Introduction to International Finance International Finance (MB 74)

Introduction to International Finance Meaning of International Finance Multinational Firm International Finance versus Domestic Finance Why Companies go Global? Modes of International Business Course Sequence

Meaning of International Finance? What is International Finance? A study of the institutions, policies, and practices that govern global financial management and/or financial aspects of global business Multinational Financial Management? Multinational/Transnational Corporation

Why Study International Finance? Exchange Rate Cross-border Barriers that include Economic barriers Cultural barriers Political and Legal barriers Ethical Issues Financing Opportunities in Global Market

Exchange Rate Risk Changing value of U.S. dollar versus other currencies since 1973 Declining dollar good for U.S. exporters, but bad for imports Rising dollar good for U.S. imports/outsourcing, but bad for exports

Economic Barriers Tariffs, Import Duties, Quota Restrictions Restrictions on remittance of profits and repatriation of capital Restrictions on foreign equity participation Trading blocks

Cultural Barriers Language Examples of Language Barriers “Please leave your values at the desk” (France) “The manager has personally passed all the water served here” (Mexico; to assure safety of drinking water at the hotel) “You are invited to take advantage of the chambermaid” (Japan) “Ladies are requested not to have children in the bar” (Norway) “Because of the impropriety of entertaining guests of the opposite sex in the bedroom, it is suggested that the lobby be used for this purpose” (Switzerland) “We will execute customers in strict rotation.” (Greece)

Cultural Barriers Contd… Hand Gestures Religion Hinduism Islam Judaism Christianity Buddhism Significance of Religion and Values Customs/Traditions

USE SURF ULTRA CLEAN LAUNDRY DIRTY LAUNDRY

N O AIRPORT

Political/Legal Barriers Political Ideology Opinions of Political Leadership Civil disorder External relations Attitude towards foreign capital Legal System

Ethical Barriers Definition of “Ethics” in your country versus definition of “Ethics” in a foreign country Ethics and the society Firm’s role in education Firm’s role in health care Ethics and the environment

Who should study international finance? A company that engages in global business A pure domestic company

Why Firms go Global? To maximize shareholder wealth through maximization of market value by maximizing the cash flows of the firm

Why companies go global? To seek raw material To seek new markets To minimize cost

Overall Goal Overall goal, shareholder wealth maximization Separation of ownership from management and Corporate Governance

Corporate Governance Meaning Goal of Corporate Governance Comparative Corporate Governance Corporate Governance and Emerging Markets Corporate Governance and Multinational Financial Management

Meaning Corporate governance is about the exercise of power over corporate entities. Governance issues arise when a corporate entity acquires a life of its own Whenever ownership of an enterprise is separated from its management The relationship among stakeholders used to determine and control the strategic direction and performance of an organization is termed corporate governance

Goal Corporate governance is, in essence, the method by which an organization establishes order among the various stakeholders to ensure that decisions are made and interests are represented in line with the firm’s stated objectives

Protect shareholders’ rights Equitable treatment of all shareholders including minority and foreign shareholders Recognize the rights of stakeholders as established by law and encourage active cooperation between corporations and stakeholders in creating wealth and jobs and the sustainability of financially sound enterprises Disclosure and transparency including financial situation, performance, ownership, and governance Effective monitoring of management by the board, and the board’s accountability to the company and to the shareholders

Comparative Corporation Governance Origins of the need for corporate governance Separation of ownership from management Varying views by culture of who the stakeholders are Corporate governance practices differ across culture

Government Affiliated Market Based Efficient equity markets; dispersed ownership U.S., U.K., Canada, Australia Family Based Management & Ownership is combined Family/majority and minority shareholders Hong Kong, Indonesia, Malaysia, Singapore, Taiwan, France Bank Based Government influence in bank lending Lack of transparency, family control Korea, Germany Government Affiliated State ownership of enterprise Lack of transparency, no minority influence China and Russia

Modes of International Business International Trade Licensing Franchising Joint Ventures Direct Foreign Investment

Focus of this Course Foreign Exchange Markets and Exchange Rate Determination Theories of Exchange Rate Determination Exchange Rate Regimes Foreign Exchange Rate Risk—Measurement and Management Capital Budgeting Analysis in a Global Environment