International Finance

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International Finance

• Essentials of Corporate Finance
• Chapter 18

Materials Created by Glenn Snyder San Francisco
State University
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Topics

• International Financial Analysts
• Why is International Finance Different?
• Time Zones / Communication
• Currency
• Culture
• Global Political Implications
• Markets
• Language
• Foreign Laws and Restrictions
• Foreign Accounting
• Strategies
• Career Advice for an International Financial
  Analyst

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International Financial Analysts

• An International Financial Analyst typically
  works in the corporate headquarters, internally
  supporting and analyzing the companys
  international operations.
• An International Financial Analyst is different
  from other Internal Financial Analysts by
• Currency
• Culture
• Global Political Implications
• Market Complexities
• Sophistication of the Consumers
• Language
• Foreign Laws and Restrictions
• Foreign Accounting

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Currency

• Currency fluctuations can change the value and
  importance of an international operation

Currency 1/3/00 (in USD) 1/1/07 (in USD) Change
Canadian Dollar 1.4465 1.1652 19
Euro 0.984736 0.757748 23
Japanese Yen 103.90 119.02 (15)
Brazilian Real 1.805 2.1342 (18)
Chinese Yuan 8.2798 7.8041 6
South Korean Won 1128 930 18
South African Rand 6.126 7.0375 (15)
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Time Zones / Communications

• Communicating with international offices is not
  just difficult because of language and cultural
  differences, but time zones as well
• If a San Francisco based company wants to talk
  with a subsidiary in India at 130 pm Indian
  local time, the San Francisco employee must call
  India at 100 am Pacific Standard Time
• If a New York based company wants to talk with a
  subsidiary in Japan at 900 am Japanese local
  time, the New York employee must call Japan at
  700 pm Pacific Standard Time

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Culture

• An International Financial Analyst must
  understand the differences between cultures
• In Italy, employees have a minimum of 5 weeks of
  vacation per year
• In many Asian cultures, it is customary to drink
  and go to bars after work
• In many Middle Eastern cultures, women must be
  dressed from head to toe
• These customs and cultures are important when
  communicating (email or phone) or visiting the
  international office

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Global Political Implications

• An International Financial Analyst must
  understand what is going on in world politics and
  the implications on their company
• India and Pakistan testing nuclear weapons
• North Korea testing nuclear weapons
• Venezuela cutting off access for American oil
  companies
• Iraq war
• Riots in Paris in 2005
• Subway bombings in Madrid and London

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Markets

• An International Financial Analyst must
  understand the complexities and trends of the
  international market place
• Sophistication of Consumers
• Financial Services Industry Many consumers in
  emerging market countries dont understand
  equities and derivatives
• Telecommunications In countries like Brazil,
  most of the population does not have home phone
  lines
• Automotive Industry Europe has gasoline prices
  close to 4 times the price of the U.S., with
  smaller roads and fewer parking spaces

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Language

• An International Financial Analyst must be able
  to communicate clearly with members of the
  international offices
• In Japan, it is a sign of respect to add san to
  the end of a persons last name
• Chevy Nova example
• Chevrolet marketed their Nova vehicle to Latin
  America, without changing the name
• In Spanish, No Va means No Go

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Foreign Laws and Restrictions

• Most countries have laws and restrictions very
  different to those of the United States
• China requires at most 33 foreign ownership
• U.S. Companies must enter China through joint
  ventures
• U.S. Companies do not have control of their China
  operations
• When a company opens an office in another
  country, it must set up a new legal entity in
  that country
• The local country will want to receive tax
  revenue for any income earned in that country

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Foreign Laws and Restrictions

• Tax Havens
• Tax Havens are countries with very low or no
  corporate income tax
• Examples are
• The Bahamas
• Grand Cayman
• Singapore
• Luxembourg
• Income earned in tax havens cannot be repatriated
  into the United States without paying U.S. taxes

12
Foreign Accounting

• Differences in Accounting Standards
• Different countries offer different tax
  incentives.
• German firms tend to stretch the definition of a
  liability and tend to understate inventory for
  tax purposes.
• Sweden offers accelerated depreciation and
  inventory write-offs, which differ from the U.S.
  accounting standards.
• Most countries have only one set of reports used
  for both taxes and public reporting. The U.S.
  reports these differently.

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Foreign Accounting

• Each foreign office typically keeps two sets of
  books
• One is for local reporting and taxes
• One is based on the companys chart of accounts
  for consolidation purposes
• Foreign offices must have their financial
  statements translated and merged into the home
  countrys financials to produce consolidated
  financial statements

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Strategies

• An International Financial Analyst must take into
  account all of the previous items when
• Developing a strategic plan of an international
  office
• Analyzing budget variances
• Analyzing impacts to consolidated financials
• Analyzing strategic projects or international
  expansion
• Evaluating management, efficiency, or production
  levels

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Career Advice for an International Financial
Analyst

• Understand cultural differences
• Be open minded, the U.S. way is not always the
  best
• Learn foreign languages
• At least learn a few phrases in many different
  languages
• Stay current with global politics and happenings
• Most people are not hired into international
  positions, they begin their careers in a domestic
  position for a global organization, then transfer
  when theyve gained specific expertise