INTERNATIONAL FINANCE – PART 1
INTORDUCTION
- MNC: multi-national corporation
- goal of corporation = profit maximisation
Issues to consider:
- agency problem → self-interest, managers make decisions for personal gain
▪ an overcome by giving stock options to senior managers
- culture → different cultures have different demands
- centralised vs decentralised
- monitoring problems → how to monitor if protocols are being complied with
Constraints to consider:
- legal → i.e. working hour legalities in various countries
- environmental → e.g. pollution
- ethical → e.g. corruption (bribe for contracts, etc.)
GLOBALISATION
Countries are more closely linked through trade in goods and services, capital flows and
investment.
Major functions of economy are highly globalised:
- consumption: trade liberalization internationalizes consumption patterns
▪ deals with product → parts of product manufactured in different places
▪ world connected via trade and consumer services
- production: producing g&S with cheap inputs and selling at higher prices
- investment: investors can diversify investment portfolios across stock exchanges
Maximize profit → increase revenue or reduce costs
MULTINATIONAL CORPORATION (MNC) OR MNE
- co that operates in its home country & in other countries around the world
- must maintain actual business operations in other countries & must make a foreign
direct investment there
- HQ (headquarter = parent co) and subsidiary
,Characteristics of MNC:
- very large assets and turnover
- network of branches throughout countries
▪ try get lowest possible costs
- control over subsidiaries
- continued growth
- sophisticated technology → competitive advantage
- right skills → afford to pick the most skilled individuals around the world
- forceful marketing and advertising (e.g. coke and McDonald’s)
- good quality products
Reasons for being an MNC:
1. Access to lower production costs
2. Proximity to target international markets
3. Access to a larger talent pool
4. Avoidance of tariffs
Advantages of being an MNC:
- efficiency
- development → develop co through use of local & foreign people
- employment → employ locals & foreigners
- innovation → continue making new products to remain competitive
INTERNATIONAL FINANCE VS DOMESTIC FINANCE
4 things that differentiate international finance from domestic finance:
1. Foreign exchange risk:
- how volatile is our currency in comparison to another (strength of currency),
▪ depreciated local currency affects exporters (benefits importers)
▪ consider competition
▪ i.e. USA exports form SA & Brazil, if R strengthens against $ & $ strengthens
against Brazil currency it becomes relatively cheaper for USA to import from
Brazil → SA prices no longer competitive
- occurs when firms and individuals are engaged in cross-border transactions
- e.g. wine sales
, 2. Political risk:
- ranges from unexpected changes in tax rules to expropriation of assets held by
foreigners
- some countries can nationalize once they have given rights
▪ i.e. Argentine state nationalizing Spanish oil firm, Repsol
3. Market imperfections:
- barriers to trade → discriminatory taxation, information asymmetry, legal
restrictions, transaction costs etc.
- can restrict the extent to which international trade grows.
4. Expanded opportunity set:
- occurs when firms enter global market
- firms can locate production in any country or region to max their performance
- can invest where capital is cheapest
TRENDS IN GLOBALISATION
1. Financial Markets:
- deregulation via forex and capital markets
▪ can invest anywhere in world (no investment barriers) → gov has no control
▪ must meet requirements of the exchanges
▪ encourages more foreign & domestic listings
- example of deregulation: In 1986, LSE discontinued fixed brokerage commissions
and the separation of order-taking function from market-making function
- implications of deregulation:
▪ financial institution can perform investment & commercial banking functions
▪ increased competitiveness → greater innovation through creation of new
instruments
2. Increased innovation:
- currency futures and currency options
- multi-currency bonds
- international mutual (unit trust) funds
- exchange-traded funds
- foreign stock index futures and options
- technology → improved communication and info flow → improved investment
3. Euro:
- benefits:
▪ wider capital market
INTORDUCTION
- MNC: multi-national corporation
- goal of corporation = profit maximisation
Issues to consider:
- agency problem → self-interest, managers make decisions for personal gain
▪ an overcome by giving stock options to senior managers
- culture → different cultures have different demands
- centralised vs decentralised
- monitoring problems → how to monitor if protocols are being complied with
Constraints to consider:
- legal → i.e. working hour legalities in various countries
- environmental → e.g. pollution
- ethical → e.g. corruption (bribe for contracts, etc.)
GLOBALISATION
Countries are more closely linked through trade in goods and services, capital flows and
investment.
Major functions of economy are highly globalised:
- consumption: trade liberalization internationalizes consumption patterns
▪ deals with product → parts of product manufactured in different places
▪ world connected via trade and consumer services
- production: producing g&S with cheap inputs and selling at higher prices
- investment: investors can diversify investment portfolios across stock exchanges
Maximize profit → increase revenue or reduce costs
MULTINATIONAL CORPORATION (MNC) OR MNE
- co that operates in its home country & in other countries around the world
- must maintain actual business operations in other countries & must make a foreign
direct investment there
- HQ (headquarter = parent co) and subsidiary
,Characteristics of MNC:
- very large assets and turnover
- network of branches throughout countries
▪ try get lowest possible costs
- control over subsidiaries
- continued growth
- sophisticated technology → competitive advantage
- right skills → afford to pick the most skilled individuals around the world
- forceful marketing and advertising (e.g. coke and McDonald’s)
- good quality products
Reasons for being an MNC:
1. Access to lower production costs
2. Proximity to target international markets
3. Access to a larger talent pool
4. Avoidance of tariffs
Advantages of being an MNC:
- efficiency
- development → develop co through use of local & foreign people
- employment → employ locals & foreigners
- innovation → continue making new products to remain competitive
INTERNATIONAL FINANCE VS DOMESTIC FINANCE
4 things that differentiate international finance from domestic finance:
1. Foreign exchange risk:
- how volatile is our currency in comparison to another (strength of currency),
▪ depreciated local currency affects exporters (benefits importers)
▪ consider competition
▪ i.e. USA exports form SA & Brazil, if R strengthens against $ & $ strengthens
against Brazil currency it becomes relatively cheaper for USA to import from
Brazil → SA prices no longer competitive
- occurs when firms and individuals are engaged in cross-border transactions
- e.g. wine sales
, 2. Political risk:
- ranges from unexpected changes in tax rules to expropriation of assets held by
foreigners
- some countries can nationalize once they have given rights
▪ i.e. Argentine state nationalizing Spanish oil firm, Repsol
3. Market imperfections:
- barriers to trade → discriminatory taxation, information asymmetry, legal
restrictions, transaction costs etc.
- can restrict the extent to which international trade grows.
4. Expanded opportunity set:
- occurs when firms enter global market
- firms can locate production in any country or region to max their performance
- can invest where capital is cheapest
TRENDS IN GLOBALISATION
1. Financial Markets:
- deregulation via forex and capital markets
▪ can invest anywhere in world (no investment barriers) → gov has no control
▪ must meet requirements of the exchanges
▪ encourages more foreign & domestic listings
- example of deregulation: In 1986, LSE discontinued fixed brokerage commissions
and the separation of order-taking function from market-making function
- implications of deregulation:
▪ financial institution can perform investment & commercial banking functions
▪ increased competitiveness → greater innovation through creation of new
instruments
2. Increased innovation:
- currency futures and currency options
- multi-currency bonds
- international mutual (unit trust) funds
- exchange-traded funds
- foreign stock index futures and options
- technology → improved communication and info flow → improved investment
3. Euro:
- benefits:
▪ wider capital market
