MBUS 663: International Finance

1
MBUS 663 International Finance

• Why study international finance?
• Globalization of business
• increasing level of FDI
• level of U.S. exports and imports
• theories based on the U.S. markets perform poorly
  in other countries

2
How is international finance different from
domestic finance?

• Unique aspects about finance in international
  setting
• FX markets and FX risk
• Country risk / political risk
• Euromarket
• International taxation
• Market segmentation
• Expanded opportunity set
• Challenges facing multinational financial
  manager
• Sensitivity to differences in cultural and
  business environments
• Ability to evaluate investment opportunities in
  foreign markets

3
Chapter 1 Intl Financial Mgmt the
Multinational Firm

• What is an MNE?
• Why do they exist?
• Additional challenges faced by MNEs
• FX risk
• political risk
• The goal of management

4
Multinational Enterprises (MNEs)

• Definition An MNE is a firm that owns and
  operates facilities in 2 or more countries -
  i.e., it has cross border operations
• In transnational corporations, the ownership too
  is dispersed

5
Challenges for MNE

• Cultural differences
• the way business is done varies across countries
• Differences in legal, accounting, and tax systems
• laws, legal conventions, and even attitudes
  towards them vary
• Differences in financial markets
• bank vs. market based economies
• functioning and importance of stock markets
• Differences in corporate governance

6
Market imperfections explaining MNEs

• Product market imperfections opportunities
• Strategic motives for FDI
• markets
• raw materials
• production efficiency
• knowledge
• political safety
• Can financial market imperfections create
  opportunities?

7
Country Risk

• Risk defined Actual outcomes can differ from
  expectations
• Country risk possibility of an unexpected
  change in business environment in a country
• political risk
• unexpected change caused by political events
• financial risk
• unexpected change in economic environment
• FX risk

8
Political Risk

• Potential for political action against the firm
• macro and micro risks
• Expropriation, civil war, blocked funds, currency
  inconvertibility, transfer pricing disagreements,
  pricing, domestic content, expatriate workers,
  etc.
• Affects either ownership or operations
• Political risk premium for investments in foreign
  markets
• higher hurdle rates

9
Macro risks

• Country-specific
• Not necessarily discriminatory towards foreign
  firms
• expropriation of private property
• how to value foreign-owned firms?
• ethnic strife

10
Micro risks

• Political actions targeted at certain industries,
  owner groups or individual firms
• Often caused by a goal conflict between the host
  government and the MNE
• important to manage prior to the investment

11
The goal of corporate management

• Finance theory Management should maximize
  shareholder wealth
• But requires well-functioning stock markets
• are investors only concerned about systematic
  risk?
• does the market for corporate control exist?

12

• In many countries, Corporate wealth
  maximization is viewed as more acceptable
• Not only shareholders, but also employees,
  community, etc. taken into account
• Does not require well-functioning stock markets
• the loyal long-term shareholder should influence
  corporate strategy, not the transient portfolio
  investor.
• Problems
• Measurement
• Priorities

13
Corporate governance

• The power of minority shareholders varies across
  countries
• multiple share classes common
• anti-takeover defenses
• poison pills
• golden parachutes
• see Exhibit 1.3, p. 9
• keiretsus in Japan
• cross-holdings and proxy voting in Germany
• cronyism in emerging markets

14
Operational goals for MNEs

• Maximization of consolidated after-tax income
• Minimization of overall tax burden
• Both can be approached by optimizing positioning
  of the firms income