Tài chính doanh nghiệp - Chapter one: Mncs & multinational financial management

1CHAPTER ONE MNCs & MULTINATIONAL FINANCIAL MANAGEMENT CHAPTER ONE OVERVIEW • What’s Special about “International” Finance? • Goals of MNC • The rise of the MNCs • The Internationalization of Business & Finance • Multinational Financial Management: Theory & practice WHAT IS THE STUDY OF INTERNATIONAL FINANCE? • Making investment and financing • Decisions in a global market. • Cash flows associated with these decisions • Risks associated with these cash flows • The international financial markets 3 WHAT’S SPECIAL ABOUT “INTERNATIONAL” FINANCE? • Foreign Exchange Risk • Political Risk • Market Imperfections • Expanded Opportunity Set 1-4 2WHAT’S SPECIAL ABOUT “INTERNATIONAL” FINANCE? • Foreign Exchange Risk – This is risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements. – Suppose $1 = ¥100 and you buy 10 shares of Toyota at ¥10,000 per share. One year later the investment is worth ten percent more in yen: ¥110,000. – But, if the yen has depreciated to $1 = ¥120, your investment has actually lost money in dollar terms. 1-5 WHAT’S SPECIAL ABOUT “INTERNATIONAL” FINANCE? • Political Risk – Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways. 1-6 • Market Imperfections – Legal restrictions on the movement of goods, people, and money – Transactions costs – Shipping costs – Tax arbitrage WHAT’S SPECIAL ABOUT “INTERNATIONAL” FINANCE? 1-7 THE EXAMPLE OF NESTLÉ’S MARKET IMPERFECTION • Nestlé used to issue two different classes of common stock bearer shares and registered shares. – Foreigners were only allowed to buy bearer shares. – Swiss citizens could buy registered shares. – The bearer stock was more expensive. • On November 18, 1988, Nestlé lifted restrictions imposed on foreigners, allowing them to hold registered shares as well as bearer shares. 1-8 3NESTLÉ’S FOREIGN OWNERSHIP RESTRICTIONS 12,000 10,000 8,000 6,000 4,000 2,000 0 11 20 31 9 18 24 Source: Financial Times, November 26, 1988 p.1. Adapted with permission. S F Bearer share Registered share 1-9 THE EXAMPLE OF NESTLÉ’S MARKET IMPERFECTION • Following this, the price spread between the two types of shares narrowed dramatically. – This implies that there was a major transfer of wealth from foreign shareholders to Swiss shareholders. • Foreigners holding Nestlé bearer shares were exposed to political risk in a country that is widely viewed as a haven from such risk. • The Nestlé episode illustrates both the importance of considering market imperfections and the peril of political risk. 1-10 • Expanded Opportunity Set – It doesn’t make sense to play in only one corner of the sandbox. – True for corporations as well as individual investors. WHAT’S SPECIAL ABOUT “INTERNATIONAL” FINANCE? 1-11 • Maximization of shareholder wealth? or • Other goals? GOALS FOR INTERNATIONAL FINANCIAL MANAGEMENT 1-12 4MULTINATIONAL CORPORATION • Goal of MNCs is maximizing shareholder’s wealth – The SWM model – Shareholder Wealth Maximization (US company) – The CWM model – Corporate Wealth Maximization (European & Japanese company): requires a single goal of value maximization with a well-defined score card 13 MAXIMIZE SHAREHOLDER WEALTH • Long accepted as a goal in the Anglo-Saxon countries, but complications arise. – Who are and where are the shareholders? – In what currency should we maximize their wealth? 1-14 OTHER GOALS • In other countries shareholders are viewed as merely one among many “stakeholders” of the firm including: – Employees – Suppliers – Customers • In Japan, managers have typically sought to maximize the value of the keiretsu—a family of firms to which the individual firms belongs. 1-15 OTHER GOALS • As shown by a series of recent corporate scandals at companies like Enron, WorldCom, and Global Crossing, managers may pursue their own private interests at the expense of shareholders when they are not closely monitored. • These calamities have painfully reinforced the importance of corporate governance, i.e., the financial and legal framework for regulating the relationship between a firm’s management and its shareholders. 1-16 5OTHER GOALS • These types of issues can be much more serious in many other parts of the world, especially emerging and transitional economies, such as Indonesia, Korea, and Russia, where legal protection of shareholders is weak or virtually non-existing. • No matter what the other goals, they cannot be achieved in the long term if the maximization of shareholder wealth is not given due consideration. 1-17 INTERNATIONAL FINANCIAL MARKET • Involves the study of: – Exchange rate regimes – Financial institutions – Financial instruments – International finance models – Current international finance issues. • The focus is to understand how The markets, instruments, risks and rewards affect investment and financing decisions 18 THEORIES OF INTERNATIONAL BUSINESS  Imperfect Markets #1  Comparative Advantage #  Product Cycle #2  “A Flat World” #3 19 20 International Financial Management Foreign Exchange Markets Sourcing Capital in Global Markets Managing FOREX Exposure Foreign Investment Decisions INTERNATIONAL FINANCIAL MARKET Synthesis 6MULTINATIONAL CORPORATION • Many MNCs obtain raw materials from one nation, financial capital from another, produce goods with labor and capital equipment in a third country, and sell their output in various other national markets. • There are about 60,000 MNCs in the world. – MNCs are reshaping the structure of the world economy. – The true MNCs emphasizes group performance rather than the performance of its individual parts. – MNC may gain from their global presence in a variety of way. First of all, MNC can benefit from the economy of scale by (1) spreading R&D expenditures and advertising costs over their global sales, (2) pooling global purchasing power over suppliers, (3) utilizing their technological and managerial know-how globally with minimum additional costs – MNCs can use their global presence to take advantage of underpriced labor service available in LDCs – Companies are increasingly using offshore outsourcing as a way of saving costs and boosting productivity. 21 BASIC TYPES OF MNCS There are three basic types of MNCs. • Raw-materials seekers • Market seekers. • Cost minimizes. In all cases, MNCs involved recognize that the world is larger than the home country and provides opportunities to gain additions supplies, sell more products or find lower cost sources of production. 22 23 DEGREE OF INTERNATIONALIZATION RELATED TO THE INVOLVEMENT OF CAPITAL AND MANAGEMENT IN THE HOME COUNTRY AND THE HOST COUNTRY 100% 100% Export License Agreement Franchising Joint venture Foreign branch Production plant Affiliate In the host countryIn the home country Involvement of management In the host country In the home country TYPICAL FOREIGN EXPANSION SEQUENCE 24 Exporting Sales subsidiary Service facilities Distribution system Production oversea Licensing 7THE PROCESS OF OVERSEA EXPANSION The process of international expansion ordinarily evolves from a low risk low-return to a higher -risk-higher return strategy • Exporting. Exporting is a low cost, low risk strategy for learning about and developing foreign markets. At the same time, internet limits a company’s ability to fully exploit foreign markets. • Oversea production. – A company can more easily keep abreast of market developments, – Adapt its products to local tastes and conditions – and provide more comprehensive after sales-service – Foreign production often requires a substantial capital investment, internet may allow company access lower cost local labor and materials. – Internet also demonstrates a tangible commitment to local market and an increased assurance of supply stability 25 THE PROCESS OF OVERSEA EXPANSION • Licensing. Foreign licensing tends to be a low risk - low return strategy – Instead of spending money to set up production facilities abroad, company can license a local firm to manufacture its products – Licensing allows the company access its licensee’s marketing smarts and distribution network. – The principal advantages of licensing are the minimal investment required, faster market entry, and fewer financial and legal risks involved – However, licensing may create a competitive in other markets because internet is often difficult to control exports by foreign licensees. – It may also be dificult to displace the licensee in the local market once the license expires – Cash flow is relatively low, and there may be problems in maintaining product quality standards 26 OPERATING & FINANCING CASH FLOWS 27 SubsidiaryParent Operational Cash Flows Payment for goods & services Rent and lease payments Royalties and license fees Management fees & distributed overhead Financial Cash Flows Dividend paid to parent Parent invested equity capital Interest on intrafirm lending Intrafirm principal payments 28 F in a n c ia l fl o w s Dividends Fees, Royalties, corporate overhead for services Interest and repayment of credit/loan Equity investment Loans Credit on goods and services Capital goods Technology Management Intermediate goods Finished goods Technology/market intelligence Alan C Sharpiro, Multinational Financial Management, 9th edition, Willey & son 8MULTINATIONAL FINANCIAL MANAGEMENT • MNC has considerable freedom in selecting the financial channels through which funds and allocated profits are moved. • In addition, MNCs have some flexibility regarding the timing of fund flows. They can speed up or slow down dividend payments, loan repayments, and payments for fees, royalties, and interaffiliate sales of goods and services. • The different modes of internal fund transfers available to the MNC: – Transfer prices on goods and services traded internally – Intercompany loans and equity investment – Dividend payments – Leading (speeding up) and lagging (slow down) intercompany payments – Fees and royalty charges 29 MULTINATIONAL FINANCIAL MANAGEMENT • The multinational firm can control the mode and timing of internal financial transfers and thereby maximize global profit. • Mode of transfer. MNCs have freedom in selecting the financial channels through which funds, allocated profit, or both are moved. Ex. – MNC can move profits and cash from one unit to another by adjusted transfer prices on intercompany sales and purchases of goods and services – Capital can be sent overseas as debt – Regarding to the limits of various national laws, MNC can take more advantage than independent company 30 MULTINATIONAL FINANCIAL MANAGEMENT • Timing flexibility – Leading and lagging is most often applied to interaffiliate trade credit. – MNCs have the greatest amount of flexibility in the timing of equity claims. The earning of a affiliate can be retained or used to pay dividends that in turn can be deferred or paid in advance – MNCs have some flexibility in the timing of fund flows even the frequent presence of government regulations or limited contractual arrangement – MNCs have been able to control the timing of many of the underlying real transaction • Value. The ability of MNCs to avoid taxes and regulatory barriers by shifting money and profit among their various units has led to conflicts with nation- states 31 FOUNDATIONS OF INTERNATIONAL FINANCIAL • Three basic concepts provide the foundation for study of international finance: arbitrage, market efficiency, and capital asset pricing model • Arbitrage: Taxes arbitrage, risk arbitrage, currency arbitrage • Market efficiency: – An efficient market is one which new information is readily incorporated in the price of traded securities . In an efficient market can not expect to prosper by finding overvalued or undervalued assets. – All funds require the same risk-adjusted returns – Absent tax consideration or government intervention, market efficiency suggests that there are no financing bargains available 32 9ROLE OF THE FINANCIAL EXECUTIVE IN AN EFFICIENT MARKET • Financial executives of MNCs face added political and economic risks, as well as more complex tax laws and multiple money markets. • Financial managers can create value by taking advantage of capital market imperfections and tax asymmetries 33 INTERNATIONAL OPPORTUNITIES 34 Marginal Return on Projects Purely Domestic Firm MNC Asset Level of Firm Investment Opportunities Cost-benefit Evaluation for Purely Domestic Firms versus MNCs Appropriate Size for Purely Domestic Firm Appropriate Size for MNC X Y Marginal Cost of Capital Purely Domestic Firm MNC Financing Opportunities                      n t t m j t k1= 1 ,$ 1 CF E = Value E (CF$,t ) = expected cash flows to be received at the end of period t n = The number of periods into the future in which cash flows received k = the required rate of return by investors VALUATION MODEL FOR MNC • DOMESTIC MODEL                          n t t m j tjtj k1= 1 , , 1 ER ECF E = Value E (CFj,t ) = expected cash flows denominated in currency j to be received by the U.S. parent at the end of period t E (ERj,t ) = expected exchange rate at which currency j can be converted to dollars at the end of period t k = the weighted average cost of capital of the U.S. parent company VALUATION MODEL FOR MNC • VALUING INTERNATIONAL CASH FLOWS 10 GLOBALIZATION OF THE WORLD ECONOMY: MAJOR TRENDS AND DEVELOPMENTS • Emergence of Globalized Financial Markets • Emergence of the Euro as a Global Currency • Europe’s Sovereign Debt Crisis of 2010 • Trade Liberalization and Economic Integration • Privatization • Global Financial Crisis of 2008-2009 1-37 • Deregulation of Financial Markets coupled with • Advances in Technology – have greatly reduced information and transaction costs, which has led to: • Financial Innovations, such as – Currency futures and options – Multi-currency bonds – Cross-border stock listings – International mutual funds EMERGENCE OF GLOBALIZED FINANCIAL MARKETS 1-38 EMERGENCE OF THE EURO AS A GLOBAL CURRENCY • A momentous event in the history of world financial systems. • Currently more than 300 million Europeans in 16 countries are using the common currency on a daily basis. • In May 2004, 10 more countries joined the European Union. • The “transaction domain” of the euro may become larger than the U.S. dollar’s in the near future. 1-39 EUROPE’S SOVEREIGN-DEBT CRISIS OF 2010 • In December of 2009 the new Greek government revealed that its budget deficit for the year would be 12.7% of GDP, not the 3.7% forecast. • Investors sold off Greek government bonds and the ratings agencies downgraded them to “junk.” • While Greece represents only 2.5% of euro-zone GDP, the crisis became a Europe-wide debt crisis. • The challenge remains that fiscal indiscipline of one euro-zone country can escalate to a Europe-wide crisis. 1-40 11 THE GREEK DRAMA • Greece paid no premium above the German rate until late fall 2009. • The Greek interest rate rose until the bailout package on May 9. 1-41 ECONOMIC INTEGRATION • Over the past 50 years, international trade increased about twice as fast as world GDP. • There has been a change in the attitudes of many of the world’s governments, who have abandoned mercantilist views and embraced free trade as the surest route to prosperity for their citizenry. 1-42 LIBERALIZATION OF PROTECTIONIST LEGISLATION • The General Agreement on Tariffs and Trade (GATT) is a multilateral agreement among member countries that has reduced many barriers to trade. • The World Trade Organization has the power to enforce the rules of international trade. • On January 1, 2005, the era of quotas on imported textiles ended. • This is an event of historic proportions. 1-43 NAFTA • The North American Free Trade Agreement (NAFTA) calls for phasing out impediments to trade between Canada, Mexico, and the United States over a 15- year period beginning in 1994. • For Mexico, the ratio of export to GDP has increased dramatically from 2.2% in 1973 to 29% in 2006. • The increased trade has resulted in increased numbers of jobs and a higher standard of living for all member nations. 1-44 12 PRIVATIZATION • The selling of state-run enterprises to investors is also known as “denationalization.” • Privatization is often seen in socialist economies in transition to market economies. • By most estimates, this increases the efficiency of the enterprise. • It also often spurs a tremendous increase in cross- border investment. 1-45 CHINESE PRIVATIZATION • State-owned enterprises have been listed on organized stock exchanges. • More than 1,500 companies are currently listed on China’s stock exchanges. • The Chinese government still retains the majority stakes in most public firms. • Chinese citizens can buy “A” shares, while foreigners are limited to “B” shares. 1-46 GLOBAL FINANCIAL CRISIS OF 2008—2009 • The “Great Recession” was the most serious, synchronized economic downturn since the Great Depression of the 1930s. • Factors included: – Households and financial institutions borrowed too much and took too much risk. – This risk was repackaged with securitization, and so defaults on subprime mortgages in the U.S. came to threaten the solvency of a teacher’s retirement plans in Norway. 1-47 GLOBAL FINANCIAL CRISIS 2008—2009 • During the course of the crisis, the G-20 emerged as the premier forum for discussing international economic issues and coordinating financial regulations and macroeconomic policies. 1-48 13 THE FOLLOWING SLIDES COVER THE APPENDIX TO CHAPTER 1. 1-49 • A comparative advantage exists when one party can produce a good or service at a lower opportunity cost than another party. • The opportunity cost of making one additional unit of a good (or service) can be defined as the value of some other good that you have to give up in order to produce this additional unit. – For example, if you can work as many hours as you like at your current employer and get paid $10 per hour, then the opportunity cost of your leisure is $10 per hour. THE THEORY OF COMPARATIVE ADVANTAGE 1-50 THE GEOMETRY OF COMPARATIVE ADVANTAGE • Consider the example where there are two countries, A and B, who can each produce only food and textiles. • Initially they do not trade with one another. • The graph on the next slide shows the increase in consumption available to the citizens of countries A and B with trade arising from the differences in their opportunity costs of production. 1-51 300 Food Textiles 180 60 200 As a practical matter, the citizens of Country A must choose a point along their production possibilities curve. Suppose they initially choose 200m pounds of food and 60m yards of textiles. A production possibilities curve shows quantities of food or textiles each country can make. The production possibilities of Country A are such that if they concentrated 100% of their resources into the production of textiles, they could produce 180 million yards of textiles. If Country A chose to concentrate 100% of their resources into the production of food, they could produce as much as 300 million pounds of food. Country A can produce any combination of food and textiles between these two points. THE GEOMETRY OF COMPARATIVE ADVANTAGE 1-52 14 1,200300 Food Textiles 180 900 240 60 200 600 The citizens of Country B must also choose a point along their production possibilities curve; 80 If Country B chose to concentrate 100% of their resources into the production of textiles, they could produce 240 million yards of textiles. If Country B chose to concentrate 100% of their resources into the production of food, they could produce 900 million pounds of food. THE GEOMETRY OF COMPARATIVE ADVANTAGE 1-53 Initially they choose 600 million pounds of food, and 80 million yards of textiles. 300 Food Textiles 180 900 240 60 200 600 80 Country A enjoys a comparative advantage in textiles because they have to give up food at a lower rate than B when making textiles. Put another way, country B enjoys a comparative advantage in food because they have to give up textiles at a lower rate than A when making more food. Geometrically, a comparative advantage exists because the slopes of the production possibilities differ. If the countries specialize according to their comparative advantage, then Country A should make textiles and trade for food, while Country B should grow food and trade for textiles. THE GEOMETRY OF COMPARATIVE ADVANTAGE 1-54 1,200300 Food Textiles 420 800 180 900 240 60 200 600 80 Before trade, combined consumption is 800 million lbs of food (= 200 + 600) and 140 million yards of textiles (= 60 + 80). 140 The combined production possibilities curve of country A and B without trade are shown in the green line. Without trade, if both countries make only food, the combined production would be 1,200 million pounds of food = 900 + 300. Without trade, if both countries make only textiles, the combined production would be 420 million yards of textiles = 240 + 180. THE GEOMETRY OF COMPARATIVE ADVANTAGE 1-55 300 Food Textiles 180 60 200 As a practical matter, the citizens of country A must choose a point along their production possibilities curve Suppose that initially they choose 200 million pounds of food, and 60 million yards of textiles. A production possibilities curve shows the various amounts of food or textiles that each country can make. The production possibilities of country A are such that if they concentrated 100% of their resources into the production of textiles, they could produce 180 million yards of textiles.If country A chose to concentrate 100% of their resources into the production of food, they could produce as much as 300 million pounds of food. Country A can produce any combination of food and textiles between these two points. 1,2 0300 900 240 200 600 The citizens of country B must also choose a point along their production possibilities curve; initially they choose 600 million pounds of food, and 80 million yards of textiles.80 If country B chose to concentrate 100% of th ir resources into the production of textiles, they could prod ce 240 million yards of textiles. If country B chose to concentrate 100% of their resources into the production of food, they could produce 900 million pounds of food. Country A enjoys a comparative advantage in textiles because they have to give up food at a lower rate than B when making textiles. Put an ther way, country B enj ys a compa ative a vantage in food because they have to give up textiles at a lower rat than A when making more food. Geometri ally, a comparative advantage exists because the slo es of the production possibilities differ. If the countries specialize according to their compar tive advantage, then country A should make textiles and trad for food, while country B should grow food and trade for textiles. 420 800 Before trade, combined consumption is 800 milli n lbs of food (= 200 + 600) and 140 million yards of textiles (= 60 + 80). 140 The combined production possibilities curve of country A and B without trade ar shown in the green line. Without trade, if both countries make only food, the combined production would be 1,200 million ounds of food = 900 + 300. Without trade, if both countries make only textiles, the combined production would be 420 million yards of textiles = 240 + 180. 1,200 Food Textiles 420 800 140 180 900 240 60 600 80 The gains from trade are shown by the increase in consumption available. The combined production possibilities curve with trade is composed of the original curves joined as shown. Country A can produce textiles at a lower opportunity cost, so let them produce the first 180 million yards of textiles. County B can produce food at a lower opportunity cost, so let B produce the first 900 million pounds of food. THE GEOMETRY OF COMPARATIVE ADVANTAGE 1-56 15 ARGUMENTS IN FAVOR OF FREE TRADE • Both partners gain from trade; we have more material goods. • “Freedom” is a good thing in and of itself. – In this case, consumers have the freedom to choose imported goods and producers have the freedom to choose to sell to foreigners. 1-57 MINI CASE: NIKE AND SWEATSHOP LABOR Discussion points 1. Do you think the criticism of Nike is fair, considering that the host countries are in dire needs of creating jobs? 2. What do you think Nike’s executives might have done differently to prevent the sensitive charges of sweatshop labor in overseas factories? 3. Do firms need to consider the so-called corporate social responsibilities in making investment decisions? 58 QUESTION? 1. Why is it important to study international financial management? 2. How is international financial management different from domestic financial management? 3. What are multinational corporations (MNCs) and what economic roles do they play? 4. Suppose you are interested in investing in shares of Nokia Corporation of Finland, which is a world leader in wireless communication. But before you make investment decision, you would like to learn about the company. Visit the website of Yahoo (finance.yahoo.com) and collect information about Nokia, including the recent stock price history and analysts’ views of the company. Discuss what you learn about the company. Also discuss how the instantaneous access to information via internet would affect the nature and workings of financial markets. 59 OPPORTUNITY COST # 60 Product #1 Product #2 Opportunity Cost $1 buys 2 candies $1 buys 4 stamps 1 candy = 4/2 = 2 stamps 1 stamp =2/4=0.5 candies $1,000,000 buys 4 cars $1,000,000 buys 10 boats 1 car = 10/4 = 2.5 boats 1 boat =4/10=0.4 cars Output /hour = 25 calculators Output /hour = 5 computers 1 calculator = 5/25=0.2 computers 1 computers = 25/5= 5 calculators 1 worker can produce 8000lbs of wheat 1 worker can produce 2000lbs of cotton 1 lbs of wheat = 2000/8000 = 0.25lbs of cotton 1 lbs of cotton = 8000/2000 = 4 lbs of wheat The opportunity cost of good X in term of good Y = Number of units of good Y/ Number of units good X 16 SOLUTION IN-CLASS EXERCISE # 2 61 TOTAL OUTPUT PER WORKER COFFEE TEA BRAZIL 9000 lbs 300 lbs CHINA 5000 lbs 200 lbs OPPORTUNITY COST Cost of TEA (in term of Cof) Cost of Cof. (in term of tea) BRAZIL CHINA BRAZIL CHINA 1 pound of tea = 32 lb Cof. 1 pound of cof = 0.035 lb tea 1 pound of cof = 0.065 lb tea 1 pound of tea = 20 lb Cof. IN-CLASS EXERCISE # 3 62 TOTAL OUTPUT PER WORKER FOOD (F) CLOTHING (C) USA 400 10 GERMANY 1000 20 OPPORTUNITY COST COST OF F (in term of C) COST OF C (in term of F) USA GERMANY USA GERMANY 1C=35F 1F=0.04C 1F=0.01C 1C=52F