International Financial Resume

Globalization and the Multinational Firm.

1.  International finance VS domestic finance

      In this resume there two resource that I can explain :

          a . the first from e-book. In the e-book there are 3 major that distinguish international finance from domestic finance.

      Three major dimensions set international finance apart from domestic finance. They are:

1. Foreign exchange and political risks.

2. Market imperfections.

3. Expanded opportunity set.

Foreign exchange risk	The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.           Ex: ·         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.
Political Risk	Sovereign (berkuasa) governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways.
Market Imperfections	·         Legal restrictions on movement of goods, people, and money ·         Transactions costs ·         Shipping costs ·         Tax arbitrage
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.

      b.    And the another material come from internet search  is six major factors that distinguish multinational from domestic financial management :

1.    Different currency denominations.

2.    Economic and legal ramifications.

3.    Language differences.

4.    Cultural differences.

5.    Role of governments.

6.    Political risk.

2.  Why do firms expand into other coutries ?

The reason to expand :

·         To seek new markets.

Because product in domestic has been saturated.

·         To seek raw materials.

·         To seek new technology.

Corporate to the other corporation to transfer knowledge. Because technology is easy to obsolete (expired)

·         To seek production efficiency.

In Indonesia, foreign firm can get efficiency with indonesian’s cheap labor wages.

·         To avoid political and regulatory hurdles.                     

·         To diversify.

In 1997 Indonesia affected by crisis and when Indonesian people have firm in the another country, so the firm didn’t affect by crisis.

  

3.  Goals for International Financial Management

      I get two resource about the goal of intrernationam financial :

the first is :

Maximize Shareholder Wealth

  l  Long accepted as a goal in the Anglo-Saxon countries, but complications arise.

n  Who are and where are the shareholders?

n  In what currency should we maximize their wealth?

Other Goals

  l  In other countries shareholders are viewed as merely one among many “stakeholders” of the firm including:

n  Employees

n  Suppliers

n  Customers

 l  In Japan, managers have typically sought to maximize the value of the keiretsu—a family of firms to which the individual firms belongs.

 l  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.

 l  These calamities have painfully reinforced the importance of corporate governance i.e. the financial and legal framework for regulating the relationship between a firm’s management and its shareholders.

And the second resource are:

Ø  the commonly accepted goal of an MNC is to maximize shareholder wealth.

Ø  We will focus on MNC’s that wholly own their foreign subsidiaries. => financial managers throughout (melalui) the MNC have a single goal of maximizing the value of the enire MNC.

-          Conflict with the MNC goal

Ø  Conflict of interest -> the agency problem. the agency problem exist when a corp.’s shareholder differ from its managers, a conflicts of goals can exist.

Ø  Agency cost are normally larger for MNC than for purely domestic firms, due to (dikarenakan):

·         the difficult in monitoring distant managerss.

·         the different cultures of foreign managers

·         the sheer size of the larger MNCs

·         the tendency to downplay (menyusut) short term effect.

Ø  Subsidiaries managers may be tempted (tergoda) to make decision that maximize that values of their respective (masing-masing) subsidiaries.

5.  Impact of Management Control

•         The magnitude (kekuatan) of agency costs can vary with the management style of the MNC.

•         A centralized management style reduces agency costs. However, a decentralized style gives more control to those managers who are closer to the subsidiary’s operations and environment.

•         Some MNCs attempt to strike a balance - they allow subsidiary managers to make the key decisions for their respective operations, but the decisions are monitored by the parent’s management.

•         Electronic networks make it easier for the parent to monitor the actions and performance of foreign subsidiaries.

For example, corporate intranet or internet email facilitates communication. Financial reports and other documents can be sent electronically too.

6.  Theories of International Business

Why are firms motivated to expand their business internationally?

Œ  Theory of Comparative Advantage by recargo

¤        Specialization by countries can increase production efficiency.

  Imperfect Markets Theory

¤        The markets for the various resources used in production are “imperfect.”

Œ  Product Cycle Theory

¤        As a firm matures, it may recognize additional opportunities outside its home country.

 International Business Methods

There are several methods by which firms can conduct international business.

•         International trade is a relatively conservative approach involving exporting and/or importing.

¤        The internet facilitates international trade by enabling firms to advertise and manage orders through their websites.

     •         Licensing allows a firm to provide its technology in exchange for fees or some other benefits.

•         Franchising obligates (mewajibkan) a firm to provide a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.

•         Firms may also penetrate foreign markets by engaging (melibatkan,menggabungkan) in a joint venture (joint ownership and operation) with firms that reside (bertempat tinggal) in those markets.

•         Acquisitions (mengambil alih, takeover) of existing operations in foreign countries allow firms to quickly gain control over foreign operations as well as a share of the foreign market.

•         Firms can also penetrate foreign markets by establishing new foreign subsidiaries.

•         In general, any method of conducting business that requires a direct investment in foreign operations is referred to as a direct foreign investment (DFI).

•         The optimal international business method may depend on the characteristics of the MNC.

8.  MNC

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.

1	General Electric	United States
2	Vodafone Group PLC	United Kingdom
3	Ford Motor Company	United States
4	British Petroleum Co. PLC	United Kingdom
5	General Motors	United States
6	Royal Dutch/Shell Group	UK/Netherlands
7	Toyota Motor Corporation	Japan
8	Total Fina Elf	France
9	France Telecom	France
10	ExxonMobile Corporation	United States