INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
1Chapter OneGlobalization & the Multinational Firm
Chapter Objectives:
?Understand why it is important to study international finance.
?Distinguish international finance from domestic finance.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-1
? What’s Special about,International” Finance?
? Goals for International Financial Management
? Globalization of the World Economy
? Multinational Corporations
? Organization of the Text
? Summary
Chapter One Outline
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-2
What’s Special about
“International” Finance?
? Foreign Exchange Risk
? Political Risk
? Market Imperfections
? Expanded Opportunity Set
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-3
What’s Special about
“International” Finance?
? Foreign Exchange Risk
? The risk that foreign currency profits may evaporate in
dollar terms due to unanticipated unfavorable exchange
rate movements.
? Political Risk
? Sovereign governments have the right to regulate the
movement of goods,capital,and people across their
borders,These laws sometimes change in unexpected
ways.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-4
? Market Imperfections
? Legal restrictions on movement of goods,
people,and money
? Transactions costs
? Shipping costs
? Tax arbitrage
What’s Special about
“International” Finance?
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-5
? Expanded Opportunity Set
? It doesn’t make sense to play in only one corner
of the sandbox.
? True for corporations as well as individual
investors.
What’s Special about
“International” Finance?
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-6
? The focus of the text is to equip the reader with
the,intellectual toolbox” of an effective global
manager—but what goal should this effective
global manager be working toward?
? Maximization of shareholder wealth?
or
? Other Goals?
Goals for International Financial
Management
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-7
Maximize Shareholder Wealth
? Long accepted as a goal in the Anglo-Saxon
countries,but complications arise.
? Who are and where are the shareholders?
? In what currency should we maximize their
wealth?
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-8
Other Goals
? In other countries shareholders are viewed as merely one
among many,stakeholders” of the firm including:
? Employees
? Suppliers
? Customers
? In Japan,managers have typically sought to maximize the
value of the keiretsu—a family of firms to which the
individual firms belongs.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-9
Other Goals
? No matter what the other goals,they cannot be
achieved in the long term if the maximization of
shareholder wealth is not given due consideration.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-10
Globalization of the World Economy,
Recent Trends
? Emergence of Globalized Financial Markets
? Trade Liberalization and Economic Integration
? Privatization
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-11
? Deregulation of Financial Markets
coupled with
? Advances in Technology
have greatly reduced information and
transactions costs,which has led to:
? Financial Innovations,such as
? Currency futures and options
? Multi-currency bonds
? Cross-border stock listings
? International mutual funds
Emergence of Globalized
Financial Markets
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-12
Economic Integration
? Over the past 50 years,international trade
increased about twice as fast as world GDP.
? There has been a sea change in the attitudes of
many of the world’s governments who have
abandoned mercantilist views and embraced free
trade as the surest route to prosperity for their
citizenry.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-13
Liberalization of
Protectionist Legislation
? The General Agreement on Tariffs and Trade
(GATT) a multilateral agreement among member
countries has reduced many barriers to trade.
? The World Trade Organization has the power to
enforce the rules of international trade.
? The North American Free Trade Agreement
(NAFTA) calls for phasing out impediments to
trade between Canada,Mexico and the United
States over a 15-year period.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-14
Privatization
? The selling off state-run enterprises to investors is
also known as,Denationalization”.
? Often seen in socialist economies in transition to
market economies.
? By most estimates this increases the efficiency of
the enterprise.
? Often spurs a tremendous increase in cross-border
investment.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-15
Multinational Corporations
? A firm that has incorporated on one country and
has production and sales operations in other
countries.
? There are about 60,000 MNCs in the world.
? Many MNCs obtain raw materials from one
nation,financial capital from another,produce
goods with labor and capital equipment in a third
country and sell their output in various other
national markets.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-16
Top 10 MNCs
1 General Electric United States
2 Ford Motor Company United States
3 Royal Dutch/Shell Group Netherlands/ UK Netherlands/U.K,
4 General Motors United States
5 Exxon Corporation United States
6 Toyota Japan
7 IBM United States
8 Volkswagen Group Germany
9 Nestlé SA Switzerland
10 Daimler-Benz AG Germany
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-17
The Organization of the Text
Macroeconomic
Environment
The Financial
Environment
Management of
the Multinational
Firm
Part I
Chapters 1-5
Part II
Chapters 6-11
Parts III & IV
Chapters 12-20
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-18
End Chapter One
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
1Chapter OneGlobalization & the Multinational Firm
Chapter Objectives:
?Understand why it is important to study international finance.
?Distinguish international finance from domestic finance.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-1
? What’s Special about,International” Finance?
? Goals for International Financial Management
? Globalization of the World Economy
? Multinational Corporations
? Organization of the Text
? Summary
Chapter One Outline
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-2
What’s Special about
“International” Finance?
? Foreign Exchange Risk
? Political Risk
? Market Imperfections
? Expanded Opportunity Set
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-3
What’s Special about
“International” Finance?
? Foreign Exchange Risk
? The risk that foreign currency profits may evaporate in
dollar terms due to unanticipated unfavorable exchange
rate movements.
? Political Risk
? Sovereign governments have the right to regulate the
movement of goods,capital,and people across their
borders,These laws sometimes change in unexpected
ways.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-4
? Market Imperfections
? Legal restrictions on movement of goods,
people,and money
? Transactions costs
? Shipping costs
? Tax arbitrage
What’s Special about
“International” Finance?
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-5
? Expanded Opportunity Set
? It doesn’t make sense to play in only one corner
of the sandbox.
? True for corporations as well as individual
investors.
What’s Special about
“International” Finance?
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-6
? The focus of the text is to equip the reader with
the,intellectual toolbox” of an effective global
manager—but what goal should this effective
global manager be working toward?
? Maximization of shareholder wealth?
or
? Other Goals?
Goals for International Financial
Management
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-7
Maximize Shareholder Wealth
? Long accepted as a goal in the Anglo-Saxon
countries,but complications arise.
? Who are and where are the shareholders?
? In what currency should we maximize their
wealth?
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-8
Other Goals
? In other countries shareholders are viewed as merely one
among many,stakeholders” of the firm including:
? Employees
? Suppliers
? Customers
? In Japan,managers have typically sought to maximize the
value of the keiretsu—a family of firms to which the
individual firms belongs.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-9
Other Goals
? No matter what the other goals,they cannot be
achieved in the long term if the maximization of
shareholder wealth is not given due consideration.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-10
Globalization of the World Economy,
Recent Trends
? Emergence of Globalized Financial Markets
? Trade Liberalization and Economic Integration
? Privatization
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-11
? Deregulation of Financial Markets
coupled with
? Advances in Technology
have greatly reduced information and
transactions costs,which has led to:
? Financial Innovations,such as
? Currency futures and options
? Multi-currency bonds
? Cross-border stock listings
? International mutual funds
Emergence of Globalized
Financial Markets
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-12
Economic Integration
? Over the past 50 years,international trade
increased about twice as fast as world GDP.
? There has been a sea change in the attitudes of
many of the world’s governments who have
abandoned mercantilist views and embraced free
trade as the surest route to prosperity for their
citizenry.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-13
Liberalization of
Protectionist Legislation
? The General Agreement on Tariffs and Trade
(GATT) a multilateral agreement among member
countries has reduced many barriers to trade.
? The World Trade Organization has the power to
enforce the rules of international trade.
? The North American Free Trade Agreement
(NAFTA) calls for phasing out impediments to
trade between Canada,Mexico and the United
States over a 15-year period.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-14
Privatization
? The selling off state-run enterprises to investors is
also known as,Denationalization”.
? Often seen in socialist economies in transition to
market economies.
? By most estimates this increases the efficiency of
the enterprise.
? Often spurs a tremendous increase in cross-border
investment.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-15
Multinational Corporations
? A firm that has incorporated on one country and
has production and sales operations in other
countries.
? There are about 60,000 MNCs in the world.
? Many MNCs obtain raw materials from one
nation,financial capital from another,produce
goods with labor and capital equipment in a third
country and sell their output in various other
national markets.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-16
Top 10 MNCs
1 General Electric United States
2 Ford Motor Company United States
3 Royal Dutch/Shell Group Netherlands/ UK Netherlands/U.K,
4 General Motors United States
5 Exxon Corporation United States
6 Toyota Japan
7 IBM United States
8 Volkswagen Group Germany
9 Nestlé SA Switzerland
10 Daimler-Benz AG Germany
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-17
The Organization of the Text
Macroeconomic
Environment
The Financial
Environment
Management of
the Multinational
Firm
Part I
Chapters 1-5
Part II
Chapters 6-11
Parts III & IV
Chapters 12-20
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
1-18
End Chapter One
