate Systems of today?
10. Please describe six entry Modes to foreign Markets.
Lessons Learned – 20 Questions:
11. What is the Difference between Portfolio Investment and
Direct Investment?
12. Differences between Futures and Forwards?
13. Three Types of Risk Exposure?
14. Why do Firms become multinational?
15. Hedging: What does it mean and how to do it?
16. Barriers to DFIs?
17. Transfer Pricing in the MNC?
18. Carlo Ponzi Schemes?
19. Compensation and the Agency Problem?
20. Derivative Scandals and the Subprime Crisis
References
-
Michael Connolly, International Business Finance. Routledge 2007.
David K. Eiteman & Arthur I. Stonehill & Michael H. Moffett, Multinational Business Finance.
Pearson Addison Wesley 2007.
Keith Pilbeam, International Finance. Palgrave Mac Millan 2006.
Dominick Salvatore, Introduction to International Economics. Wiley 2005.
Jeff Madura, International Financial Management. Thomson South Western 2003.
Cheol S. Eun & Bruce G. Resnick, International Financial Manaegement. McGrw Hill Irwin 2007.
Hans E. Büschgen, Internationales Finanzmanagement. Fritz Knapp Vlg. 1993.
Manfred Perlitz, Internationales Management. Lucius & Lucius 5.A.
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Goodbye!
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Cheerio!
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Cheers!
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Bye!