Download Globalization and the Multinational Firm

Globalization & the
Multinational Firm
Chapter
1
PowerPoint® Presentation Prepared By
Charles Schell
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Chapter One Outline
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What’s Special about “International” Finance?
Goals for International Financial Management
Globalization of the World Economy
Multinational Corporations
Organization of the Text
Summary
Slide 1-1
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
1.1 What’s Special about
“International” Finance?
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Foreign Exchange Risk
Political Risk
Market Imperfections
Expanded Opportunity Set
Slide 1-2
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
What’s Special about
“International” Finance?
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Foreign Exchange Risk
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Slide 1-3
The 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 for
¥100,000 (i.e. $100 per share = ¥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 $1 = ¥120, your
investment has actually lost money in dollar terms.
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Monthly Percentage Change in
C$ - US$ Exchange Rate
Slide 1-4
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
R in Yen = 10% but R in $ = -8.33%
Gomenasai!
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R in Yen = (110,000/100,000) – 1 = 10%
R in $ = (916.67/1,000) – 1 = -8.33%
At t=0: JY100,000/JY100 = $1,000
At t=1: JY110,000/JY120 = $916.67
Percent appreciation of JY or aJY = -16.67%
At t=0: JY = 1/100 = $0.01
At t=1: JY = 1/120 = $0.0083
(1 + R$) = (1+RJY) (1+aJY)
Slide 1-5
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
What’s Special about
“International” Finance?
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Political Risk
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Sovereign governments have the right to regulate the
movement of goods, capital, and people across their
borders. These laws sometimes change in unexpected
ways.
For example:
 China’s
decision to ban Canola, on the basis that it is a
genetically improved product;
 Canada banned gasoline additive MMT in 1997
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Slide 1-6
Multilateral agreements may reduce political risk – for
example, a NAFTA claim led to a settlement with Ethyl,
the manufacturer of MMT
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
What’s Special about
“International” Finance?
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Market Imperfections
 Legal restrictions on movement of goods,
people, and money
 Transactions costs
 Shipping costs
 Tax arbitrage
Slide 1-7
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
The Example of Nestlé’s Market
Imperfection
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Nestlé used to issue two different classes of
common stock bearer shares and registered shares.
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Non-Swiss were allowed to buy only bearer shares.
Swiss citizens could buy only registered shares.
The bearer stock was more expensive.
On November 18, 1988, Nestlé lifted restrictions
imposed on non-Swiss, allowing them to hold
registered shares as well as bearer shares.
Slide 1-8
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SF
Nestlé’s Foreign Ownership
Restrictions
Slide 1-9
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
The Example of Nestlé’s Market
Imperfection
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Following this, the price spread between the two
types of shares narrowed dramatically.
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This implies that there was a major transfer of wealth
from non-Swiss 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.
Slide 1-10
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
What’s Special about
“International” Finance?
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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.
 McCain’s
 Barrick
 CN
 Roots
Slide 1-11
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
1.2 Goals for International Financial
Management
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The focus of the text is to equip the reader with
the “intellectual toolbox” of an effective global
manager—but what goal should this effective
global manager be working toward?
Maximization of shareholder wealth?
or
Other Goals?
Slide 1-12
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Maximize Shareholder Wealth
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Long accepted as a goal in the Anglo-Saxon
countries, but complications arise.
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Slide 1-13
Who are and where are the shareholders?
In what currency should we maximize their wealth?
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Other Goals
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In other countries shareholders are viewed as
merely one among many “stakeholders” of the
firm including:
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Employees
Suppliers
Customers
In Japan, managers have typically sought to
maximize the value of the keiretsu (Korean
version is chaebol)—a family of firms to which
the individual firms belongs. Firms mutually own
shares in the other family firms.
Slide 1-14
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Other Goals
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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.
Slide 1-15
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Other Goals
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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.
Slide 1-16
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
1.3 Globalization of the World
Economy: Recent Trends
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Emergence of Globalized Financial Markets
Advent of the Euro
Trade Liberalization and Economic Integration
Privatization
Slide 1-17
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Emergence of Globalized
Financial Markets
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Deregulation of Financial Markets coupled with
Advances in Technology have greatly reduced
information and transactions costs, which has led
to:
Financial Innovations, such as
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Slide 1-18
Currency futures and options
Multi-currency bonds
Cross-border stock listings: ADRs American Depositary
Receipts, GDRs Global Depositary Receipts
International mutual funds
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Advent of the Euro
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Currently more than 300 million Europeans in 15
countries are using the common currency on a
daily basis.
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(Bulgaria, Czech Republic, Denmark, Estonia, Latvia,
Lithuania, Hungary, Poland, Romania, Slovakia, Sweden
and the UK not included)
In May 2004 10 more countries joined the
European Union and most want to adopt the euro.
The “transaction domain” of the euro may become
larger than the U.S. dollar’s in the near future.
Slide 1-19
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Advent of the Euro
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For more information on the euro, visit the
European Central Bank's Web site at
www.ecb.int.
Slide 1-20
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Economic Integration
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Over the past 50 years, international trade
increased about twice as fast as world GDP.
There has been a sea 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.
Slide 1-21
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Liberalization of
Protectionist Legislation
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The General Agreement on Tariffs and Trade
(GATT) a multilateral agreement among member
countries has reduced many barriers to trade.
The World Trade Organization has the power to
enforce the rules of international trade.
Slide 1-22
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Economic Openness
(Merchandise exports / GDP %)
Slide 1-23
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NAFTA
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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.
For Canada, the ratio of exports to GDP has
increased dramatically from 20% in 1973 to 43%
in 2006.
The increased trade will result in increased
numbers of jobs and a higher standard of living
for all member nations.
Slide 1-24
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Privatization
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The selling off state-run enterprises to investors is
also known as “Denationalization”.
Often seen in socialist economies in transition to
market economies.
By most estimates this increases the efficiency of
the enterprise.
Often spurs a tremendous increase in cross-border
investment.
Slide 1-25
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
1.4 Multinational Corporations
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A firm that has incorporated on one country and
has production and sales operations in other
countries.
There are about 75,000 MNCs in the world.
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.
For more information see www.unctad.org
Slide 1-26
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Top 12 MNCs
(ranked by foreign assets)
See Exhibit 1.4
Slide 1-27
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1.5 The Organization of the Text
Slide 1-28
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved
Summary
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Three major dimensions distinguish international from
domestic finance:
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Financial managers contribute to shareholder wealth
maximization by managing risks
Important trends and issues include:
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Foreign exchange and political risks
Market imperfections
Expanded opportunity set
Emergence of the Euro
Trade liberalization and economic integration
Privatization
Multinationals are a major force driving globalization
Slide 1-29
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved