Financial Management in the International Business

1
Financial Management in the International Business

• ?????????
• ???????69533005
• ???69633004
• ???69633005
• ???69633009

2
Index

• Introduction
• Investment Decisions
• Financing Decisions
• Global Money ManagementThe Efficiency Objective
• Global Money ManagementThe Tax Objective
• Moving Money across BordersAttaining
  Efficiencies and Reducing Taxes
• Techniques for Global Money Management
• Cases

3
Introduction

• Scope of financial management includes three sets
  of related decisions
• Investment decisions
• Decisions about what activities to finance
• Financing decisions
• Decisions about how to finance those activities
• Money management decisions
• Decisions about how to manage the firms
  financial resources most efficiently

4
Introduction

• In an international business, investment,
  financing, and money management decisions are
  complicated by different

norms regarding the financing of business
activities
regulations concerning the flow of capital
across borders
tax regimes
levels of economic and political risk
currencies
5
Introduction

• Financial managers must consider
• 1. when deciding which activities to finance
• 2. how best to finance those activities
• 3. how best to manage the firms financial
  resources
• 4. how best to protect the firm from political
  and economic risks (including foreign exchange
  risk)

6
Investment Decisions

• Capital budgeting
• Project and Parent Cash Flows
• Adjusting for Political and Economic Risk

7
Review
CH2 CH3 Discuss how the political, economic ,legal, and cultural environment of a country can influence the benefits, costs and risks of doing business there and thus its attractiveness as an investment site.
CH7 Discuss of the economic theory of foreign direct Investment.
CH8 We looked at the political economy of foreign direct investment and considered the role that government intervention can play in foreign Investment.
CH12 We pulled much of this material together when we considered how a firm can reduce its costs of value creation and / or increase its value added by investing in productive activities in other countries.
CH14 We considered the various models for entering foreign markets.
8
Capital budgeting

• Capital budgeting
• Quantifies the benefits, costs and risks of an
  investment
• Managers can reasonably compare different
  investment alternatives within and across
  countries
• Complicated process

Identification
Selection
Follow-up
Development
Implementation
9
Project and Parent Cash Flows

• Project cash flows may not reach the parent
• Host country may block cash-flow repatriation
• Cash flows may be taxed at an unfavorable rate
• Host government may require a percentage of cash
  flows to be reinvested in the host country

10
Adjusting for Political and Economic Risk

• Political risk
• Expropriation - Iranian revolution, 1979
• Social unrest - after the breakup of Yugoslavia,
  company assets were rendered worthless
• Political change - may lead to tax and ownership
  changes
• Collapse of communism in Eastern Europe
• Attack on the World Trade Center
• Economic risk
• Inflation

11
Financing Decisions

• How the foreign investment will be financed
• How the financial structure of the foreign
  affiliate should be configured

12
Financing Decisions and The Global Capital Market

• A capital market brings together those who want
  to invest money and those who want to borrow
  money
• Those who want to invest money include
• Corporations
• Individuals
• Non-bank financial institutions
• Those who want to borrow money include
• Individuals
• Companies
• Governments

13
Financing Decisions and The Global Capital Market

• Capital market loans to corporations are either
• Equity loans occur when corporations sell stock
  to investors
• Debt loans occur when a corporation borrows money
  and agrees to repay a predetermined portion of
  the loan amount at regular intervals regardless
  of how much profit it is making

14
Financing Decisions and The Global Capital Market

• Cost of capital is the price of borrowing money,
  which is the rate of return that borrowers must
  pay investors
• In a purely domestic capital market the pool of
  investors is limited to residents of the country
• Places an upper limit on the supply of funds
  available
• Increases the cost of capital
• A global capital market provides a larger supply
  of funds for borrowers to draw on
• Lowers the cost of capital

15
Financing Decisions and The Global Capital Market
16
Source of Financing

• Global capital markets for lower cost financing.
• Impact of host country - may require projects to
  be locally financed through debt or equity
• Limited liquidity raises the cost of capital
• Host government may offer low interest or
  subsidized loans to attract investment
• Impact of local currency (appreciation/depreciatio
  n)
• influences capital and financing decisions

17
Financial Structure

• Financial structure
• Follow local capital structure norms?
• More easily evaluate return on equity relative to
  local competition
• Good for companys image
• Best recommendation adopt a financial structure
  that minimizes the cost of capital

18
Global Money Management -The Efficiency
Objective

• Minimizing cash balances
• Money market accounts - low interest - high
  liquidity
• Certificates of deposit - higher interest - lower
  liquidity
• Reducing transaction costs (cost of exchange)
• Transaction costs changing from one currency to
  another
• Transfer fee fee for moving cash from one
  location to another

19
Global Money Management - The Tax Objective

• Countries tax income earned outside their
  boundaries by entities based in their country
• Can lead to double taxation
• Tax credit allows entity to reduce home taxes by
  amount paid to foreign government
• Tax treaty is an agreement between countries
  specifying what items will be taxed by
  authorities in country where income is earned
• Deferral principle specifies that parent
  companies will not be taxed on foreign income
  until the dividend is received
• Tax haven is used to minimize tax liability

20
Moving Money Across Borders Attaining
Efficiencies and Reducing Taxes

• Unbundling A mix of techniques to transfer
  liquid funds from a foreign subsidiary to the
  parent company without piquing the host country
• Dividend remittances
• Royalty payments and fees
• Transfer Prices
• Fronting loans
• Selecting a particular policy is limited when a
  foreign subsidiary is part owned by a local
  joint-venture partner or local stockholders

21
Dividend Remittances

• Most common method of transfer
• Dividend varies with
• Tax regulations
• Foreign exchange risk
• Age of subsidiary
• Extent of local equity participation

22
Royalty Payments and Fees

• Royalties represent the remuneration paid to
  owners of technology, patents or trade names for
  their use by the firm
• Common for parent to charge a subsidiary for
  technology, patents or trade names transferred to
  it
• May be levied as a fixed amount per unit sold or
  percentage of revenue earned
• Fees are compensation for professional services
  or expertise supplied to subsidiary
• Management fees or technical assistance fees
• Fixed charges for services provided

23
Transfer Prices

• Price at which goods or services are transferred
  within a firms entities
• Position funds within a company
• Move founds out of country by setting high
  transfer fees or into a country by setting low
  transfer fees
• Movement can be within subsidiaries or between
  the parent and its subsidiaries

24
Benefits of ManipulatingTransfer Prices

• Reduce tax liabilities by using transfer fees to
  shift from a high-tax country to a low-tax
  country
• Reduce foreign exchange risk exposure to expected
  currency devaluation by transferring funds
• Can be used where dividends are restricted or
  blocked by host-government policy
• Reduce import duties (ad valorem) by reducing
  transfer prices and the value of the goods

25
Problems With Transfer Pricing

• Few governments like it
• Believe (rightly) that they are losing revenue
• Has an impact on management incentives and
  performance evaluations
• Inconsistent with a profit center
• Managers can hide inefficiencies

26
Fronting Loans

• Loan between a parent and subsidiary is channeled
  through a financial intermediary (bank)
• Allows circumvention of host country restrictions
  on remittance of funds from subsidiary to parent
• Provides certain tax advantages

27
Tax Advantages of Fronting Loans
28
Techniques for Global Money Management

• Firms use two money management techniques in
  attempting to manage their global cash resources
  in the most efficient manner centralized
  depositories and multilateral netting.

29
Techniques for Global Money Management
--Centralized depositories

• Need cash reserves to service accounts and
  insuring against negative cash flows
• Should each subsidiary hold its own cash balance?
• By pooling, firm can deposit larger cash amounts
  and earn higher interest rates
• If located in a major financial center, can get
  information on good investment opportunities
• Can reduce the total size of cash pool and invest
  larger reserves in higher paying, long term,
  instruments
• Cash Budget report
• Netting Center

30
?????
????
?????
????
????

• ??????????
• ????????????
• ????,????
• ?????????
• ???????
• ???????

???? (Netting Center)

• ??

31
Techniques for Global Money Management
--Centralized depositories

• Square root of (1,000,000²2,000,000²3,000,000²)
  
• Square root of 14,000,000
• 3,741,657
• 28 million(3 3,741,657) 39,224,971
• 46 million- 39,224,9716,775,029

32
Techniques for Global Money Management
--Multilateral Netting

• Bilateral netting
• Multilateral netting simply extending the
  bilateral concept to multiple subsidiaries within
  an international business

4million
French subsidiary
Mexican subsidiary
6 million
2 million
33
Techniques for Global Money Management
--Multilateral Netting
34
Techniques for Global Money Management
--Multilateral Netting
35
Cash Flows After Multilateral Netting

• If the transaction costs is 1
• Before multilateral netting, transaction costs is
  430,000 (43 million 1)
• After multilateral netting, transaction costs is
  50,000 (5 million 1)
• A saving of 380,000 achieved through
  multilateral netting

36
Case1- Introduction of company

• Procter Gamble (PG) is the largest U.S.
• consumer products company.
• PG manufactures and markets more than 200
  products that it sells in 130 countries.
• Unilever PG is a dominant global force in
  laundry detergents, clearing products, personal
  care products, and pet food products.

37
Case1- Company failure

• By 1985, after 13 years in Japan, PG was still
  losing 40 million a year there.
• It had introduced disposable diapers in Japan and
  only held 8 share of market.
• In the early 1980s, PG introduced its Cheer
  laundry detergent in Japan, but the advertisement
  is wrong.

38
Case1- Products succeed

• PG experience with disposable diapers and
  laundry detergents in Japan forced the company to
  rethink its product development and marketing
  philosophy.
• Succeed brain Joy (dish soap.)
• New laundry detergent.

39
Case2- Introduction of company

• Merrill Lynch is a investment banking, also the
  largest underwriter of debt and equity and the
  third largest mergers and acquisitions adviser.
• Merrill Lynch started a private client business
  in Japan in 1980s but met with limited success.

40
Case2- Company failure in Japan

• Because Japans big four stockbrokerages, which
  traditionally had monopolized the Japanese
  market.
• Restrictive regulations made it almost impossible
  for Merrill Lynch to offer private clients.

41
Case2- Reentry Japan

• In the mid-1990s, Japan embarked on a
  wide-ranging deregulation of its financial
  services industry.
• The company initially considered a joint venture
  with Sanwa Bank to sell Merrill Lynchs mutual
  fund products.
• The best way to enter the Japanese market is
  acquired Yamaichi Securities which is bankrupt.

42

• Thank you for your listening