1. International Business Environments & Operations
Daniels ● Radebaugh ● Sullivan
International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan
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2. Global Capital Markets
Chapter 10
Global Capital Markets
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Learning Objectives
Describe the finance function and how it fits in the
MNE’s organizational structure
Show how capital structure varies internationally
Describe the different ways to access debt internationally
Show how companies can raise capital on stock markets outside their home countries
Highlight tax issues facing MNEs
The Learning Objectives for this chapter are:
To describe the finance function and how it fits in the MNE’s organizational structure
To show how capital structure varies internationally
To describe the different ways to access debt internationally
To show how companies can raise capital on stock markets outside their home countries
To highlight tax issues facing MNEs
To explore how offshore financial centers are used to raise funds and manage cash flows
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Introduction
Learning Objective: Describe the finance function and how it fits in the MNE’s organizational structure
Learning Objective:
To describe the finance function and how it fits in the
MNE’s organizational structure
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The Finance Function
The CFO, controller, and treasurer determine the objectives of the global financial management by:
Making the financing decisions
Making investment decisions
Managing short-term capital needs
The CFO, controller, and treasurer determine the objectives of the global financial management by:
Making the financing decisions
Making investment decisions
Managing short-term capital needs
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Capital Structure
Leveraging Debt Financing
The degree to which a firm funds the growth of business by debt is known as leverage
It may not be the best option when:
Excessive reliance on long-term debt raises financial risk and requires a higher return for investors
Foreign subsidiaries of the MNE have limited access to capital markets and debt financing
Leveraging Debt Financing
The degree to which a firm funds the growth of business by debt is known as leverage
It may not be the best option when:
Excessive reliance on long-term debt raises financial risk and requires a higher return for investors
Foreign subsidiaries of the MNE have limited access to capital markets and debt financing
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Capital Structure
Learning Objective:
Show how capital structure varies internationally
Learning Objective:
To show how capital structure varies internationally
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8. Selected Capital Structures, FY 2012
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9. Factors Affecting the Choice of Capital Structure
Debt and Exchange Rates
Asian financial crisis 1997
Global crisis
European economic crisis
Regulatory Risk
Financial stability of banks
Debt and Exchange Rates
Asian financial crisis 1997
Global crisis
European economic crisis
Regulatory Risk
Financial stability of banks
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10. Global Capital Markets
Learning Objective:
Show how companies can raise capital on stock markets outside their home countries
Learning Objective:
To show how companies can raise capital on stock markets outside their home countries
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11. Global Capital Markets
Eurocurrency
“Offshore Currency” – any currency banked outside its country of origin
Eurodollar is the most significant Eurocurrency market
Eurocurrency is “Offshore Currency” – any currency banked outside its country of origin The Eurodollar is the most significant Eurocurrency market
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12. Global Capital Markets
Major Sources of Eurocurrencies
Foreign governments or individuals
Multinational enterprises with excess cash
European banks with excess foreign currency
Countries with large foreign exchange reserves
China, Japan, EU, Saudi Arabia, Russia, Taiwan
The Major sources of Eurocurrencies are foreign governments or individuals, multinational enterprises with excess cash, European banks with excess foreign currency, countries with large foreign exchange reserves, such as China, Japan, EU, Saudi Arabia, Russia, Taiwan
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13. Global Capital Markets
Characteristics of the Eurocurrency Market
Eurocurrency market is a wholesale market
Public borrowers are major players
Governments, Central banks, Public sector corporations
Euro-credit – short term credit of 1-5 years
Syndication – banks pool resources spread the financial risk
Some characteristics of the Eurocurrency Market
The Eurocurrency market is a wholesale market where public borrowers are major players as well as governments, central banks, and public sector corporations.
Euro-credit is short term credit of 1-5 years
Syndication is where banks pool resources spread the financial risk
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14. Global Capital Markets
Interest Rates in the Eurocurrency Market
LIBOR – London Inter-Bank Offered Rate
Began in 1986 by British Bankers’ Association
Average rate submitted by 18 different banks
Published daily in London
Interest Rates in the Eurocurrency Market
LIBOR is the London Inter-Bank Offered Rate which began in 1986 by British Bankers’ Association.
It is an average rate submitted by 18 different banks and is published daily in London
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15. Global Capital Markets
International Bonds
Foreign Bonds – a bond sold outside the borrower’s country but denominated in the currency of the country of issue
Eurobonds – usually underwritten by a syndicate of banks from different countries and sold in a currency other than that of the country of issue
International Bond
A Foreign Bonds is a bond sold outside the borrower’s country but denominated in the currency of the country of issue. Eurobonds are usually underwritten by a syndicate of banks from different countries and sold in a currency other than that of the country of issue.
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16. Global Capital Markets
International Bond market is attractive to borrowers because it allows companies to diversify its funding sources aside from local, domestic banks
Firms can sometimes borrow in maturities that might not be available in the domestic market
The International Bond market is attractive to borrowers because it allows companies to diversify its funding sources aside from local, domestic banks. Firms can sometimes borrow in maturities that might not be available in the domestic market.
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17. Global Capital Markets
Equity Securities
Private placement market
Angel investors
Venture capital firms
Institutional investors
Sovereign wealth funds (SWF’s) – state-owned government fund
Equity Securities come in different forms. In the Private placement market there are:
Angel investors
Venture capital firms
Institutional investors
Sovereign wealth funds (SWF’s) – state-owned government fund
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18. Global Capital Markets
Equity Securities
Equity-capital market (stock market)
IPO – Initial Public Offering
Firms can list in their home country or abroad – International IPO
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19. Market Capitalization 2012
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Global Stock Market
Trends toward the importance of stock markets in emerging economies, especially China.
Hong Kong Stock Exchange
Shanghai Stock Exchange
Shenzhen Stock Exchange
The smear stock markets around the world have caused trends toward the importance of stock markets in emerging economies, especially China, such as:
The Hong Kong Stock Exchange
The Shanghai Stock Exchange
The Shenzhen Stock Exchange
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Global Stock Market
Trend towards a rise in the Euro-equity market
Stock shares are sold outside the boundaries of the issuing firm’s home country
Trend toward Delisting
Trend of listing stocks on more than one exchange has reversed somewhat
Better prices are often found in the home market
Listing in several markets is expensive
There are new trend towards a rise in the Euro-equity market, where stock shares are sold outside the boundaries of the issuing firm’s home country. Also the trend of listing stocks on more than one exchange has reversed somewhat because better prices are often found in the home market, and listing in several markets is expensive.
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Global Stock Market
American Depositary Receipt (ADR)
A negotiable certificate issued by a U.S. bank in the United States to represent the underlying shares of a foreign corporation’s stock held in trust at a custodian bank in the foreign country.
Traded like stock shares
Most foreign companies list on the U.S. stock exchanges through ADR’s
An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. bank in the United States to represent the underlying shares of a foreign corporation’s stock held in trust at a custodian bank in the foreign country. They are traded like stock shares, and most foreign companies list on the U.S. stock exchanges through ADR’s
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23. International Tax Practices
Learning Objective:
Highlight tax issues facing MNEs
Learning Objective:
To highlight tax issues facing MNEs
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24. International Tax Practices
Issues:
Differences in types of taxes
Differences in Generally Accepted Accounting Principles (GAAP)
Differences in Tax Rates
Two Approaches to Corporate Taxation:
Separate Entity Approach – used in the U.S.
Integrated System Approach – avoids double taxation
There are differences in types of taxes, differences in Generally Accepted Accounting Principles (GAAP), and differences in Tax Rates.
The are generally two Approaches to Corporate Taxation:
Separate Entity Approach – used in the U.S.
Integrated System Approach – avoids double taxation
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25. Taxing Branches and Subsidiaries
The Foreign Branch
Extension of the parent company
The Foreign Subsidiary
Legal entity
The Controlled Foreign Corporation (CFC)
US Tax law – Active vs. Passive income
The IRS recognizes the following for tax purposes:
The Foreign Branch, an extension of the parent company
The Foreign Subsidiary, a legal entity
The Controlled Foreign Corporation (CFC) where US Tax law determines Active vs. Passive income
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Transfer Prices
Differences in taxation rates between countries
Arm’s length prices – the price between 2 companies that do not have an ownership interest in each other
Companies can establish arbitrary transfer prices between their affiliated companies, to reduce taxes paid
Transfer pricing practices occur because of differences in taxation rates between countries.
Arm’s length prices are the price between 2 companies that do not have an ownership interest in each other.
Companies can establish arbitrary transfer prices between their affiliated companies, to reduce taxes paid.
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Transfer Prices
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28. Offshore Financial Center
OFC’s are cities or countries that provide large amounts of funds in currencies other than their own, and are used as locations in which to raise and accumulate cash.
Transactions are usually on both sides of the balance sheet
Transactions are usually initiated elsewhere
Institutions involved are usually controlled by nonresidents
OFC’s are cities or countries that provide large amounts of funds in currencies other than their own, and are used as locations in which to raise and accumulate cash.
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29. Characteristics of OFC’s
Large foreign currency (Eurocurrency)
Large net supplier of funds (Switzerland)
Intermediary or pass-through for international loan funds (Bahamas, and Cayman Islands)
Economic and political stability
Efficient and experienced financial community
Good communications and support services
Regulatory climate favorable to the financial industry
Some characteristics of Offshore Financial Centers are that they have a stock of foreign currency (Eurocurrency), and are large net suppliers of funds, like Switzerland, They are often an intermediary or pass-through for international loan funds, like the Bahamas, and Cayman Islands, and they also enjoy economic and political stability.
They are located in efficient and experienced financial communities and have good communications and support services. Their regulatory climate is favorable to the financial industry.
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OFC’s as Tax Havens
OECD uses the following key factors in identifying tax havens:
No or only nominal taxes
Lack of effective exchange of information (especially bank secrecy)
Lack of transparency
No substantial activities
OECD is trying to reduce harmful tax practices through improved translation and disclosure
The OECD uses the following key factors in identifying tax havens:
No or only nominal taxes
Lack of effective exchange of information (especially bank secrecy)
Lack of transparency
No substantial activities
Accordingly, the OECD is trying to reduce harmful tax practices through improved translation and disclosure.
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