MAN 441: International FinanceMAN 441: International Finance

Instructor: Instructor: M. Nihat SolakogluM. Nihat SolakogluOffıce: FA-401Offıce: FA-401Email: nsolakoglu@fatih.edu.trEmail: nsolakoglu@fatih.edu.trOffice Phone: 0 212 889 0810 /5063Office Phone: 0 212 889 0810 /5063

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Why is IF important?Why is IF important?

Will GE India Unit Catch Eyes of Citi, B of A?Will GE India Unit Catch Eyes of Citi, B of A?By Will WadeBy Will WadeAmerican Banker , September 20, 2004American Banker , September 20, 2004Bank of America Corp. and Citigroup Inc. may emerge as bidders for a Bank of America Corp. and Citigroup Inc. may emerge as bidders for a big Indianbig Indianoutsourcing operation that General Electric Co. is said to be trying to outsourcing operation that General Electric Co. is said to be trying to sell.sell.

........

The Wall Street Journal reported Friday that GE is hoping to sell all or The Wall Street Journal reported Friday that GE is hoping to sell all or part of GE Capital International Services, and that the price tag could part of GE Capital International Services, and that the price tag could reach $1reach $1billion. The operation has 12,000 employees in India and 5,000 in billion. The operation has 12,000 employees in India and 5,000 in Hungary, Mexico, and China.Hungary, Mexico, and China.

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Why is IF important?Why is IF important?

Goodyear Intends to Slice CostsGoodyear Intends to Slice CostsBy Up to $1 Billion Over 3 YearsBy Up to $1 Billion Over 3 Years

By TIMOTHY AEPPEL By TIMOTHY AEPPEL Staff Reporter of THE WALL STREET JOURNALStaff Reporter of THE WALL STREET JOURNALSeptember 24, 2005; Page B6September 24, 2005; Page B6

Goodyear Tire & RubberGoodyear Tire & Rubber Co. said it will cut costs by as much as $1 Co. said it will cut costs by as much as $1 billion over the next three years as it pushes ahead its turnaround billion over the next three years as it pushes ahead its turnaround plan, closing an unspecified number of factories and setting the plan, closing an unspecified number of factories and setting the stage for tough labor negotiations.stage for tough labor negotiations.

The tire maker, based in Akron, Ohio, said it also will save money The tire maker, based in Akron, Ohio, said it also will save money by sourcing more tires from low-cost countries and boosting by sourcing more tires from low-cost countries and boosting productivity...productivity...

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Why is IF important?Why is IF important?

US Federal Reserve verdict to set markets toneUS Federal Reserve verdict to set markets toneBy Chris Flood (Financial Tımes) By Chris Flood (Financial Tımes)

Published: September 19 2004 17:28 | Last updated: September 19 2004 17:28Published: September 19 2004 17:28 | Last updated: September 19 2004 17:28

The central event for investors worldwide will be tomorrow’s meeting of the The central event for investors worldwide will be tomorrow’s meeting of the Federal Open Markets Committee, where US interest rates are widely Federal Open Markets Committee, where US interest rates are widely expected to be increased to 1.75 per cent from 1.5 per cent.expected to be increased to 1.75 per cent from 1.5 per cent.

Philip Shaw of Investec, the banking group, said: “All eyes will be trained on Philip Shaw of Investec, the banking group, said: “All eyes will be trained on the accompanying statement to see whether the FOMC hints at a rate pause the accompanying statement to see whether the FOMC hints at a rate pause before the end of the year.”before the end of the year.”

Sterling slips on soft housing dataBy Steve Johnson in London (Financial Times)Published: September 20 2004 11:28 | Last updated: September 20 2004 11:28Sterling weakened in European morning trade on Monday amid fresh signs that the UK housing market is slowing.

....... “This adds to the case for the Bank of England leaving rates unchanged for at least another month,” said James Knightley, economist at ING Financial Markets.

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INTRODUCTIONTHE RISE OF THE MULTINATIONAL CORPORATIONINTRODUCTIONTHE RISE OF THE MULTINATIONAL CORPORATION

Today, companies operate within a global marketplace and Today, companies operate within a global marketplace and faces with global competitors. faces with global competitors.

I. The MNCI. The MNC

A. DefinitionA. Definition

a company with production and distribution facilities in a company with production and distribution facilities in more than one country.more than one country. Ordinarily, Ordinarily,

- a parent company at home country and- a parent company at home country and

- multiple foreign subsidiaries- multiple foreign subsidiaries

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THE RISE OF THE MULTINATIONAL CORPORATIONTHE RISE OF THE MULTINATIONAL CORPORATION

Rise of multinational corporation was not anticipated by classical trade Rise of multinational corporation was not anticipated by classical trade theory (Smith, Ricardo)theory (Smith, Ricardo)

Comparative AdvantageComparative Advantage - Each nation should specialize in the production - Each nation should specialize in the production and export of those goods that it can produce with highest relative efficiency and export of those goods that it can produce with highest relative efficiency and import those goods that other nations can produce relatively more and import those goods that other nations can produce relatively more efficiently. efficiently.

Underlying assumption: Goods and services can move ınternationally, but Underlying assumption: Goods and services can move ınternationally, but factors of production (e.g. Capital, land and labor) are relatively immobile. factors of production (e.g. Capital, land and labor) are relatively immobile.

Existence of MNCs is based on international mobility of certain factors of Existence of MNCs is based on international mobility of certain factors of production.production.

Prime transmitter of competitive forces is the MNCs (E.g. China)Prime transmitter of competitive forces is the MNCs (E.g. China)

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THE RISE OF THE MULTINATIONAL CORPORATIONTHE RISE OF THE MULTINATIONAL CORPORATION

B. EVOLUTION OF THE MNCB. EVOLUTION OF THE MNC

Reasons to Go Global:Reasons to Go Global:

1. Raw materials1. Raw materials

2. More markets2. More markets

3. Minimize costs of 3. Minimize costs of productionproduction

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THE RISE OF THE MULTINATIONAL CORPORATIONTHE RISE OF THE MULTINATIONAL CORPORATION

1.1. RAW MATERIAL SEEKERSRAW MATERIAL SEEKERS exploit markets in other countriesexploit markets in other countries historically first to appearhistorically first to appear modern-day counterpartsmodern-day counterparts

– Anaconda CopperAnaconda Copper

– Standard OilStandard Oil

– Exxon- MobilExxon- Mobil

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THE RISE OF THE MULTINATIONAL CORPORATIONTHE RISE OF THE MULTINATIONAL CORPORATION

2.2. MARKET SEEKERSMARKET SEEKERS produce and sell in foreign marketsproduce and sell in foreign markets heavy foreign direct investorsheavy foreign direct investors representative firms:representative firms:

– IBMIBM

– NestleNestle

– Levi StraussLevi Strauss

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3.3. COST MINIMIZERSCOST MINIMIZERS Seek lower-cost production abroadSeek lower-cost production abroad Motive: to remain cost competitiveMotive: to remain cost competitive Representative firms:Representative firms:

– Texas InstrumentsTexas Instruments– IntelIntel– MotorolaMotorola

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THE RISE OF THE MULTINATIONAL CORPORATIONTHE RISE OF THE MULTINATIONAL CORPORATION

D. THE MNC: A BEHAVIORAL VIEWD. THE MNC: A BEHAVIORAL VIEW

Characterized by :Characterized by :

- its state of mind and- its state of mind and

- not by its size and worldwide dispersion of its assets- not by its size and worldwide dispersion of its assets

Distinguishing characteristıcs from other firms is Distinguishing characteristıcs from other firms is its commitment to seeking out, its commitment to seeking out, undertaking and integrating manufacturing, marketing, R&D and financing undertaking and integrating manufacturing, marketing, R&D and financing opportunities on a global, not domestic, basisopportunities on a global, not domestic, basis..

Necessary complements to integration of worldwide operations are:Necessary complements to integration of worldwide operations are:

- flexibility- flexibility

- adaptability- adaptability

- speed- speed

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THE RISE OF THE MULTINATIONAL CORPORATIONTHE RISE OF THE MULTINATIONAL CORPORATION

Key to international competitiveness is the ability of Key to international competitiveness is the ability of management to adjust to change and volatility at an ever faster management to adjust to change and volatility at an ever faster rate.rate.

““I am not here to predict the world. I am here to be sure I’ve got I am not here to predict the world. I am here to be sure I’ve got a company that is strong enough to respond whatever a company that is strong enough to respond whatever happens”. Jack Welch, happens”. Jack Welch, ex-CEO of GEex-CEO of GE

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THE RISE OF THE MULTINATIONAL CORPORATIONTHE RISE OF THE MULTINATIONAL CORPORATION

E. THE GLOBAL MANAGERE. THE GLOBAL MANAGER

1. Understands political and1. Understands political and

economic differences;economic differences;

2. Searches for most cost-2. Searches for most cost-

effective suppliers;effective suppliers;

3. Evaluates changes on value 3. Evaluates changes on value of the firm.of the firm.

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PART II.MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEPART II.MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE

I. THE MULTINATIONAL FINANCIAL SYSTEMI. THE MULTINATIONAL FINANCIAL SYSTEM

A. Main Objective of MNC:A. Main Objective of MNC:

Maximize shareholder wealthMaximize shareholder wealth as measured by share price. as measured by share price. Hence, make financing and investment decisions that add as much Hence, make financing and investment decisions that add as much value as possiblevalue as possible

- Shareholders are the legal owners- Shareholders are the legal owners

- Minimize (hostile) takeover risks- Minimize (hostile) takeover risks

- It is the best (or maybe the only) way to maximize economic benefits of - It is the best (or maybe the only) way to maximize economic benefits of all stakeholdersall stakeholders

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MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEMULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE

II. FUNCTIONS OF FINANCIALII. FUNCTIONS OF FINANCIAL MANAGEMENTMANAGEMENT

A. Two Basic Functions:A. Two Basic Functions:

1. Financing1. Financing (Acquisition of funds) (Acquisition of funds)

2. Investing2. Investing (Allocation of those funds over time (Allocation of those funds over time so that shareholder wealth is maximized)so that shareholder wealth is maximized)

B. Additional Factors Facing theB. Additional Factors Facing the MNC ExecutiveMNC Executive

1. Political risk1. Political risk

2. Economic risk2. Economic risk

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MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEMULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE

III. THEORETICAL FOUNDATIONSIII. THEORETICAL FOUNDATIONS

A. Useful Concepts from A. Useful Concepts from Financial Economics:Financial Economics:

1. Arbitrage1. Arbitrage

2. Market Efficiency2. Market Efficiency

3. Capital Asset Pricing3. Capital Asset Pricing

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MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEMULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE

Arbitrage:Arbitrage:

Definition: Purchase of assets or commodities on one markets Definition: Purchase of assets or commodities on one markets for immediate resale in another in order to profit from a price for immediate resale in another in order to profit from a price discrepancy.discrepancy.

e.g., Tax arbitrage - shifting of gains or losses from one e.g., Tax arbitrage - shifting of gains or losses from one tax jurisdiction to anothertax jurisdiction to another

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MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEMULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE

Market Efficiency:Market Efficiency:

An efficient market is one in which the prices of traded An efficient market is one in which the prices of traded securities readily incorporate new informatıon. securities readily incorporate new informatıon.

Hence, one cannot rely on historical prices or publicly available Hence, one cannot rely on historical prices or publicly available information to information to consistently benefıts from trading.consistently benefıts from trading.

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MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEMULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE

Capital Asset Pricing Model (CAPM):Capital Asset Pricing Model (CAPM):

-Refers to the valuation of securities based on expected risks and return. Refers to the valuation of securities based on expected risks and return.

-Assumes a specific relationship between risk (measured by return variability) and Assumes a specific relationship between risk (measured by return variability) and required asset return.required asset return.

Two source of variability:Two source of variability:

(a) Systematic (or non-diversifiable) risk: Marketwide influences that affect (a) Systematic (or non-diversifiable) risk: Marketwide influences that affect all sources (e.g. State of the economy)all sources (e.g. State of the economy)

- relevant even for diversified investor- relevant even for diversified investor

- investor must be compensated for bearing that risk- investor must be compensated for bearing that risk

(b) Unsystematic (or diversifiable) risk: specific to given firm (b) Unsystematic (or diversifiable) risk: specific to given firm

- irrelevant for diversified investor- irrelevant for diversified investor

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MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEMULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE

Total risk is also important for the firm (not only systematic risk) Total risk is also important for the firm (not only systematic risk)

1. Adverse Impact1. Adverse Impact on expected cash flow on expected cash flow

- - lower sales and higher costslower sales and higher costs

2. Justifies hedging activities of2. Justifies hedging activities of MNCMNC to reduce total to reduce total riskrisk

3. 3. International International diversification reduces diversification reduces total total riskrisk