1、McGraw-Hill/IrwinCopyright 2012 by The McGraw-Hill Companies,Inc.All rights reserved.Globalization and the Multinational FirmChapter One1-2 Whats Special about“International”Finance?Goals for International Financial Management Globalization of the World Economy Multinational Corporations Organizatio
2、n of the Text SummaryChapter One Outline1-3Whats Special about“International”Finance?Foreign Exchange Risk Political Risk Market Imperfections Expanded Opportunity Set1-4Whats Special about“International”Finance?Foreign Exchange Risk This is risk that foreign currency profits may evaporate in dollar
3、 terms due to unanticipated unfavorable exchange rate movements.Suppose$1=100 and you buy 10 shares of Toyota at 10,000 per share.One year later the investment is worth ten percent more in yen:110,000.But,if the yen has depreciated to$1=120,your investment has actually lost money in dollar terms.1-5
4、Whats Special about“International”Finance?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.1-6 Market Imperfections Legal restrictions on the movement of goods,people,and money
5、 Transactions costs Shipping costs Tax arbitrageWhats Special about“International”Finance?1-7The Example of Nestls Market Imperfection Nestl used to issue two different classes of common stock bearer shares and registered shares.Foreigners were only allowed to buy bearer shares.Swiss citizens could
6、buy registered shares.The bearer stock was more expensive.On November 18,1988,Nestl lifted restrictions imposed on foreigners,allowing them to hold registered shares as well as bearer shares.1-8Nestls Foreign Ownership Restrictions12,00010,0008,0006,0004,0002,000011203191824Source:Financial Times,No
7、vember 26,1988 p.1.Adapted with permission.SFBearer shareRegistered share1-9The Example of Nestls Market Imperfection Following this,the price spread between the two types of shares narrowed dramatically.This implies that there was a major transfer of wealth from foreign shareholders to Swiss shareh
8、olders.Foreigners holding Nestl bearer shares were exposed to political risk in a country that is widely viewed as a haven from such risk.The Nestl episode illustrates both the importance of considering market imperfections and the peril of political risk.1-10 Expanded Opportunity Set It doesnt make
9、 sense to play in only one corner of the sandbox.True for corporations as well as individual investors.Whats Special about“International”Finance?1-11 The focus of the text is to equip the reader with the“intellectual toolbox”of an effective global managerbut what goal should this effective global ma
10、nager be working toward?Maximization of shareholder wealth?or Other goals?Goals for International Financial Management1-12Maximize 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 maximiz
11、e their wealth?1-13Other 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 keiretsua family of firms to which the individual firms belongs.1-1
12、4Other Goals As shown by a series of recent corporate scandals at companies like Enron,WorldCom,and Global Crossing,managers may pursue their own private interests at the expense of shareholders when they are not closely monitored.These calamities have painfully reinforced the importance of corporat
13、e governance,i.e.,the financial and legal framework for regulating the relationship between a firms management and its shareholders.1-15Other Goals These types of issues can be much more serious in many other parts of the world,especially emerging and transitional economies,such as Indonesia,Korea,a
14、nd Russia,where legal protection of shareholders is weak or virtually non-existing.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.1-16Globalization of the World Economy:Major Trends and Developments Eme
15、rgence of Globalized Financial Markets Emergence of the Euro as a Global Currency Europes Sovereign Debt Crisis of 2010 Trade Liberalization and Economic Integration Privatization Global Financial Crisis of 2008-20091-17 Deregulation of Financial Marketscoupled with Advances in Technology have great
16、ly reduced information and transaction costs,which has led to:Financial Innovations,such as Currency futures and options Multi-currency bonds Cross-border stock listings International mutual fundsEmergence of Globalized Financial Markets1-18Emergence of the Euro as a Global Currency A momentous even
17、t in the history of world financial systems.Currently more than 300 million Europeans in 16 countries are using the common currency on a daily basis.In May 2004,10 more countries joined the European Union.The“transaction domain”of the euro may become larger than the U.S.dollars in the near future.1-
18、19Euro Area Austria Belgium Cyprus Finland France Germany GreecelIrelandlItalylLuxembourg lMalta lThe NetherlandslPortugal lSlovenia lSlovakialSpain1-20Value of the Euro in U.S.Dollars1-21Europes Sovereign-Debt Crisis of 2010 In December of 2009 the new Greek government revealed that its budget defi
19、cit for the year would be 12.7%of GDP,not the 3.7%forecast.Investors sold off Greek government bonds and the ratings agencies downgraded them to“junk.”While Greece represents only 2.5%of euro-zone GDP,the crisis became a Europe-wide debt crisis.The challenge remains that fiscal indiscipline of one e
20、uro-zone country can escalate to a Europe-wide crisis.1-22The Greek Drama Greece paid no premium above the German rate until late fall 2009.The Greek interest rate rose until the bailout package on May 9.1-23Economic Integration Over the past 50 years,international trade increased about twice as fas
21、t as world GDP.There has been a change in the attitudes of many of the worlds governments,who have abandoned mercantilist views and embraced free trade as the surest route to prosperity for their citizenry.1-24Liberalization of Protectionist Legislation The General Agreement on Tariffs and Trade(GAT
22、T)is a multilateral agreement among member countries that has reduced many barriers to trade.The World Trade Organization has the power to enforce the rules of international trade.On January 1,2005,the era of quotas on imported textiles ended.This is an event of historic proportions.1-25NAFTA The No
23、rth American Free Trade Agreement(NAFTA)calls for phasing out impediments to trade between Canada,Mexico,and the United States over a 15-year period beginning in 1994.For Mexico,the ratio of export to GDP has increased dramatically from 2.2%in 1973 to 29%in 2006.The increased trade has resulted in i
24、ncreased numbers of jobs and a higher standard of living for all member nations.1-26Privatization The selling of state-run enterprises to investors is also known as“denationalization.”Privatization is often seen in socialist economies in transition to market economies.By most estimates,this increase
25、s the efficiency of the enterprise.It also often spurs a tremendous increase in cross-border investment.1-27Chinese Privatization State-owned enterprises have been listed on organized stock exchanges.More than 1,500 companies are currently listed on Chinas stock exchanges.The Chinese government stil
26、l retains the majority stakes in most public firms.Chinese citizens can buy“A”shares,while foreigners are limited to“B”shares.1-28Global Financial Crisis of 20082009 The“Great Recession”was the most serious,synchronized economic downturn since the Great Depression of the 1930s.Factors included:House
27、holds and financial institutions borrowed too much and took too much risk.This risk was repackaged with securitization,and so defaults on subprime mortgages in the U.S.came to threaten the solvency of a teachers retirement plans in Norway.1-29Global Financial Crisis 20082009 During the course of the
28、 crisis,the G-20 emerged as the premier forum for discussing international economic issues and coordinating financial regulations and macroeconomic policies.1-30Multinational Corporations A multinational corporation(MNC)is a firm that has been incorporated in one country and has production and sales
29、 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.1-31Top 10 MNCs1General Elec
30、tricUnited States2Royal Dutch/Shell GroupUK/Netherlands3Vodafone Group PLCUnited Kingdom4British Petroleum Co.PLCUnited Kingdom5Toyota Motor CorporationJapan6ExxonMobile CorporationUnited States7TotalFrance8E.ON AGGermany9Electricit De FranceFrance10ArcelorMittalLuxembourg1-32The following slides co
31、ver the appendix to Chapter 1.1-33 A comparative advantage exists when one party can produce a good or service at a lower opportunity cost than another party.The opportunity cost of making one additional unit of a good(or service)can be defined as the value of some other good that you have to give u
32、p in order to produce this additional unit.For example,if you can work as many hours as you like at your current employer and get paid$10 per hour,then the opportunity cost of your leisure is$10 per hour.The Theory of Comparative Advantage1-34The Geometry of Comparative Advantage Consider the exampl
33、e where there are two countries,A and B,who can each produce only food and textiles.Initially they do not trade with one another.The graph on the next slide shows the increase in consumption available to the citizens of countries A and B with trade arising from the differences in their opportunity c
34、osts of production.1-35300FoodTextiles 18060200As a practical matter,the citizens of Country A must choose a point along their production possibilities curve.Suppose they initially choose 200m pounds of food and 60m yards of textiles.A production possibilities curve shows quantities of food or texti
35、les each country can make.The production possibilities of Country A are such that if they concentrated 100%of their resources into the production of textiles,they could produce 180 million yards of textiles.If Country A chose to concentrate 100%of their resources into the production of food,they cou
36、ld produce as much as 300 million pounds of food.Country A can produce any combination of food and textiles between these two points.The Geometry of Comparative Advantage1-361,200300FoodTextiles 18090024060200600The citizens of Country B must also choose a point along their production possibilities
37、curve;80If Country B chose to concentrate 100%of their resources into the production of textiles,they could produce 240 million yards of textiles.If Country B chose to concentrate 100%of their resources into the production of food,they could produce 900 million pounds of food.The Geometry of Compara
38、tive AdvantageInitially they choose 600 million pounds of food,and 80 million yards of textiles.1-37300FoodTextiles 1809002406020060080Country A enjoys a comparative advantage in textiles because they have to give up food at a lower rate than B when making textiles.Put another way,country B enjoys a
39、 comparative advantage in food because they have to give up textiles at a lower rate than A when making more food.Geometrically,a comparative advantage exists because the slopes of the production possibilities differ.If the countries specialize according to their comparative advantage,then Country A
40、 should make textiles and trade for food,while Country B should grow food and trade for textiles.The Geometry of Comparative Advantage1-381,200300FoodTextiles 4208001809002406020060080Before trade,combined consumption is 800 million lbs of food(=200+600)and 140 million yards of textiles(=60+80).140T
41、he combined production possibilities curve of country A and B without trade are shown in the green line.Without trade,if both countries make only food,the combined production would be 1,200 million pounds of food=900+300.Without trade,if both countries make only textiles,the combined production woul
42、d be 420 million yards of textiles=240+180.The Geometry of Comparative Advantage1-39300FoodTextiles 18060200As a practical matter,the citizens of country A must choose a point along their production possibilities curveSuppose that initially they choose 200 million pounds of food,and 60 million yards
43、 of textiles.A production possibilities curve shows the various amounts of food or textiles that each country can make.The production possibilities of country A are such that if they concentrated 100%of their resources into the production of textiles,they could produce 180 million yards of textiles.
44、If country A chose to concentrate 100%of their resources into the production of food,they could produce as much as 300 million pounds of food.Country A can produce any combination of food and textiles between these two points.1,200300FoodTextiles 18090024060200600The citizens of country B must also
45、choose a point along their production possibilities curve;initially they choose 600 million pounds of food,and 80 million yards of textiles.80If country B chose to concentrate 100%of their resources into the production of textiles,they could produce 240 million yards of textiles.If country B chose t
46、o concentrate 100%of their resources into the production of food,they could produce 900 million pounds of food.300FoodTextiles 1809002406020060080Country A enjoys a comparative advantage in textiles because they have to give up food at a lower rate than B when making textiles.Put another way,country
47、 B enjoys a comparative advantage in food because they have to give up textiles at a lower rate than A when making more food.Geometrically,a comparative advantage exists because the slopes of the production possibilities differ.If the countries specialize according to their comparative advantage,the
48、n country A should make textiles and trade for food,while country B should grow food and trade for textiles.1,200300FoodTextiles 4208001809002406020060080Before trade,combined consumption is 800 million lbs of food(=200+600)and 140 million yards of textiles(=60+80).140The combined production possibi
49、lities curve of country A and B without trade are shown in the green line.Without trade,if both countries make only food,the combined production would be 1,200 million pounds of food=900+300.Without trade,if both countries make only textiles,the combined production would be 420 million yards of text
50、iles=240+180.1,200300FoodTextiles 4208001401809002406020060080The gains from trade are shown by the increase in consumption available.The combined production possibilities curve with trade is composed of the original curves joined as shown.Country A can produce textiles at a lower opportunity cost,s
