Chap 1 Slides Essay

Slides Globalization and the Multinational Firm
Chapter One

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter One Outline
      What’s Special about “International” Finance? Goals for International Financial Management Globalization of the World Economy Multinational Corporations Organization of the Text Summary

1-2

What’s Special about “International” Finance?
    Foreign Exchange Risk Political Risk Market Imperfections Expanded Opportunity Set

1-3

What’s Special about “International” Finance?
 Foreign Exchange Risk
– This is risk that foreign currency profits may evaporate in dollar 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.

1-4

What’s 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.

1-5

What’s Special about “International” Finance?
 Market Imperfections – Legal restrictions on the movement of goods, people, and money – Transactions costs – Shipping costs – Tax arbitrage

1-6

The Example of Nestlé’s Market Imperfection
 Nestlé 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 buy registered shares. – The bearer stock was more expensive.  On November 18, 1988, Nestlé lifted restrictions imposed on foreigners, allowing them to hold registered shares as well as bearer shares.
1-7

Nestlé’s Foreign Ownership Restrictions
12,000 10,000 8,000 SF 6,000 4,000 2,000 0

Bearer share

Registered share

11

20

31

9

18

24

Source: Financial Times, November 26, 1988 p.1. Adapted with permission. 1-8

The Example of Nestlé’s 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 shareholders.  Foreigners holding Nestlé bearer shares were exposed to political risk in a country that is widely viewed as a haven from such risk.  The Nestlé episode illustrates both the importance of considering market imperfections and the peril of political risk.
1-9

What’s Special about “International” Finance?
 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.

1-10

Goals for International Financial Management
 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?

1-11

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?

1-12

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.
1-13

Other 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 corporate governance, i.e., the financial and

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