Meaning of IF
1. the branch of econ. that studies of exchange rates, foreign investment, and how
affect int.trade.
2. Also study of int. project, int. investment, & int. capital flows.
3. Includes study of futures, options n swap (derivaties in capital market).
Benefit of IF
1. Enhance the ability of business firms and market participants in general to
diversify their financing and investment portfolios.
2. extension of the market for the firm's product beyond the national frontiers.
Multinational corporation ( MNC)
A company engaged in producing and selling goods or services in more than one
country.
Consists of a parent company located in the home country and at least five or six foreign
subsidiaries
(typically witht high degree of strategic interaction among unit.)
A briefly taxanomy of the MNC and its evolution is :
a. Raw Materials Seekers.
- the earliest multinationals of international business.
- ex : the firms such as British, Dutch, French East India Companies, the Hudson's Bay
Trading Company, the Union Dutch , French and Belgian colonial empires.
- aims : to exploit(use) the raw materials that could be found o/seas.
b. Market Seekers.
- modern MNC firms that goes o/seas to produce & sell in foreign market.
- ex : IBM, Volkswagen, Unilever, Nestle, Levi Strauss, MacDonald’s, Procter&Gamble,
Coca-Cola
- some earlier examples of MNC co. (Colt Firearms, Singer, Coca-Cola, N.V.Philips,
Imperial Chemicals)
c. Cost Minimizers.
- they seek out and invest in lower cost of production sites o/seas, for examples Hong
Kong, Taiwan, Ireland) to remain cost competitive both at home and abroad.
- most of them are in the electronics industry.
- ex : Texas Instruments, Intel, Seagate Techology.
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Objective of Multinational FM
-
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to maximise shareholder wealth as measured by share price. Reward to s/holders
: dividends
Why ? :
o S/holders are the legal owners of the firm and management has a
fiduciary obligation to act in their best interests.
o Although other stakeholders (all in company) do have rights. These are
not coequal with the s/holder’s rights.
o S/holders provide the risk capital that cushions the claims of alternative
stakeholders.
o The best proctection against a hostile takeover : examples get a high
stock price. Companies that do not are likely to be prime takeover targets
and candidates for a forces corporate restructuring.
o Enhance the company’s cash flow
What happens if shareholders do not satisfied with their firms/ co.
performances?
o Remain quietly disgruntled(dissatidfied)
o Sell their shares
o Change management
o Initiate a takeover
Role of Global Manager
In a world in which change is the rule and not the exception, the key to international
competitivenes is the ability of management to adjust to change and volatitly at an
ever faster rate.
- know how to make the products
- where the raw materials comes from
- how they get the resources
- any alternatives way the funds come from
- change the way of managements
As a conclusion, the payoff of thinking globally is a quality of decision making the
enhances the firm’s prospects for survival, growth and profitability in the evolving
world economy.
Introduction of international finance
Eun & Resnick (2009) finds that three (3) major dimensions set international finance
apart from domestic. They are foreign exchange and political risk, market imperfections
and expanded opportunity set.
Foreign exchange risk and political risks.
Foreign exchange risk: 1997 – Asian currency crisis - Suppose Thailand is a major export
market for your company and the Bath depreciates drastically against the US dollar. This
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means your company’s products can be priced out of the Thailand market, as the Bath
price of American imports will rise following the Bath’s fall.
Political risk is arise from unexpected changes in tax rules to outright expropriation of
assets held by foreigners. Example:
(1) 1992 – Enron Development Corporation, a subsidiary of a Houstan- based energy
company, signed a contract to build India’s largest power plant. After Enron had spent
nearly $300M, the project was canceled by 1995 by nationalist politicians in the
Mahanrashtra state who argued India didn’t need the power plant.
(2) The meltdown of Yukos, the largest Russian Oil Company. Following the arrest of
Mikhail Khodorkovsky, the majority owner and a critic of the government, on fraud and
tax evasion charges, the Russian authorities have been steadily hammering Yukos into
bankruptacy. The Russian authorities sued the company for more than $20 billion back
taxes and auctioned off its assets to cover the alleged tax arrears.
(3) Malaysia – Universiti Malaysia Kelantan. Launch for 12 x at Bachok, but still pending
(4) Wilayah Iskandar Johor., changes PM
Take note: multinational firms and investors should be particularly aware of political risk
when they invest in those countries without a tradition of the rule of law.
Market imperfection
Although the world economy is much more integrated today than a few years ago, but a
variety of barrier still hamper free movements of people, goods, services, and capital
across national boundaries. These barriers include legal restrictions, excessive
transportation and transportation costs, information asymmetry and discriminatory
taxation. Imperfections in the world financial markets tend to restrict the extent to
which investors can diversify their portfolios. The world markets are thus highly
imperfect.
Example : Nestle Corporation, a well known Swiss MNC. Nestle used to issues 2 different
classes of common stock, bearer shares and registered shares. The foreigners were
allowed to hold only bearer shares only. The bearer shares used to trade for about twice
the price of registered shares, which were exclusively reserved for Swiss residents. This
kind of price is attributing to market imperfections.
Expanded opportunity set
When firms venture into the arena of global markets, they can benefit from an
expanded opportunity set. For example, firms can locate production in any country or
region of the world to maximize their performance and raise funds in any capital market
where the cost of capital is the lowest. Furthermore, firms can gain from greater
economics of scale when their tangible and intangible assets are deployed (organise) on
a global basis. For example, you have a given amount of money to invest in stock. You
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may invest the entire amount in Malaysia or outsider. If you diversify internationally, the
resulting international portfolio may have lower/ higher risk and return.
Crum,Brigham, Houstan (2005) noticed that various reasons explain why firms ‘go
global’ as follows :
(a) to seek production efficiency
As competition increases in their domestic market and as demand increase in other
markets, companies often consider (think again) other place it is best to produce
their products. Basically, companies with requisite (basic skills), long term establish,
(have an adequacy of transportation, more capital) that operate in high cost
countries have strong incentives to shift production to lower cost regions. Example:
GE( has plant in Mexico – shift : Pacific Ram, Americans) & BMW ( Germany- US)
shift their production to lower cost countries. A main objective is labor costs.
(b) to avoid political, trade and regulatory hurdles (problem)
Governments sometimes impose tariff, quotes, and other restrictions on imported
goods and services. They often do so to raise revenue, protect domestic industries
and pursue various political and economy policy objectives. To avoid government
hurdles, firm often develop production facilities abroad. For instance, the Japanese
auto companies moved production to the US was to get US import quote.
(c) to broaden their markets
After a company’s home market matures and competition becomes more intense,
growth opportunities re often better in foreign markets. According to Vernon’s
product life cycles theory, a firm first produces in its home market, where it can
better develop its product and satisfy local customers. (growth). Example:
McDonalds are aggressively expanding into overseas.
(d) to seek raw materials and new technology
Supplies of raw materials that are important for industrial societies are
geographically dispersed, so companies must go where the materials are found, no
matter how challenging it may be to operate in some of the locations. Example:
major deposits of oil are located on the northern cost of Alaska, in Siberia and in the
deserts of the Middle East, all of which present unique challenges.(2) example :
ExxonMobil, US oil companies have major production facilities around the world to
ensure access to the basic input resources needed to sustain the companies
business.
(e) to protect the secrecy of their process and products
Firms often have special intangible assets such as brand names; technological and
marketing know how, managerial expertise and superior research and development
capabilities among others. Unfortunately, property rights in intangible assets are
often difficult to protect, particularly if foreign markets. Firms sometimes invest
abroad rather than license local foreign firms in order to protect secrecy of their
production process, distribution system, or the production itself.
(f) to diversify
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By establishing worldwide production facilities and markets, firms can cushion the
impact of adverse economic trends in any single country. In general, diversification
of inputs and outputs works because the economic fluctuations or political vagaries
of different countries are not perfectly correlated. Therefore, companies investing
overseas can benefit from diversification in the same way that individuals benefit
from investing in a broad portfolio of stocks. Example: GM has depreciated in sales
in US during recession with strong sales by its European subsidiaries.
(g) to retain customers
If company goes abroad and established production or distribution operations, it will
need inputs and services at these new locations. If it can obtain what it needs from
a single supplier that also operates in the same set of countries, then managing the
relationship is much easier and it is likely economies of scale and other synergies will
be obtained. For example: Maybank opens it branch in UK – easier for students and
workers to transfer money.
Madura stated that 3 theory why are firms motivated to expand their business
internationally because :
(a) Theory of comparative advantage
Specialization by countries can increase production efficiency
(b) Imperfect Market Theory
The markets for the various resources used in are ‘imperfect’
(c) Product Cycles Theory
As a firm matures, it may regcognize additional opportunities outside its home country.
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