PART 1: The International Financial Environment

1
FINC3240 International Finance

• Chapter 1
• Introduction

2
Topics

• A. Multinational corporation (MNC) and
  international financial management
• B. Why firm do international business
• C. How firms conduct international business

3
Multinational Corporation (MNC)

• Firms that engage in some form of international
  business.
• import
• export
• direct foreign investment (DFI)
• The focus of this course is on the U.S.-based
  MNC whose parents wholly own any foreign
  subsidiaries.

4
International Financial Management

• International financial management is important
  to both MNC and companies that have no
  international business.
• financial Management includes financial
  analysis, issue of bond and stock, project
  evaluation (capital budgeting), etc.

5
Incentive for International Business

• A. Comparative advantage
• Japan and U.S. vs. Mexico and China
• comparative advantage allows firms to penetrate
  foreign markets and benefit from savings in cost.
• B. Imperfect Market
• ---factors of production (such as labor and
  other resources) are somewhat immobile due to
  costs of transportation.
• MNC do direct foreign investment (DFI) in other
  countries.
• C. Product Cycle
• home market becomes mature and need to expand in
  foreign market and produce locally to reduce cost.

6
Types of International Business

• International trade
• Licensing
• Direct Foreign Investment (DFI)
• Franchising
• Joint ventures
• Acquisitions of existing operations
• Establishing new subsidiaries

7
DFI Risk
Franchising and Joint Ventures
New Foreign Subsidiaries
Foreign Acquisitions
LEAST RISK
MOST RISK
Degrees of Risk to MNC
8
The Value of a Firm (MNC)

• Determined by the present value of its expected
  future cash flows.
• Net Present Value (NPV)

9
Example 1

• Following the terrorist attack on the United
  States on September 11, 2001, the valuation of
  many MNCs decreased by more than 10. Explain why
  the expected cash flows of MNCs were reduced,
  even if they were not directly hit by the
  terrorist attacks.

10
Summary

• The incentive for international business
• Types of doing international business and
  associated risk
• Homework assignment
• QA 2,4,7,8,13,14,15,17.