1. International Financial Environment.ppt

8/15/2019 1. International Financial Environment.ppt

http://slidepdf.com/reader/full/1-international-financial-environmentppt 1/54

International Finance I [CFI4102]

B.Com Finance

International Financial Management

Prepared by

Edson Mbedzi

1



Course Outline

1. International Finance introd!ction to m!ltinational b!siness.

2. International Flo" o# F!nds

$. %&e Forei'n E(c&an'e Mar)et

4. Forecastin' E(c&an'e *ate Mo+ements

,. International Financial Mar)ets

-. Forei'n irect In+estment

2



Topic Objectives

/ %o identi#y t&e main 'oal o# t&e MC and conicts "it&t&at 'oal

/ %o describe t&e )ey t&eories t&at 3!sti#y internationalb!siness and

/ %o e(plain t&e common met&ods !sed to cond!ctinternational b!siness.

/ E(plain "orld opport!nities t&at promote t&e rele+ance o#International b!siness.

3



4

International BusinessManagement

/ International b!siness is cond!cted t&ro!'& m!ltinationalcorporations.

/ In+ol+es international in+estin' and 5nancin' decisions.

/ 6tarts "it& simple attempt to e(port prod!cts to a partic!lar co!ntryor imports #rom a #orei'n man!#act!rer7 b!t o+er time reco'nise

additional #orei'n opport!nities and e+ent!ally establis& s!bsidiariesin #orei'n co!ntries.

/ Important to companies not in+ol+ed in international b!siness as "ell7to e+al!ate &o" #orei'n competitors "ill be a8ected by mo+ements in

e(c&an'e rates7 #orei'n interest rates7 labo!r costs7 ination etc.

/ 9ey international b!siness 5nancin' decisions:

/ ;&et&er to p!rs!e ne" b!siness in a partic!lar co!ntry

/ ;&et&er to e(pand b!siness in a partic!lar co!ntry



The International Business

Multinational Corporation (MNC)

Foreign Exchange Markets

ro!uct Markets "u#si!iaries InternationalFinancialMarkets

$i%i!en!&e'ittance FinancingExporting

I'portingIn%esting

Financing



Goal of the MNC

• %&e commonly accepted 'oal o# an MC is to ma(imize s&are&older "ealt&.

• %&e role o# international 5nance is to inte'rate all local and #orei'n

operations in a "ay t&at ma(imise 5rm +al!e ta)in' into acco!nt alloperational7 economic and co!ntry ris)s in+ol+ed.

• For corporations "it& s&are&olders "&o di8er #rom t&eir mana'ers7 a conicto# 'oals can e(ist = t&e agency problem.

• Agency costs are normally lar'er #or MCs t&an #or p!rely domestic 5rms7

b!t can +ary "it& t&e mana'ement style o# t&e MC.

>1? Monitor costs @ o+erloo) o# mana'erial acti+ities7 s!c& as a!dit costs

>2? *estr!ct!rin' costs >e.'. to limit mana'erial be&a+io!r = board o#

directors and7

>$? Apport!nity costs

>4? Bondin'

*



Managing Agency Costs

• ario!s #orms o# corporate control can red!ce a'ency problems

>1? per#ormance=based incenti+e plans >stoc) compensation?7

>2? direct monitorin'inter+ention by s&are&olders7

>$? t&e t&reat o# 5rin'7 and

>4? t&e t&reat o# &ostile ta)eo+er.

Ds MC mana'ers attempt to ma(imize t&eir 5rms +al!e7 t&ey may

be con#ronted "it& +ario!s environmental7 regulatory 7 or ethical

constraints.

+



Theories of International Business

,

;&y are 5rms moti+ated to e(pand t&eir b!siness internationally @

&ence Importance o# International Finance

!Theory of Comparative A"vantage

6pecialization by co!ntries can increase prod!ction eGciency

based on relative implicit cost/opportunity cost reasoning ($a%i! &icar!o-1,1+).



! The Theory of Comparative A"vantage

a+id *icardo: Principles o# Political Economy >1H1?

•E(tends #ree trade ar'!ment.•EGciency o# reso!rce !tilization leads to more prod!cti+ity.

•Joo) to see &o" m!c& more eGcient7 i# only comparati+ely eGcient7t&en import.

•Ma)es better !se o# reso!rces.

• %rade is a positi+e=s!m 'ame.#icar"o$s theory suggests that comparative a"vantage arisesfrom "i%erences in pro"uctivity

Assumptions an" limitations

ri+en only by ma(imization o# prod!ction and cons!mption.Anly 2 co!ntries en'a'ed in prod!ction and cons!mption o# 3!st 2'oods.

oes not ta)e into acco!nt t&e transportation costs.

Anly one reso!rce7 t&at is labo!r is in !se >t&at too7 non=.



! The Theory of ComparativeA"vantage

• In t&e %able t&e 6D &as a total absol!te ad+anta'e in t&e prod!ctiono# bot& cars and bee# o+er Kimbab"e.

• Dccordin' to Ddam smit& t&ere is no bene5t #rom specialisation7

nonet&eless accordin' to *icardos e(planation7 "&en co!ntriesdecide "&at to prod!ce or not t&ey consider relati+e cost or implicitcost reasonin' ill!strated belo".

Cars Bee#

6D 2 H tonnesKimbab"e 1 - tonnes

1/



! The Theory of Comparative A"vantage

6D &as lo"er opport!nity cost ratio in t&e prod!ction o# cars "&ileKimbab"e is better in t&e prod!ction o# bee#.

%o prod!ce 1 car t&e 6D reL!ires 4 tonnes o# bee# eL!i+alent "&ileKimbab"e reL!ires - tonnes instead. An t&e ot&er &and7 #or Kimbab"eto prod!ce - tonnes o# bee# it #ore'oes 1 car7 "&ile 6D #ore'oes 1 car toprod!ce only 4 tonnes.

%&!s 6D prod!ces cars and e(port to Kimbab"e "&ile Kimbab"e

prod!ces more bee# and e(ports to t&e 6D. Bot& Kimbab"e and 6Dbene5t #rom specialisation and trade i# a m!t!ally bene5cial tradin' ratiois establis&ed.Jet !s s!ppose 1 car is e(c&an'ed #or , tonnes o# bee# in t&einternational mar)ets7 bot& t&e 6D and Kimbab"e still 'ain #rom trade.

%&ere#ore bot& co!ntries bene5t ro+ided t&e international mar)et rice

Cars Bee#

6D H24 2H0.2,

Kimbab"e -1- 1-0.1

11



Implications of the #icar"ian Mo"el

• iminis&in' ret!rns: – More a co!ntry prod!ces7 at some point7 "ill reL!ire

more reso!rces.

• <o"e+er:

– Free trade can increase a co!ntrys prod!ctionreso!rces7 and

– Increase t&e eGciency o# reso!rce !tilization.

• International trade "ill only be o# bene5t i# comparati+ead+anta'e e(ists7 t&at is7 i# opport!nity costs di8erbet"een t"o co!ntries.

12



13


Implications of comparative a"vantage to international mar&ets

/ International trade bene5t i# comparati+e ad+anta'e e(ists7 t&at is7 i#opport!nity costs di8er bet"een t"o co!ntries.

/Co!ntries "ill only bene5t #rom international b!siness i# internationalmar)et prices lie bet"een t&e opport!nity costs o# t&e co!ntriesconcerned0



14

'! Imperfect Mar&ets Theory

• Goods differ in their factor requirements. Cars require morecapital per labour than furniture and aircraft requires more than

cars. Thus goods can be ranked by their factor intensity.

• Countries differ in factors endoments! some have more capital

than others. Thus countries can be ranked by factor abundance.

• %&e mar)ets #or t&e +ario!s reso!rces !sed inprod!ction are Nimper#ect.O Je'al restrictions on mo+ement o# 'oods7 people7 and money

%ransactions costs

6&ippin' costs

%a( arbitra'e opport!nities

B: 6ee t&e &ec




'a! (ec&scher )**+,Olin )*--+ Theory

• oods di8er in t&eir #actor reL!irements. Cars reL!ire more capital perlabo!r t&an #!rnit!re and aircra#t reL!ires more t&an cars. %&!s 'oods

can be ran)ed by t&eir #actor intensity.

• Co!ntries di8er in #actors endo"ments some &a+e more capital t&anot&ers. %&!s co!ntries can be ran)ed by #actor ab!ndance.

• E(port 'oods t&at intensi+ely !se #actor endo"ments "&ic& are locallyab!ndant.

– Corollary: import 'oods made #rom locally scarce #actors.

• Patterns o# trade are determined by di8erences in #actor endo"ments =not prod!cti+ity.

• *emember7 #oc!s on relati+e ad+anta'e7 not absol!te ad+anta'e.1



'a! (ec&scher,Ohlin theory

*icardos t&eory s!''ests t&at comparati+e ad+anta'e arises #romdi8erences in prod!cti+ity.

Eli <ec)sc&er and Bertil A&lin ar'!ed t&at comparati+e ad+anta'e arises#rom di8erences in national #actor endo"ments @ t&e e(tent to "&ic& aco!ntry is endo"ed "it& reso!rces li)e land7 labor7 and capital.

%&e <ec)sc&er=A&lin t&eory predicts t&at co!ntries "ill e(port 'oods t&atma)e intensi+e !se o# t&ose #actors t&at are locally ab!ndant7 "&ileimportin' 'oods t&at ma)e intensi+e !se o# #actors t&at are locallyscarce.

1*

A ti f th ( O Th



Assumptions of the (,O Theory• %&e model is &ypot&esised on t"o co!ntries7 t"o sectors and t"o inp!ts>labo!r and capital?7 t&!s sometimes called t&e 2(2(2 model.•It ass!mes t&at endo"ments o# labo!r and capital di8er acrossco!ntries.•It ass!mes per#ectly competition 'oods mar)et.•Firms ma(imise pro5ts >M*MC?.

•People demand bot& 'oods and tastes are t&e same in bot& co!ntries.Called t&e e(istence o# &omot&etic pre#erences in bot& co!ntries and it

entails t&at t&e pre#erences o# t&e cons!mers in bot& co!ntries arecon+e( to t&e ori'in "&en considered in terms o# t&e indi8erence c!r+esanalysis.

•It ass!mes per#ect s!bstit!tability o# #actors. Bot& inp!ts o# labo!r andcapital are !sed to prod!ce bot& 'oods and can be L!ic)ly reallocated to

eit&er o# t&e sectors >#ood and clot&in'?. i.e.

•Dss!mes a constant ret!rn to scale >C*6? prod!ction #!nction. %&!s7 inbot& co!ntries t&ere is t&e same state o# tec&nolo'y >&omo'eneity o# 1 st

( )∫ = x x L K x X ;

( )∫ = y y L K yY ;

1+



#eturns to .cale

Ane important c&aracteristic o# prod!ction #!nction is t&e response o#o!tp!t to eL!i=proportional c&an'es in bot& inp!ts. *et!rns to scale can

be depicted !sin' isoL!ants. %&e distance bet"een isoL!ants representst&e e(tent to "&ic& o!tp!t o# a 'ood scales !p or do"n in response toc&an'es o# #actors o# prod!ction. D ma3or ass!mption o# t&e prod!ction#!nction is t&at o# t&e Constant *et!rns to 6cale >C*%6?. %&is ass!mptionis also called t&e <omo'eneity o# 1st de'ree and ill!strated as #ollo"s:

e5nition o# C*%6:

Jet Q 07 'i+en t&at R S >97 J?7 t&en t&is eL!ation is said to be&omo'eneity o# de'ree k i# :

7 "&ere k is t&e de'ree o# &omo'eneity or &omo'eneo!s de'ree.

sin' t&e eL!ation7 i# 9 17 t&en s!c& a #!nction is said to be&omo'eneo!s.

6!c& a #!nction de5nes constant ret!rns to scale. D more #ormal

macroeconomics de5nition states t&at constant ret!rns to scale pre+ailsi# ca ital and labo!r are scaled ! b #actor t&e o!t !t is also increased

λ

( )∫ = L K X K

λ λ λ ;

1,

λ



Constant #eturns to .cale of /

%&e do!blin' o# #actors capital 9 and labo!r J leads to o!tp!t R todo!ble. %&is depicts t&e prod!ction #!nction "&ic& is &omo'eneo!s o#de'ree 1 >C*%6?.

%"o important otes

%&e slopes o# t&e isoL!ants alon' any ray #rom t&e ori'in !nderconditions o# &omo'eneity are eL!al.

%&e +al!e o# ) determines t&e spacin' bet"een isoL!ants.

NB0 Dlso note t&e di8erence bet"een ret!rns to scale and t&e la" o#diminis&in'

λ

1.



;e de5ne #actor endo"ments in terms o# t&e #actor ratios bet"een

stoc)s o# 9 and J in t&e t"o co!ntries.

I# 9J ratio is 'reater in &ome co!ntry < t&an in #orei'n co!ntry F7 t&enco!ntry < is relati+ely 9=ab!ndant >labo!r=scarce? "&ile co!ntry F is J=ab!ndant >capital=scarce?.

%&e p&ysical symbolically meas!re is as #ollo"s:

============================================1

F H L

K

L

K

>

(ec&scher )**+,Olin )*--+ Theory1

2/



%&e t&eory can be e(plained in terms o# #actors price ratios as belo" and

note t&e c&an'e in eL!ality si'n "&en #actors prices are !sed. %&e p&ysical symbolically meas!re is as #ollo"s:

============================================2

%&e A&linTs t&eory concl!des t&at: %&e basis o# international trade is t&e di8erence in commodity prices int&e t"o co!ntries.

i8erences in t&e commodity prices are d!e to cost di8erences "&ic&are t&e res!lts o# di8erences in #actor endo"ments in t"o co!ntries.

D capital ric& co!ntry specializes in capital intensi+e 'oods e(portst&em. ;&ile a Jabo!r ab!ndant co!ntry specializes in labo!r intensi+e'oods e(ports t&em.

(ec&scher )**+,Ohlin )*--+ Theory1

F H PL

PK

PL

PK <

21



(ec&scher,Ohlin vs #icar"o

• Economists pre#er <ec)sc&er on t&eoretical 'ro!nds b!t is arelati+ely poor predictor o# trade patterns.

• *icardos Comparati+e Dd+anta'e %&eory7 re'arded as too limited #or

predictin' trade patterns7 act!ally predicts t&em "it& 'reater

acc!racy.

• In t&e end7 di8erences in prod!cti+ity may be t&e )ey to determinin'

trade patterns.

22

Conclusion of ( O Theory



Conclusion of (,O Theory

%&e A&linTs t&eory concl!des t&at:

• %&e basis o# international trade is t&e di8erence in commodity prices int&e t"o co!ntries.

•i8erences in t&e commodity prices are d!e to cost di8erences "&ic&are t&e res!lts o# di8erences in #actor endo"ments in t"o co!ntries.

•D capital ric& co!ntry specializes in capital intensi+e 'oods e(portst&em. ;&ile a Jabo!r ab!ndant co!ntry specializes in labo!r intensi+e'oods e(ports t&em.

23



'b The .peci2c Factors Mo"el



'b! The .peci2c,Factors Mo"elAssumptions

.imilar Assumptions to (,O Mo"el

• %"o 'oods are prod!ced "it& prod!ction #!nctions t&at e(&ibit

Constant *ate o# *et!rns >C*%6?.• %"o #actors o# prod!ction are reL!ired #or bot& prod!ction #!nctions.

• %astes are &omo'eneo!s and identical #or all cons!mers "&ic& allo"edt&e representation o# pre#erences by t&e Comm!nity Indi8erenceC!r+es >CICs?.

4i%erent Assumptions to (,O Mo"el

Anly labo!r is &omo'eneo!s and common to t&e t"o prod!ction#!nctions7 b!t capital is 5(ed by ind!stry in t&e s&ort=r!n.

2

The pro"uction functions of the mo"el are



The pro"uction functions of the mo"el aresho3n belo30

%&e prod!ction #!nctions o# t&e model are s&o"n belo":

%&e abo+e prod!ction #!nctions are ass!med to be &omo'eneo!s o# t&e1st de'ree and also increasin' #!nctions o# bot& inp!ts. It is also ass!medt&at positi+e o!tp!ts are a prod!ct o# positi+e inp!ts o# bot& #actors.

%&e economy is ass!med to &a+e 5(ed total s!pply o# bot& 9 and J andt&ese t"o constraints are represented by eL!ation belo":

It is also ass!med t&at t&e t"o processes !se all t&e a+ailable 9 and J7t&at #!ll employment is ass!med.

Based on t&e #actor s!pply o# eL!ations abo+e7 "e ded!ce t&e #ollo"in'eL!ations !nder t&e speci5c #actors model:

( )

∫ = x x L R x X ; ( )∫ = y y LS yY ;

Ky Kx K += Ly Lx L +=

Rx R =

SyS = Ly Lx L +=

2*

I li ti f th . i2 F t M " l



Implications of the .peci2c,Factor Mo"el

%&e $ eL!ations abo+e s&o" t&at t&e entire a+ailable stoc) o# #actor * is!sed to prod!ce 'ood R "&ile t&e entire endo"ment o# #actor 6 is !sed

to prod!ce commodity U.

%&!s ret!rn to capitals * and 6 are NrO and NsO respecti+ely d!especi5city o# 9.

%&e ret!rn to labo!r7 J is N"O7 "&ic& is t&e same #or bot& ind!stries d!eto #ree mobility o# J.

%&e model t&en can be simpli5ed as a t&eory "it& t"o 'oods and t&ree#actors.

2+

li i f " 5 i



Implications for Tra"e 5 Business

• Jocation implications: ma)es sense to disperse prod!ction acti+ities to

co!ntries "&ere t&ey can be per#ormed most eGciently.

• First=mo+er implications: It pays to in+est s!bstantial 5nancialreso!rces in b!ildin' a 5rst=mo+er7 or early=mo+er7 ad+anta'e.

• Policy implications: promotin' #ree trade is 'enerally in t&e best

interests o# t&e &ome=co!ntry7 alt&o!'& not al"ays in t&e bestinterests o# t&e 5rm. E+en t&o!'&7 many 5rms promote open mar)ets.

2,

Th i f I t ti l B i




-! 6ro"uct Cycle Theory

Firm createsprod!ct toaccommodate

local demand.

1

Firm e(ports prod!ctto accommodate#orei'n demand.

2

Firmestablis&es

#orei'ns!bsidiary toestablis&presence in#orei'nco!ntry and

possibly tored!ce costs.

3

Firm di8erentiatesprod!ct #rom

competitors andore(pands prod!ct line in#orei'n co!ntry.

4a

Firms #orei'n

b!siness declines asits competiti+ead+anta'es areeliminated. [E(it]

4#

or

2.

Internationaltra!e F$I



" C l " l " "



6ro"uct Cycle Mo"el an" Tra"e

1. Firms )eep prod!ction close to t&e mar)et

Did decisions minimize ris) o# ne" prod!ct introd!ctionsemand not based on price yet lo" prod!ction cost not aniss!e1

2. Jimited initial demand in ot&er ad+anced co!ntriesE(ports more attracti+e t&an prod!ction t&ere initially.

$. ;it& demand increase in ad+anced co!ntriesProd!ction #ollo"s t&ere.

4. ;it& demand e(pansion else"&ereProd!ct becomes standardizedprod!ction mo+es to lo" prod!ction cost areasProd!ct no" imported to ori'inal co!ntry and to ad+ancedco!ntries

31

6 " t 7if l M " l " t "



6ro"uct 7ifecycle Mo"el an" tra"e

32

;<amples of pro"ucts that are currently at "i%erent



.ector INT#O48CT

ION

G#O9T( MAT8#IT: 4;C7IN;

I% 4rd

'eneration

mobile

p&ones

Portable

Players

Personal

Comp!ters

%ype"riters

Comm!nication

E=con#erencin'

Email Fa(es <and"rittenletters

Ban)in' iris=based

personal

identity

cards

6mart cards Credit cards C&eL!e boo)s

p p ystages of the pro"uct life,cycle

33



e" prod!ct de+elopment

;&at is ne" prod!ct

• Ma3or sta'es in ne" prod!ct de+elopment

• Ari'inal prod!cts

• Prod!ct impro+ements

• Prod!ct modi5cations

• e" brands t&at t&e 5rm de+elops t&ro!'& its o"n researc& and

de+elopment e8orts

The international 67C

34



I!eaI!eaenerationeneration

ConceptConcept

$e%elop'ent$e%elop'entan! Testingan! Testing

MarketingMarketing"trateg"trateg

$e%elop'ent$e%elop'ent

I!eaI!ea"creening"creening

BusinessBusinessnalsisnalsis

ro!uctro!uct

$e%elop'ent$e%elop'ent

MarketMarketTestingTesting

Co''erciali5ationCo''erciali5ation3

Major stages in ne3 pro"uct "evelopment



Probability o# 6!ccess

ro#a#ilitro#a#ilito6 technicalo6 technical

co'pletionco'pletion

7%erall7%erallpro#a#ilitpro#a#ilit

o6 successo6 success 88ro#a#ilit o6 ro#a#ilit o6 co''erciali5ationco''erciali5ation

gi%en technicalgi%en technical

co'pletionco'pletion99

ro#a#ilit o6 ro#a#ilit o6 econo'icecono'ic

success gi%ensuccess gi%en

co''erciali5ationco''erciali5ation99

ro#a#ilit o6 ro#a#ilit o6

InternationalInternational

ExpansionExpansion

993*

International Business Metho"s



• International Tra"e = a relati+ely conser+ati+e approac& in+ol+in'

e(portin' andor importin'.

• 7icensing = pro+ision o# tec&nolo'y in e(c&an'e #or #ees or someot&er bene5ts.

• Franchising = pro+ision o# a specialized sales or ser+ice strate'y7s!pport assistance7 and possibly an initial in+estment in t&e #ranc&ise

in e(c&an'e #or periodic #ees.

• =oint >entures = 3oint o"ners&ip and operation by t"o or more 5rms.

• Ac?uisitions of ;<isting Operations

• ;stablishing Ne3 Foreign .ubsi"iaries Dny met&od o# increasin' international b!siness t&at reL!ires a direct

in+estment in #orei'n operations normally is re#erred to as a directforeign investment (DFI)!

3+

International Business Opportunities




Cost:#ene6it E%aluation 6or urel $o'estic Fir's %ersus MNCs

Marginal&eturn on

ro;ects

MarginalCost o6Capital

urel$o'esticFir'

urel$o'esticFir'

MNC

MNC

ppropriate "i5e

6or urel$o'estic Fir' ppropriate "i5e6or MNC

<sset =e%el o6 Fir' 3,

I t ti l O t iti



International Opportunities

/ Global Opportunities in Globali@e" Financial Mar&ets

ere'!lation o# Financial Mar)ets

co!pled "it&

Dd+ances in %ec&nolo'y &a+e 'reatly red!ced in#ormation and

transactions costs7 "&ic& &as led to:Financial Inno+ations7 s!c& as

C!rrency #!t!res and optionsM!lti=c!rrency bondsCross=border stoc) listin'sInternational m!t!al #!nds

3.

I t ti l B i O t iti




/ Gro3th in 9orl" Tra"e

• A+er t&e past ,0 years7 international trade increased abo!t t"ice as#ast as "orld P.

• %&ere &as been a sea c&an'e in t&e attit!des o# many o# t&e "orlds

'o+ernments "&o &a+e abandoned mercantilist +ie"s and embraced#ree trade as t&e s!rest ro!te to prosperity #or t&eir citizenry.

• %&e eneral D'reement on %ari8s and %rade=D%% >later replaced"it& ;%A? a m!ltilateral a'reement amon' member co!ntries &asred!ced many barriers to trade.

4/





• Opportunities in ;urope

– 6in'le E!ropean Comm!nity Dct o# 1VH – *emo+al o# t&e Berlin ;all in 1VHV

– 6in'le c!rrency system in 1VVV

• C!rrently more t&an $20 million E!ropeans in 1 co!ntries are !sin'

t&e common c!rrency on a daily basis >Bel'i!m7 ermany7 reece76pain7 France7 Ireland7 Italy7 J!(embo!r'7 t&e et&erlands7 D!stria7Port!'al7 6lo+enia7 6lo+a)ia7 Estonia7 Finland7 Malta7 and Cypr!s?.

• %&e Ntransaction domainO o# t&e e!ro may become lar'er t&an t&e.6. dollars in t&e near #!t!re

41





/ Opportunities in 7atin America

W ort& Dmerican Free %rade D'reement >DF%D? o# 1VV$

• %&e ort& Dmerican Free %rade D'reement >DF%D? calls #or p&asin'o!t o# impediments to trade bet"een Canada7 Me(ico and t&e .6.o+er a 1,=year period.

For Canada7 t&e ratio o# e(ports to P &as increased dramatically#rom 1V.2X in 1V$ to 4,.2X in 200$.

%&e increased trade "ill res!lt in increased n!mbers o# 3obs and a&i'&er standard o# li+in' #or all member nations.

Opportunities in Asia

6i'ni5cant 'ro"t& e(pected #or C&inaDsian economic crisis in 1VV=1VVH

42

;<posure to International Business #is&




• ;<posure to ;<change #ate Movements

– e(c&an'e rate !ct!ations a8ect cas& o"s and #orei'n demand.

– %&e ris) t&at #orei'n c!rrency pro5ts may e+aporate in &omec!rrency terms d!e to !nanticipated !n#a+orable e(c&an'e ratemo+ements.

e.'. i? *ecent s!r'e in Canadian dollar +al!e a'ainst 6dollar.

ii? 6Ds 6&oprite loses in Mala"i d!e t&e de+al!ation o# t&eMala"i c!rrency.

43




/ ;<posure to Foreign ;conomies

Forei'n economic conditions a8ect demand7 and t&ere#ore cas&o"s.

/ ;<posure to 6olitical #is&

political actions a8ect cas& o"s.

6o+erei'n 'o+ernments &a+e t&e ri'&t to re'!late t&e mo+emento# 'oods7 capital7 and people across t&eir borders. %&ese la"ssometimes c&an'e in !ne(pected "ays.

e.'. i? C&inese ban on canola imports #rom Canada in 2002.

ii? Complaints in 6o!t& D#rica abo!t t&e Brazilian c&ic)enimports in Yan!ary 201$.

44

b



Top MNCs by #evenues '

1 ;allmart nited 6tates

2 E((on Mobile Corporation nited 6tates

$ *oyal !tc&6&ell ro!p et&erlands 9

4 BP 9

, 6inopec C&ina- %oyota Motor Corporation Yapan

Petro C&ina C&ina

H %otal Fina 6D France

V C&e+ron nited 6tates

10 Yapan Post <oldin's Yapan

4



Overvie3 of an MNC$s Cash Flo3s

Pro5le D: MCs #oc!sed on International %rade

>0"0 Businesses

Foreign I'porters

>0"0 Custo'ers

Foreign Exporters

>0"0:#ase!MNC

? 6or pro!ucts

? 6or supplies

? 6or exports

? 6or i'ports

4*




Pro5le B: MCs #oc!sed on International %rade andInternational Drran'ements

>0"0 Businesses

Foreign I'porters

>0"0 Custo'ers

Foreign Exporters

Foreign Fir's

>0"0:#ase!MNC

? 6or pro!ucts

? 6or supplies

? 6or exports

? 6or i'ports

? 6or ser%icecost o6 ser%ice

4+




Pro5le C: MCs #oc!sed on International %rade7 InternationalDrran'ements7 and irect Forei'n In+estment

>0"0 Businesses

Foreign I'porters

>0"0 Custo'ers

Foreign Exporters

Foreign Fir's

Foreign "u#si!iaries

>0"0:#ase!MNC

? 6or pro!ucts

? 6or supplies

? 6or exports

? 6or i'ports

? 6or ser%ice

cost o6 ser%ice

6un!s re'itte!

6un!s in%este!

4,

>aluation Mo"el for an MNC




• omestic Model

@alue 8E CF?-

8

t

t t

n

k 11

∑

"&ere E >CFZ7t ? e(pected cas& o"s to be recei+ed at t&e

end o# period t. n t&e n!mber o# periods into t&e #!t!re in"&ic& cas& o"s are recei+ed. k t&e reL!ired rate o# ret!rn by in+estors.

4.




I t # I t ti l A t iti MC l



Impact o# e" International Apport!nities on an MCs al!e

( ) ( )[ ]( )

∑ ∑

+×=

n

t t

m

jt jt j

k 1=

1 ,,

1

ER ECFE =Value

More Exposure to Exchange &ate &isk

More Exposure to Countr &isk

More Exposure to Foreign Econo'ies

1

"olitical #iskTransfer #isk

$%propriation #isk

#egulatory #isk

&elivery #isk

Translation $%posure

Transaction $%posure$conomic $%posure

'usiness Cycles

nflation

ncome levels

nterest rates



Mini Case0 Ni&e$s 4ecisioni)e a 6 =based company "it& a 'lobally reco'nized brand name



i)e7 a .6. based company "it& a 'lobally reco'nized brand name7man!#act!res at&letic s&oes in s!c& Dsian de+elopin' co!ntries as C&ina7Indonesia7 and ietnam !sin' s!bcontractors7 and sells t&e prod!cts int&e .6. and #orei'n mar)ets. %&e company &as no prod!ction #acilities in

t&e nited 6tates. In eac& o# t&ose Dsian co!ntries "&ere i)e &asprod!ction #acilities7 t&e rates o# !nemployment and !nderemploymentare L!ite &i'&. %&e "a'e rate is +ery lo" in t&ose co!ntries by t&e .6.standard &o!rly "a'e rate in t&e man!#act!rin' sector is less t&an onedollar in eac& o# t&ose co!ntries7 "&ic& is compared "it& abo!t Z1H in

t&e .6. In addition7 "or)ers in t&ose co!ntries o#ten are operatin' inpoor and !n&ealt&y en+ironments and t&eir ri'&ts are not "ell protected.nderstandably7 Dsian &ost co!ntries are ea'er to attract #orei'nin+estments li)e i)es to de+elop t&eir economies and raise t&e li+in'standards o# t&eir citizens. *ecently7 &o"e+er7 i)e came !nder a "orld="ide criticism #or its practice o# &irin' "or)ers #or s!c& a lo" pay7 Nne(t

to not&in'O in t&e "ords o# critics7 and condonin' poor "or)in'conditions in &ost co!ntries.

3

roup 1 ssign'enta)*sing relevant literature+ provide a theoretical frameork for international

b i



4

business.

b)$valuate and discuss various ,ethical- as ell as economic implications of

ike-s decision to invest in the sian countries.

c)s the e%ploitation and plundering of resources by 0Cs in developing countries

responsible for their slo economic groth1

d)2hat can be done by host countries to reduce the level of e%ploitation by

foreign 0Cs ithout compromising 3&1

Documents

1. International Financial Environment.ppt