1. International Financial Management: INBU 4200 Fall Semester 2004
Lecture 1:
The Globalization Process and Some Initial Concepts and Issues
(Chapter 1)

2. Globalization Defined
Becoming world wide in scope or application
Applies to markets (where we are selling and buying):
Industrial goods and consumer goods.
Applies to factors of production (where we are getting our inputs for production):
Capital (Financial markets), technology, labor
Applies to business firms (where we do business; how we set up our enterprises):
Financial institutions (including exchanges).
Non-financial firms: manufacturing and service firms.

3. Globalization: Functions
Consumption (Sales)
McDonalds Corporation
Starbucks
Production
Nike Corporation
Finance
Citigroup
Foreign Exchange Market
Euronext Stock Exchange

4. Consumption (Sales) McDonalds operates in 120 Countries.
- 64% of 2003 sales were from international operations.
Starbucks has 1500 “licensed”
international retail coffee stores operating in 31 countries.
- licensed international stores accounted for about 17% of Starbucks 2002 earnings.

5. Production
About 99% of all Nike brand apparel is produced outside the US in 35 different countries.
Country Percent
China 38%
Indonesia 27
Vietnam 18
Thailand 16

6. Finance Citigroup with its combined banking, insurance,
and investment businesses
operates in over 100 countries.
In 2003, 46% of its revenues from operations resulted from activities outside of North America!

7. Finance
Euronext Stock Exchange, based in Paris, France (example of regionalization).
Formed by the merger of the Paris, Brussels, Amsterdam (in 2000) stock exchanges and Lisbon (in 2002) stock exchange.
Currently lists over 1,400 firms.
Second largest stock exchange in Europe, behind London Stock Exchange.

8. Globalization of Financial Markets
Resulted from major market deregulations over the last 20 years.
Lifting of U.S. Glass Steagall Act (in 1999)
“Big Bang” in London (in 1986)
“Big Bang” in Japan (in 1998)
Developing nations (especially in Asia; India and China) also opening their financial markets to non-resident investors.
Attracting capital and financial institutions.
Threat to traditional financial centers?

9. The Globalization Process for a Firm
“The globalization process of a firm can be viewed and studied by the operational and managerial changes and challenges experienced by that firm as it moves from a purely domestic firm to one with global operations.”

10. Moving Beyond a Domestic Firm
Stage 1: Domestic to International Trade Phase.
Domestic: Suppliers and buyers in home country.
Payments in home currency; firm operates under home country legal environment (credit risk).
International Trade Phase: Suppliers and buyers in foreign countries linked through exporting and importing activities.
Payments in foreign currencies; firm operates under host country legal environments (credit risk).

11. Why Does a Firm Move from Domestic to International Trade?
Access to cheaper production inputs through imports.
Possible economies of scale gained through expanded foreign markets.
Resulting in higher production volumes/sales to cover fixed costs.
Home market fully captured.
Stagnant home market.
Competitive forces from home and foreign country competitors.
Product life cycle of mature firm with mature products.

12. Viewing The Globalization Process: A Domestic Firm
Phase One: Domestic Operations
Sean Skate Boards Inc
Boulder, Co
U.S. Suppliers
(domestic)
U.S. Buyers
(domestic)
All payments in US dollars;
All credit risk under U.S. law

13. From Domestic Firm to International Trade Firm
U.S. Suppliers
(domestic)
U.S. Buyers
Phase One: Domestic Operations
All payments in US dollars
All credit risk under U.S. law
Sean Skate Boards, Inc
Boulder, Co
Japanese Suppliers
Canadian Buyers
Phase Two: Expansion into International Trade
Are Canadian buyers creditworthy?
Will payment be made in US$ or C$?
Are Japanese suppliers dependable?
Will Sean Inc pay in US$ or Yen?

14. Becoming a Multinational Firm
Stage 2: International Trade Phase to Multinational Phase (physical presence abroad)
Multinational Firm Defined: A firm with dispersed production and/or sales around the world. Characterized by:
Involvement in many financial markets
Dealings in many different currencies
Dealings with many different national and business cultures
Dealings with many different partnering relationships.

15. The Multinational Sequence
Domestic Company
Sean Skate Boards, Inc
Greater Foreign Presence
Greater
Foreign
Investment
Can it Establish a
Competitive Advantage?
Exploit Its Competitive
Advantage Abroad
Production at Home:
Exporting
Production Abroad
Licensing Production
To Foreign Manufacturer
Control of Production Assets
Abroad
Joint Venture with Foreign
Partners
Establish a Wholly-Owned
Subsidiary
Building a New Facility:
Greenfield Investment
Acquisition of a Existing
Foreign Enterprise

16. Multinational Firms and Risk
As a firm proceeds along the multinationalization sequence, it takes on new and greater risks.
The initial foreign exchange and credit risk assumed by an international trade company has expanded for a multinational firm.
This expanded risk environment facing multinational firms is referred to as country risk!

17. Country Risk and Multinational Firms
Foreign exchange exposure, risk and management
Different legal and political environments
Common law to civil law!
Different economic environments
How best to structure global operations?
Location decisions (based on the comparative advantages of various countries).
Where to financing globally?
Dealing with different corporate cultures
Shareholder value or corporate wealth value!
Impact on corporate goals and shared management decisions.
Impact of foreign operations on domestic results (consolidated results).

18. Why is International Finance Difference from Domestic Finance?
Foreign Exchange Risk
Political Risk
Market Imperfections
Expanded Opportunity Set
Cultural Differences
Corporate Governance Issues

19. Foreign Exchange Risk
Occurs because you are dealing in different currencies.
Other than your home (reference) currency
Composition of your production and sales can be a big factor here.
Can be used as an operational offset to foreign exchange exposure!
Currencies you are dealing in also critical.
How stable, how volatile?

20. Political Risk Involves:
Contract enforcement; protection of private property (legal systems important here)
Foreign exchange market controls and government intervention (manipulation!)
Profit repatriation process
Nationalization of assets
Taxation policies (including withholding taxes on dividends and tax treaties)

21. Market Imperfections
Multinational Firms Operate in a World of Market Imperfections.
Factors which restrict “free trade.”
Government Restrictions
Tariffs affecting MNC location decisions.
Import substitution policies
Encouraging a physical presence as opposed to importing.
Anti-Dumping Actions
Restricting shares of stock to be held by foreigners (not as much of an issue today).
Transaction and Transportation Costs

22. Expanded Opportunities
Possibility for activities in many markets allows for:
Possible economy of scale in operations.
Issue of Standardization versus Localization of products and activities.
Expanded revenues
Expanded financing and investment opportunities
But not without RISK!

23. Cultural Differences Anglo Saxon Model Continental Europe Asia
Focus on (Long Run) Profit Maximization!
“Shareholder Wealth.” Stresses Market Price, EPS.
Continental Europe
Consider all “stakeholders” of enterprise.
Employees, community, suppliers, state.
Asia
Japan: Maximize market share to reinforce “keiretsu.”
Interlocking arrangements between companies and their suppliers and bankers.
Put in place in the 1970s as a way of discouraging foreign takeovers.
China: Joint venturing with state owned enterprises with their goals of employment or output.
Consistent with the planned economy era.

24. The “Appropriate” Goal of Management
Anglo-American markets believe that a firm’s objective should be to maximize shareholder wealth
These countries include the US, Canada, Australia, United Kingdom.
Non-Anglo-American markets believe that a firm’s objective should be to maximize corporate (stakeholder) wealth
These countries include the EU, Japan and Latin American countries
How does this affect the performance and management of joint ventures between two different business cultures!

25. Corporate Wealth Concept
Came about because of:
Distrust of Anglo-American capitalism especially in Europe.
Definition of corporate wealth is broader than Anglo-American viewpoint (where wealth is strictly financial)
A corporation’s role in wealth maximization includes the firm’s technical, market and human resources
Considerations as to the implications of strategic moves affecting all parties, human resources, community, state, etc.
Advisory Committees in Europe!
Labor laws in Europe.
Life time employment concept in Japan
Has weakened in the 1990s

26. Capital and Cultures “Impatient Capital” “Patient Capital”
Stakeholders
Banks
Firm
(management)
Shareholders
Firm
(management)
Banks
Employees
The Non-Anglo-American Model
has come under increasing criticism
for its lack of accountability to equity
investors – its shareholders – while
focusing on the demands of too
diffuse a group of stakeholders.
The Anglo-American Model has been
frequently criticized as focusing on
short-term profitability rather than
long-term growth.

27. Corporate Governance
The financial and legal framework for “regulating the relationship between managers and owners.”
(Relatively) well defined in the United States.
Not so in other parts of the world.
No independent boards of directors in China!
Who are the owners?