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About This Presentation
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
International Financial Management
...
Slide Content
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
International Financial Management
11th Edition
by Jeff Madura
1
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
2
3 International Financial Markets
Describe the background and corporate use of the
following International Financial Markets:
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
International Financial Management
11th Edition
by Jeff Madura
1
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
2
3 International Financial Markets
Describe the background and corporate use of the
following International Financial Markets:
nternational money market
2
Chapter Objectives
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
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service or otherwise on a password-protected website for
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3
Foreign Exchange Market
1. Allows for the exchange of one currency for
another.
2. Exchange rate specifies the rate at which one
currency can be exchanged for another.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
2
Chapter Objectives
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
3
Foreign Exchange Market
1. Allows for the exchange of one currency for
another.
2. Exchange rate specifies the rate at which one
currency can be exchanged for another.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
4
History of Foreign Exchange
1. Gold Standard (1876 – 1913)
Each currency was convertible into gold at a specified
rate. When World War I began in 1914, the gold
standard was suspended.
2. Agreements on Fixed Exchange Rates
a.Bretton Woods Agreement 1944 - 1971
b.Smithsonian Agreement 1971 - 1973
3. Floating Exchange Rate System
Widely traded currencies were allowed to fluctuate in
accordance with market forces
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
5
Foreign Exchange Transactions
1. The over-the-counter market is the
service or otherwise on a password-protected website for
classroom use.
4
History of Foreign Exchange
1. Gold Standard (1876 – 1913)
Each currency was convertible into gold at a specified
rate. When World War I began in 1914, the gold
standard was suspended.
2. Agreements on Fixed Exchange Rates
a.Bretton Woods Agreement 1944 - 1971
b.Smithsonian Agreement 1971 - 1973
3. Floating Exchange Rate System
Widely traded currencies were allowed to fluctuate in
accordance with market forces
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
5
Foreign Exchange Transactions
1. The over-the-counter market is the
telecommunications network where companies
normally exchange one currency for another.
2. Foreign exchange dealers serve as intermediaries
in the foreign exchange market
3. A foreign exchange transaction for immediate
exchange is said to trade in the spot market. The
exchange rate in the spot market is the spot rate.
4. Trading between banks occurs in the interbank
market.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
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6
Spot Market
1. The U.S. Dollar is the commonly accepted
medium of exchange in the spot market.
2. Spot market time zones - Foreign exchange
trading is conducted only during normal business
hours in a given location. Thus, at any given time
on a weekday, somewhere around the world a
bank is open and ready to accommodate foreign
exchange requests.
normally exchange one currency for another.
2. Foreign exchange dealers serve as intermediaries
in the foreign exchange market
3. A foreign exchange transaction for immediate
exchange is said to trade in the spot market. The
exchange rate in the spot market is the spot rate.
4. Trading between banks occurs in the interbank
market.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
6
Spot Market
1. The U.S. Dollar is the commonly accepted
medium of exchange in the spot market.
2. Spot market time zones - Foreign exchange
trading is conducted only during normal business
hours in a given location. Thus, at any given time
on a weekday, somewhere around the world a
bank is open and ready to accommodate foreign
exchange requests.
3. Spot market liquidity: More buyers and sellers
means more liquidity.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
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7
Attributes of Banks That Provide Foreign Exchange
1. Competitiveness of quote
2. Special relationship with the bank
3. Speed of execution
4. Advice about current market conditions
5. Forecasting advice
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8
means more liquidity.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
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7
Attributes of Banks That Provide Foreign Exchange
1. Competitiveness of quote
2. Special relationship with the bank
3. Speed of execution
4. Advice about current market conditions
5. Forecasting advice
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
8
Foreign Exchange Quotations
rateAsk
rate Bid rateAsk
spreadask / Bid
1. At any given point in time, a bank’s bid (buy) quote
for a foreign currency will be less than its ask (sell)
quote.
2. The bid/ask spread covers the bank’s cost of
conducting foreign exchange transactions
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copied, scanned, or duplicated, in whole or in part, except for
use as
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9
Exhibit 3.1 Computation of the Bid Ask Spread
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copied, scanned, or duplicated, in whole or in part, except for
use as
rateAsk
rate Bid rateAsk
spreadask / Bid
1. At any given point in time, a bank’s bid (buy) quote
for a foreign currency will be less than its ask (sell)
quote.
2. The bid/ask spread covers the bank’s cost of
conducting foreign exchange transactions
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
9
Exhibit 3.1 Computation of the Bid Ask Spread
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
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10
Factors That Affect the Spread
1. Order costs: Costs of processing orders, including
clearing costs and the costs of recording transactions.
2. Inventory costs: Costs of maintaining an inventory of a
particular currency.
3. Competition: The more intense the competition, the
smaller the spread quoted by intermediaries.
4. Volume: Currencies that have a large trading volume
are more liquid because there are numerous buyers and
sellers at any given time.
5. Currency risk: Economic or political conditions that
cause the demand for and supply of the currency to
change abruptly.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
11
service or otherwise on a password-protected website for
classroom use.
10
Factors That Affect the Spread
1. Order costs: Costs of processing orders, including
clearing costs and the costs of recording transactions.
2. Inventory costs: Costs of maintaining an inventory of a
particular currency.
3. Competition: The more intense the competition, the
smaller the spread quoted by intermediaries.
4. Volume: Currencies that have a large trading volume
are more liquid because there are numerous buyers and
sellers at any given time.
5. Currency risk: Economic or political conditions that
cause the demand for and supply of the currency to
change abruptly.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
11
Interpreting Foreign Exchange Quotations
1. Direct Quotation represents the value of a
foreign currency in dollars (number of dollars
per currency).
Example: $1.40 per Euro
2. Indirect quotation represents the number of
units of a foreign currency per dollar.
Example: €0.7143 per Dollar
Indirect quotation = 1 / Direct quotation
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
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12
Exhibit 3.2 Direct and Indirect Exchange Rate Quotations
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use as
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13
1. Direct Quotation represents the value of a
foreign currency in dollars (number of dollars
per currency).
Example: $1.40 per Euro
2. Indirect quotation represents the number of
units of a foreign currency per dollar.
Example: €0.7143 per Dollar
Indirect quotation = 1 / Direct quotation
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
12
Exhibit 3.2 Direct and Indirect Exchange Rate Quotations
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
13
Cross Exchange Rates
1. Cross exchange rate is the amount of one foreign currency
per unit of another foreign currency
2. Example
Value of peso = $0.07
Value of Canadian dollar = $0.70
Value of peso in C$ = Value of peso in $
Value of C$ in $
= $0.07 = C$ 0.10
$0.70
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
14
Currency Derivatives
1. Forward Contracts: agreements between a
foreign exchange dealer and an MNC that
specifies the currencies to be exchanged, the
1. Cross exchange rate is the amount of one foreign currency
per unit of another foreign currency
2. Example
Value of peso = $0.07
Value of Canadian dollar = $0.70
Value of peso in C$ = Value of peso in $
Value of C$ in $
= $0.07 = C$ 0.10
$0.70
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
14
Currency Derivatives
1. Forward Contracts: agreements between a
foreign exchange dealer and an MNC that
specifies the currencies to be exchanged, the
exchange rate, and the date at which the
transaction will occur.
the exchange rate
specified by the forward contract.
-the-
counter market where forward contracts are
traded.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
15
Currency Derivatives
2. Futures Contracts: similar to forward
contracts but sold on an exchange
currency to be exchanged on a specific settlement
date.
can purchase or sell a specified currency on the
specified settlement date.
t rate is the spot rate that will exist
at a future point in time and is uncertain as of
transaction will occur.
the exchange rate
specified by the forward contract.
-the-
counter market where forward contracts are
traded.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
15
Currency Derivatives
2. Futures Contracts: similar to forward
contracts but sold on an exchange
currency to be exchanged on a specific settlement
date.
can purchase or sell a specified currency on the
specified settlement date.
t rate is the spot rate that will exist
at a future point in time and is uncertain as of
today.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
16
Currency Derivatives
3. Currency Options Contracts
a. Currency Call Option: provides the right to buy
currency at a specified strike price within a
specified period of time.
b. Currency Put Option: provides the right to sell
currency at specified strike price within a specified
period of time.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
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17
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
16
Currency Derivatives
3. Currency Options Contracts
a. Currency Call Option: provides the right to buy
currency at a specified strike price within a
specified period of time.
b. Currency Put Option: provides the right to sell
currency at specified strike price within a specified
period of time.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
17
International Money Market
1. Corporations or governments need short-term
funds denominated in a currency different from
their home currency.
2. The international money market has grown because
firms:
a. May need to borrow funds to pay for imports
denominated in a foreign currency.
b. May choose to borrow in a currency in which the
interest rate is lower.
c. May choose to borrow in a currency that is expected to
depreciate against their home currency
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copied, scanned, or duplicated, in whole or in part, except for
use as
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service or otherwise on a password-protected website for
classroom use.
18
Origins and Development
1. European Money Market: Dollar deposits in banks in
Europe and other continents are called Eurodollars or
Eurocurrency. Origins of the European money market can
be traced to the Eurocurrency market that developed
during the 1960s and 1970s.
1. Corporations or governments need short-term
funds denominated in a currency different from
their home currency.
2. The international money market has grown because
firms:
a. May need to borrow funds to pay for imports
denominated in a foreign currency.
b. May choose to borrow in a currency in which the
interest rate is lower.
c. May choose to borrow in a currency that is expected to
depreciate against their home currency
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
18
Origins and Development
1. European Money Market: Dollar deposits in banks in
Europe and other continents are called Eurodollars or
Eurocurrency. Origins of the European money market can
be traced to the Eurocurrency market that developed
during the 1960s and 1970s.
2. Asian Money Market: Centered in Hong Kong and
Singapore. Originated as a market involving mostly
dollar-denominated deposits, and was originally known as
the Asian dollar market.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
19
Money Market Interest Rates Among Currencies
1. The money market interest rates in any particular
country are dependent on the demand for short-
term funds by borrowers, relative to the supply of
available short-term funds that are provided by
savers.
2. Money market rates vary due to differences in the
interaction of the total supply of short-term funds
available (bank deposits) in a specific country
versus the total demand for short-term funds by
borrowers in that country.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
Singapore. Originated as a market involving mostly
dollar-denominated deposits, and was originally known as
the Asian dollar market.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
19
Money Market Interest Rates Among Currencies
1. The money market interest rates in any particular
country are dependent on the demand for short-
term funds by borrowers, relative to the supply of
available short-term funds that are provided by
savers.
2. Money market rates vary due to differences in the
interaction of the total supply of short-term funds
available (bank deposits) in a specific country
versus the total demand for short-term funds by
borrowers in that country.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
20
Risk of International Money Market Securities
1. International Money Market Securities are
debt securities issued by MNCs and government
agencies with a short-term maturity (1 year or
less)
2. Normally, these securities are perceived to be
very safe from the risk of default.
3. Even if the international money market securities
are not exposed to credit risk, they are exposed
to exchange rate risk when the currency
denominating the securities differs from the home
currency of the investors.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
21
International Credit Market
1. MNCs sometimes obtain medium-term funds
service or otherwise on a password-protected website for
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20
Risk of International Money Market Securities
1. International Money Market Securities are
debt securities issued by MNCs and government
agencies with a short-term maturity (1 year or
less)
2. Normally, these securities are perceived to be
very safe from the risk of default.
3. Even if the international money market securities
are not exposed to credit risk, they are exposed
to exchange rate risk when the currency
denominating the securities differs from the home
currency of the investors.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
21
International Credit Market
1. MNCs sometimes obtain medium-term funds
through term loans from local financial
institutions or through the issuance of notes
(medium-term debt obligations) in their local
markets.
2. Loans of 1 year or longer extended by banks to
MNCs or government agencies in Europe are
commonly called Eurocredits or Eurocredit
loans.
3. To avoid interest rate risk, banks commonly use
floating rate loans with rates tied to the London
Interbank Offer Rate (LIBOR).
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copied, scanned, or duplicated, in whole or in part, except for
use as
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22
Regulations in the Credit Market
1. Single European Act:
nd
securities activities in the EU.
similar throughout the EU.
institutions or through the issuance of notes
(medium-term debt obligations) in their local
markets.
2. Loans of 1 year or longer extended by banks to
MNCs or government agencies in Europe are
commonly called Eurocredits or Eurocredit
loans.
3. To avoid interest rate risk, banks commonly use
floating rate loans with rates tied to the London
Interbank Offer Rate (LIBOR).
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
22
Regulations in the Credit Market
1. Single European Act:
nd
securities activities in the EU.
similar throughout the EU.
right to expand into any or all of the other EU countries.
2. Basel Accord - Banks must maintain capital equal to at
least 4 percent of their assets. For this purpose, banks’ assets
are weighted by risk.
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copied, scanned, or duplicated, in whole or in part, except for
use as
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23
Regulations in the Credit Market (Cont.)
3. Basel II Accord - Attempts to account for differences in
collateral among banks. In addition, this accord encourages
banks to improve their techniques for controlling
operational risk, which could reduce failures in the banking
system. Also plans to require banks to provide more
information to existing and prospective shareholders about
their exposure to different types of risk.
4. Basel III Accord - Called for new methods of estimating
risk-weighted assets that would increase the level of risk-
weighted assets, and therefore require banks to maintain
higher levels of capital.
© 2012 Cengage Learning. All Rights Reserved. May not be
2. Basel Accord - Banks must maintain capital equal to at
least 4 percent of their assets. For this purpose, banks’ assets
are weighted by risk.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
23
Regulations in the Credit Market (Cont.)
3. Basel II Accord - Attempts to account for differences in
collateral among banks. In addition, this accord encourages
banks to improve their techniques for controlling
operational risk, which could reduce failures in the banking
system. Also plans to require banks to provide more
information to existing and prospective shareholders about
their exposure to different types of risk.
4. Basel III Accord - Called for new methods of estimating
risk-weighted assets that would increase the level of risk-
weighted assets, and therefore require banks to maintain
higher levels of capital.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
24
Syndicated Loans in the Credit Market
1. Sometimes a single bank is unwilling or unable to
lend the amount needed by an MNC or
government agency.
2. A syndicate of banks can be formed to
underwrite the loans and the lead bank is
responsible for negotiating the terms with the
borrower.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
25
Impact of the Credit Crisis on the Credit Market
1. The credit crisis of 2008 triggered by defaults in
subprime loans led to a halt in housing
development, which reduced income, spending,
and jobs.
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
24
Syndicated Loans in the Credit Market
1. Sometimes a single bank is unwilling or unable to
lend the amount needed by an MNC or
government agency.
2. A syndicate of banks can be formed to
underwrite the loans and the lead bank is
responsible for negotiating the terms with the
borrower.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
25
Impact of the Credit Crisis on the Credit Market
1. The credit crisis of 2008 triggered by defaults in
subprime loans led to a halt in housing
development, which reduced income, spending,
and jobs.
2. Financial institutions became cautious with their
funds and were less willing to lend funds to
MNCs
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
26
International Bond Market
1. Foreign bonds are issued by borrower
foreign to the country where the bond is
placed.
2. Eurobonds are bonds sold in countries other
than the country of the currency denominating
the bond
(EIT) imposed by the U.S. government in 1963 to
discourage U.S. investors from investing in
foreign securities.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
funds and were less willing to lend funds to
MNCs
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
26
International Bond Market
1. Foreign bonds are issued by borrower
foreign to the country where the bond is
placed.
2. Eurobonds are bonds sold in countries other
than the country of the currency denominating
the bond
(EIT) imposed by the U.S. government in 1963 to
discourage U.S. investors from investing in
foreign securities.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
27
Eurobonds
1. Features:
2. Denominations
3. Underwriting Process
icate; simultaneously placed in many
countries
4. Secondary Market
who sell the primary issues
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
service or otherwise on a password-protected website for
classroom use.
27
Eurobonds
1. Features:
2. Denominations
3. Underwriting Process
icate; simultaneously placed in many
countries
4. Secondary Market
who sell the primary issues
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
28
Development of Other Bond Markets
1. Bond markets have developed in Asia and
South America
2. Bond market yields among countries tend to be
highly correlated over time.
3. When economic conditions weaken, aggregate
demand for funds declines with the decline in
corporate expansion.
4. When economic conditions strengthen,
aggregate demand for funds increases with the
increase in corporate expansion.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
29
Risk of International Bonds
1. Credit Risk - represents the potential for default.
2. Interest Rate Risk - potential for the value of
bonds to decline in response to rising long-term
Development of Other Bond Markets
1. Bond markets have developed in Asia and
South America
2. Bond market yields among countries tend to be
highly correlated over time.
3. When economic conditions weaken, aggregate
demand for funds declines with the decline in
corporate expansion.
4. When economic conditions strengthen,
aggregate demand for funds increases with the
increase in corporate expansion.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
29
Risk of International Bonds
1. Credit Risk - represents the potential for default.
2. Interest Rate Risk - potential for the value of
bonds to decline in response to rising long-term
interest rates.
3. Exchange Rate Risk - represents the potential for
the value of bonds to decline (from the investor’s
perspective) because the currency denominating the
bond depreciates against the home currency.
4. Liquidity Risk - represents the potential for the
value of bonds to decline because there is not a
consistently active market for the bonds.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
30
Impact of the Greek Crisis on Bonds
1. Spring 2010: Greece experienced weak
economic conditions and large increase in the
government budget deficit.
2. Concern spread to other European countries
such as Spain, Portugal, and Ireland that had
large budget deficits.
3. May 2010: many European countries and the
IMF agreed to provide Greece with new loans.
3. Exchange Rate Risk - represents the potential for
the value of bonds to decline (from the investor’s
perspective) because the currency denominating the
bond depreciates against the home currency.
4. Liquidity Risk - represents the potential for the
value of bonds to decline because there is not a
consistently active market for the bonds.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
30
Impact of the Greek Crisis on Bonds
1. Spring 2010: Greece experienced weak
economic conditions and large increase in the
government budget deficit.
2. Concern spread to other European countries
such as Spain, Portugal, and Ireland that had
large budget deficits.
3. May 2010: many European countries and the
IMF agreed to provide Greece with new loans.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
31
International Stock Markets
1. Issuance of Stock in Foreign Markets - Some
U.S. firms issue stock in foreign markets to enhance
their global image.
2. Issuance of Foreign Stock in the U.S.
a. Yankee stock offerings - Non-U.S. corporations
that need large amounts of funds sometimes issue
stock in the United States
b. American Depository Receipts (ADR) -
Certificates representing bundles of stock. ADR
shares can be traded just like shares of a stock.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
32
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
31
International Stock Markets
1. Issuance of Stock in Foreign Markets - Some
U.S. firms issue stock in foreign markets to enhance
their global image.
2. Issuance of Foreign Stock in the U.S.
a. Yankee stock offerings - Non-U.S. corporations
that need large amounts of funds sometimes issue
stock in the United States
b. American Depository Receipts (ADR) -
Certificates representing bundles of stock. ADR
shares can be traded just like shares of a stock.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
32
Non-U.S. Firms Listing on U.S.
Exchanges
1. Non-U.S. firms have their shares listed on the
New York Stock Exchange or the Nasdaq
market so that the shares can easily be traded
in the secondary market.
2. Effect of Sarbanes-Oxley Act on Foreign
Stock Listings - Many non-U.S. firms decided to
place new issues of their stock in the United Kingdom
instead of in the United States so that they would not
have to comply with the law.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
33
Investing in Foreign Stock Markets
1. Many investors purchase stocks outside of the
home country.
2. Recently, firms outside the U.S. have been
issuing stock more frequently.
Exchanges
1. Non-U.S. firms have their shares listed on the
New York Stock Exchange or the Nasdaq
market so that the shares can easily be traded
in the secondary market.
2. Effect of Sarbanes-Oxley Act on Foreign
Stock Listings - Many non-U.S. firms decided to
place new issues of their stock in the United Kingdom
instead of in the United States so that they would not
have to comply with the law.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
33
Investing in Foreign Stock Markets
1. Many investors purchase stocks outside of the
home country.
2. Recently, firms outside the U.S. have been
issuing stock more frequently.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
34
Exhibit 3.5 Comparison of Stock Exchanges (as of 2008)
34
Source: World Federation of Exchanges
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
35
How Market Characteristics Vary among Countries
1. Stock market participation and trading activity are
higher in countries where managers are encouraged to
make decisions that serve shareholder interests, and
where there is greater transparency.
2. Factors that influence trading activity:
oting power
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
34
Exhibit 3.5 Comparison of Stock Exchanges (as of 2008)
34
Source: World Federation of Exchanges
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
35
How Market Characteristics Vary among Countries
1. Stock market participation and trading activity are
higher in countries where managers are encouraged to
make decisions that serve shareholder interests, and
where there is greater transparency.
2. Factors that influence trading activity:
oting power
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
36
Exhibit 3.6 Impact of Governance on Stock Market
Participation and Trading Activity
36
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
37
How Financial Markets Serve MNCs
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
36
Exhibit 3.6 Impact of Governance on Stock Market
Participation and Trading Activity
36
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
37
How Financial Markets Serve MNCs
1. Corporate functions that require foreign exchange
markets.
real assets.
-term investment or financing in foreign securities.
-term financing in the international bond or stock
markets.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
38
Exhibit 3.7 Foreign Cash Flow Chart of an MNC
38
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
markets.
real assets.
-term investment or financing in foreign securities.
-term financing in the international bond or stock
markets.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
38
Exhibit 3.7 Foreign Cash Flow Chart of an MNC
38
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
39
Summary
exchanged in order to facilitate international trade or
financial transactions. Commercial banks serve as financial
intermediaries in this market.
large banks that accept deposits and provide short-term
loans in various currencies. This market is used primarily by
governments and large corporations.
commercial banks that serve the international money
market. These banks convert some of the deposits received
into loans (for medium-term periods) to governments and
large corporations.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
40
Summary (Cont.)
transfers of long-term credit, thereby enabling governments
and large corporations to borrow funds from various
Summary
exchanged in order to facilitate international trade or
financial transactions. Commercial banks serve as financial
intermediaries in this market.
large banks that accept deposits and provide short-term
loans in various currencies. This market is used primarily by
governments and large corporations.
commercial banks that serve the international money
market. These banks convert some of the deposits received
into loans (for medium-term periods) to governments and
large corporations.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
40
Summary (Cont.)
transfers of long-term credit, thereby enabling governments
and large corporations to borrow funds from various
countries. The international bond market is facilitated by
multinational syndicates of investment banks that help to
place the bonds.
financing in foreign countries. Thus, these markets help
MNCs finance their international expansion.
APA 7th Edition
Quick Guide
The American Psychological Association recently
updated its publication manual for its 7th edition.
There are some new and updated content regarding
paper elements and format, bias-free language
guidelines, in-text citations, and more than 100
examples of APA Style references including templates
for every reference category. Here’s an overview of
some of the changes.
Elements & Format
(Sections 2.3-2.25)
Recommended Fonts: (Use the same font throughout the text of
the paper) 11-point Calibri, 11-point Arial, or 10-
point Lucida Sans Unicode; 12-point Times New Roman, 11-
point Georgia, or normal 10-point Computer Modern
(default font for LaTeX).
Header: For student papers, include the short title of the paper
in all caps. No “Running head” required.
Student Title Page: Include the title, author names, author
affiliation, course number and name, instructor name,
assignment due date, and page number.
multinational syndicates of investment banks that help to
place the bonds.
financing in foreign countries. Thus, these markets help
MNCs finance their international expansion.
APA 7th Edition
Quick Guide
The American Psychological Association recently
updated its publication manual for its 7th edition.
There are some new and updated content regarding
paper elements and format, bias-free language
guidelines, in-text citations, and more than 100
examples of APA Style references including templates
for every reference category. Here’s an overview of
some of the changes.
Elements & Format
(Sections 2.3-2.25)
Recommended Fonts: (Use the same font throughout the text of
the paper) 11-point Calibri, 11-point Arial, or 10-
point Lucida Sans Unicode; 12-point Times New Roman, 11-
point Georgia, or normal 10-point Computer Modern
(default font for LaTeX).
Header: For student papers, include the short title of the paper
in all caps. No “Running head” required.
Student Title Page: Include the title, author names, author
affiliation, course number and name, instructor name,
assignment due date, and page number.
Writing Style & Grammar
(Sections 4.16-4.21)
The singular “they” is endorsed, consistent with inclusive
usage.
Always use a person’s self-identified pronoun, including when a
person uses the singular “they” as their pronoun.
Also use “they” as a generic third-person singular pronoun to
refer to a person whose gender is unknown or irrelevant
to the context of the usage.
Do not use “he” or “she” alone as generic third-person singular
pronouns. Use combination forms such as “he or she”
and “she or he” only if you know that these pronouns match the
people being described.
Do not use combination forms such as “(s)he” and “s/he.”
If you do not know the pronouns of the person being described,
reword the sentence to avoid a pronoun or use the
pronoun “they.”
By Francesca Gacho, Graduate Writing Coach
Annenberg School of Communication
http://cmgtwriting.uscannenberg.org
[email protected]
1/2
Levels of Heading
(Section 2.27)
References
(Sections 9.1-9.2; 9.16; 9.23-9.37)
DOIs and URLs should be hyperlinks. The label “DOI:” is no
longer used.
(Sections 4.16-4.21)
The singular “they” is endorsed, consistent with inclusive
usage.
Always use a person’s self-identified pronoun, including when a
person uses the singular “they” as their pronoun.
Also use “they” as a generic third-person singular pronoun to
refer to a person whose gender is unknown or irrelevant
to the context of the usage.
Do not use “he” or “she” alone as generic third-person singular
pronouns. Use combination forms such as “he or she”
and “she or he” only if you know that these pronouns match the
people being described.
Do not use combination forms such as “(s)he” and “s/he.”
If you do not know the pronouns of the person being described,
reword the sentence to avoid a pronoun or use the
pronoun “they.”
By Francesca Gacho, Graduate Writing Coach
Annenberg School of Communication
http://cmgtwriting.uscannenberg.org
[email protected]
1/2
Levels of Heading
(Section 2.27)
References
(Sections 9.1-9.2; 9.16; 9.23-9.37)
DOIs and URLs should be hyperlinks. The label “DOI:” is no
longer used.
The words “Retrieved from” are only used when a retrieval date
is also needed.
For online sources, include the URL at the end of the reference.
Do not use “Retrieved from”
Resources obtained from most academic research databases
(EBSCO, CINAHL, Films on
Demand): Do not include a database name and do not include a
url. Do include a DOI if there is one.
Individual Author Names: Provide last names and initials for up
to and including 20 authors. When there are two to
20 authors, use an ampersand before the final author’s name.
Group Author Names: When numerous layers of government
agencies are listed as the author of a work, use the
most specific agency as the author in the reference. The names
of parent agencies appear after the title as the
publisher.
Publisher location is no longer included in book citations.
Ex. Division for Heart Disease and Stroke Prevention. (2019,
January 8). Heart failure fact sheet. U.S.
Department of Health & Human Services, Centers for Disease
Control.
https://www.cdc.gov/dhdsp/data_statistics/fact_sheets/fs_heart
_failure.htm
Appropriate Level of Citation
(Section 8.1)
According to the APA: “Avoid both undercitation and
overcitation. Undercitation can lead to plagiarism and/or self-
plagiarism. Overcitation can be distracting and is unnecessary.
For example, it is considered overcitation to repeat the
same citation in every sentence when the source and topic have
not changed. Instead, when paraphrasing a key point
in more than one sentence within a paragraph, cite the source in
is also needed.
For online sources, include the URL at the end of the reference.
Do not use “Retrieved from”
Resources obtained from most academic research databases
(EBSCO, CINAHL, Films on
Demand): Do not include a database name and do not include a
url. Do include a DOI if there is one.
Individual Author Names: Provide last names and initials for up
to and including 20 authors. When there are two to
20 authors, use an ampersand before the final author’s name.
Group Author Names: When numerous layers of government
agencies are listed as the author of a work, use the
most specific agency as the author in the reference. The names
of parent agencies appear after the title as the
publisher.
Publisher location is no longer included in book citations.
Ex. Division for Heart Disease and Stroke Prevention. (2019,
January 8). Heart failure fact sheet. U.S.
Department of Health & Human Services, Centers for Disease
Control.
https://www.cdc.gov/dhdsp/data_statistics/fact_sheets/fs_heart
_failure.htm
Appropriate Level of Citation
(Section 8.1)
According to the APA: “Avoid both undercitation and
overcitation. Undercitation can lead to plagiarism and/or self-
plagiarism. Overcitation can be distracting and is unnecessary.
For example, it is considered overcitation to repeat the
same citation in every sentence when the source and topic have
not changed. Instead, when paraphrasing a key point
in more than one sentence within a paragraph, cite the source in
the first sentence in which it is relevant and do not
repeat the citation in subsequent sentences as long as the source
remains clear and unchanged.”
Example of an Appropriate Level of Citation (Figure 8.1 from
the Manual)
Humor plays an important role in everyday life, from
interacting with strangers to attracting mates (Bressler &
Balshine, 2006; Earleywine, 2010; Tornquist & Chiappe, 2015).
Some people, however, come up with funny and
witty ideas much more easily than do others. In this study, we
examined the role of cognitive abilities in humor
production, a topic with a long past (e.g., Feingold & Mazzella,
1991; Galloway, 1994) that has recently attracted
more attention (Greengross & Miller, 2011; Kellner & Benedek,
2016). Humor production ability is measured with
open-ended tasks (Earleywine, 2010), the most common of
which involves asking participants to write captions for
single-panel cartoons (for review, see Nusbaum & Silvia, 2017).
2/2
APA 7th Edition Quick Guide
For samples and templates, visit APA Style at
https://apastyle.apa.org/
For graduate writing support in CMGT, Communication, Global
Comm, Public
Diplomacy, Communication Data Science, and DSM contact
[email protected]
In-text Citations
(Sections 8.10-8.22)
repeat the citation in subsequent sentences as long as the source
remains clear and unchanged.”
Example of an Appropriate Level of Citation (Figure 8.1 from
the Manual)
Humor plays an important role in everyday life, from
interacting with strangers to attracting mates (Bressler &
Balshine, 2006; Earleywine, 2010; Tornquist & Chiappe, 2015).
Some people, however, come up with funny and
witty ideas much more easily than do others. In this study, we
examined the role of cognitive abilities in humor
production, a topic with a long past (e.g., Feingold & Mazzella,
1991; Galloway, 1994) that has recently attracted
more attention (Greengross & Miller, 2011; Kellner & Benedek,
2016). Humor production ability is measured with
open-ended tasks (Earleywine, 2010), the most common of
which involves asking participants to write captions for
single-panel cartoons (for review, see Nusbaum & Silvia, 2017).
2/2
APA 7th Edition Quick Guide
For samples and templates, visit APA Style at
https://apastyle.apa.org/
For graduate writing support in CMGT, Communication, Global
Comm, Public
Diplomacy, Communication Data Science, and DSM contact
[email protected]
In-text Citations
(Sections 8.10-8.22)
For a work with one or two authors, include the author name(s)
in every citation.
For a work with three or more authors, include the name of only
the first author plus “et al.” in every citation (even the
first citation).
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
International Financial Management
11th Edition
by Jeff Madura
1
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
2
2 International Flow of Funds
in every citation.
For a work with three or more authors, include the name of only
the first author plus “et al.” in every citation (even the
first citation).
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
International Financial Management
11th Edition
by Jeff Madura
1
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
2
2 International Flow of Funds
l trade flows are influenced by
economic factors and other factors,
country characteristics,
funds.
2
Chapter Objectives
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
3
Balance of Payments
Definition:
Summary of transactions between domestic and
foreign residents for a specific country over a
specified period of time.
economic factors and other factors,
country characteristics,
funds.
2
Chapter Objectives
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
3
Balance of Payments
Definition:
Summary of transactions between domestic and
foreign residents for a specific country over a
specified period of time.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
4
Balance of Payments
Components of the Balance of Payments
Statement:
a. Current Account: summary of flow of funds due to
purchases of goods or services or the provision of
income on financial assets.
b. Capital Account: summary of flow of funds
resulting from the sale of assets between one
specified country and all other countries over a
specified period of time.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
5
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
4
Balance of Payments
Components of the Balance of Payments
Statement:
a. Current Account: summary of flow of funds due to
purchases of goods or services or the provision of
income on financial assets.
b. Capital Account: summary of flow of funds
resulting from the sale of assets between one
specified country and all other countries over a
specified period of time.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
5
Current Account
1. Payments for merchandise and services
Merchandise exports and imports represent tangible
products that are transported between countries. Service
exports and imports represent tourism and other services.
The difference between total exports and imports is referred
to as the balance of trade.
2. Factor income payments
Represents income (interest and dividend payments)
received by investors on foreign investments in financial
assets (securities).
3. Transfer payments
Represent aid, grants, and gifts from one country to
another.
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6
Exhibit 2.1 Examples of Current Account Transactions
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1. Payments for merchandise and services
Merchandise exports and imports represent tangible
products that are transported between countries. Service
exports and imports represent tourism and other services.
The difference between total exports and imports is referred
to as the balance of trade.
2. Factor income payments
Represents income (interest and dividend payments)
received by investors on foreign investments in financial
assets (securities).
3. Transfer payments
Represent aid, grants, and gifts from one country to
another.
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6
Exhibit 2.1 Examples of Current Account Transactions
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7
Exhibit 2.2 Summary of Current Account in the year
2010 (in billions of $)
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8
Capital and Financial Accounts
1. Direct foreign investment
Investments in fixed assets in foreign countries
2. Portfolio investment
Transactions involving long term financial assets (such as
stocks and bonds) between countries that do not affect the
transfer of control.
3. Other capital investment
Transactions involving short-term financial assets (such as
money market securities) between countries.
4. Errors and omissions
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classroom use.
7
Exhibit 2.2 Summary of Current Account in the year
2010 (in billions of $)
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8
Capital and Financial Accounts
1. Direct foreign investment
Investments in fixed assets in foreign countries
2. Portfolio investment
Transactions involving long term financial assets (such as
stocks and bonds) between countries that do not affect the
transfer of control.
3. Other capital investment
Transactions involving short-term financial assets (such as
money market securities) between countries.
4. Errors and omissions
Measurement errors can occur when attempting to measure the
value of funds transferred into or out of a country.
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9
Events That Increased Trade Volume
1. Removal of the Berlin Wall: Led to reductions in trade
barriers in Eastern Europe.
2. Single European Act of 1987: Improved access to
supplies from firms in other European countries.
3. North American Free Trade Agreement
(NAFTA): Allowed U.S. firms to penetrate product and
labor markets that previously had not been accessible.
4. General Agreement on Tariffs and Trade
(GATT): Called for the reduction or elimination of trade
restrictions on specified imported goods over a 10-year period
across 117 countries.
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value of funds transferred into or out of a country.
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9
Events That Increased Trade Volume
1. Removal of the Berlin Wall: Led to reductions in trade
barriers in Eastern Europe.
2. Single European Act of 1987: Improved access to
supplies from firms in other European countries.
3. North American Free Trade Agreement
(NAFTA): Allowed U.S. firms to penetrate product and
labor markets that previously had not been accessible.
4. General Agreement on Tariffs and Trade
(GATT): Called for the reduction or elimination of trade
restrictions on specified imported goods over a 10-year period
across 117 countries.
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10
Events That Increased Trade Volume (cont.)
5. Inception of the Euro: Reduced costs and risks
associated with converting one currency to another.
6. Expansion of the European Union: reduced
restrictions on trade with Western Europe.
7. Other Trade Agreements: The United States has
established trade agreements with many other countries.
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11
Impact of Outsourcing on Trade
1. Definition of Outsourcing: The process of
subcontracting to a third party in another country to
provide supplies or services that were previously
produced internally.
2. Impact of outsourcing:
service or otherwise on a password-protected website for
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10
Events That Increased Trade Volume (cont.)
5. Inception of the Euro: Reduced costs and risks
associated with converting one currency to another.
6. Expansion of the European Union: reduced
restrictions on trade with Western Europe.
7. Other Trade Agreements: The United States has
established trade agreements with many other countries.
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11
Impact of Outsourcing on Trade
1. Definition of Outsourcing: The process of
subcontracting to a third party in another country to
provide supplies or services that were previously
produced internally.
2. Impact of outsourcing:
1. Increased international trade activity because MNCs now
purchase products or services from another country.
2. Lower cost of operations and job creation in countries with
low wages.
3. Criticism of outsourcing:
1. Outsourcing may reduce jobs in the United States.
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12
Managerial Decisions About Outsourcing
1. Managers of a U.S.–based MNC may argue that
they create jobs for U.S. workers.
2. Shareholders may suggest that the managers are not
maximizing the MNC’s value as a result of their
commitment to creating U.S. jobs.
3. Managers should consider the potential savings that
could occur as a result of outsourcing.
4. Managers must also consider the possible bad
publicity or bad morale that could occur among the
purchase products or services from another country.
2. Lower cost of operations and job creation in countries with
low wages.
3. Criticism of outsourcing:
1. Outsourcing may reduce jobs in the United States.
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12
Managerial Decisions About Outsourcing
1. Managers of a U.S.–based MNC may argue that
they create jobs for U.S. workers.
2. Shareholders may suggest that the managers are not
maximizing the MNC’s value as a result of their
commitment to creating U.S. jobs.
3. Managers should consider the potential savings that
could occur as a result of outsourcing.
4. Managers must also consider the possible bad
publicity or bad morale that could occur among the
U.S. workers.
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13
Trade Volume Among Countries
1. The annual international trade volume of the United
States is between 10 and 20 percent of its annual
GDP.
2. Trade volume between the United States and Other
Countries:
1. About 20 percent of all U.S. exports are to Canada,
while 13 percent are to Mexico.
2. Canada, China, Mexico, and Japan are the key
exporters to the United States. Together, they are
responsible for more than half of the value of all U.S.
imports.
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13
Trade Volume Among Countries
1. The annual international trade volume of the United
States is between 10 and 20 percent of its annual
GDP.
2. Trade volume between the United States and Other
Countries:
1. About 20 percent of all U.S. exports are to Canada,
while 13 percent are to Mexico.
2. Canada, China, Mexico, and Japan are the key
exporters to the United States. Together, they are
responsible for more than half of the value of all U.S.
imports.
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14
Exhibit 2.3 Distributions of U.S. Exports Across
Countries (in billions of $)
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15
Exhibit 2.4 2008 Distribution of U.S. Exports and
Imports
15
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16
Trend in U.S. Balance of Trade
classroom use.
14
Exhibit 2.3 Distributions of U.S. Exports Across
Countries (in billions of $)
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15
Exhibit 2.4 2008 Distribution of U.S. Exports and
Imports
15
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16
Trend in U.S. Balance of Trade
1. The U.S. balance of trade deficit increased
substantially from 1997 until 2008.
2. In the 2008–2009 period, U.S. economic
conditions weakened and the U.S. demand for
foreign products and services decreased.
3. In recent years, the U.S. annual balance of trade
deficit with China has exceeded $200 billion.
4. Any country’s balance of trade can change
substantially over time.
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17
Exhibit 2.5 U.S. Balance of Trade Over Time
(Quarterly)
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substantially from 1997 until 2008.
2. In the 2008–2009 period, U.S. economic
conditions weakened and the U.S. demand for
foreign products and services decreased.
3. In recent years, the U.S. annual balance of trade
deficit with China has exceeded $200 billion.
4. Any country’s balance of trade can change
substantially over time.
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17
Exhibit 2.5 U.S. Balance of Trade Over Time
(Quarterly)
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18
Factors Affecting International Trade Flows
1. Cost of Labor: Firms in countries where labor costs
are low commonly have an advantage when
competing globally, especially in labor intensive
industries
2. Inflation: Current account decreases if inflation
increases relative to trade partners.
3. National Income: Current account decreases if
national income increases relative to other
countries.
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19
Factors Affecting International Trade Flows (cont.)
4. Government Policies: can increase imports through:
a. Restrictions on imports
b. Subsidies for exporters
c. Lack of Restriction on piracy
Factors Affecting International Trade Flows
1. Cost of Labor: Firms in countries where labor costs
are low commonly have an advantage when
competing globally, especially in labor intensive
industries
2. Inflation: Current account decreases if inflation
increases relative to trade partners.
3. National Income: Current account decreases if
national income increases relative to other
countries.
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19
Factors Affecting International Trade Flows (cont.)
4. Government Policies: can increase imports through:
a. Restrictions on imports
b. Subsidies for exporters
c. Lack of Restriction on piracy
d. Environmental restrictions
e. Labor laws
f. Tax breaks
g. Country security laws
5. Exchange Rates: current account decreases if
currency appreciates relative to other currencies.
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20
Impact of Government Policies
1. Restrictions on Imports: Taxes (tariffs) on imported goods
increase prices and limit consumption. Quotas limit the
volume of imports.
2. Subsidies for Exporters: Government subsidies help firms
produce at a lower cost than their global competitors.
3. Restrictions on Piracy: A government can affect
international trade flows by its lack of restrictions on
piracy.
e. Labor laws
f. Tax breaks
g. Country security laws
5. Exchange Rates: current account decreases if
currency appreciates relative to other currencies.
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20
Impact of Government Policies
1. Restrictions on Imports: Taxes (tariffs) on imported goods
increase prices and limit consumption. Quotas limit the
volume of imports.
2. Subsidies for Exporters: Government subsidies help firms
produce at a lower cost than their global competitors.
3. Restrictions on Piracy: A government can affect
international trade flows by its lack of restrictions on
piracy.
4. Environmental Restrictions: Environmental restrictions
impose higher costs on local firms, placing them at a global
disadvantage compared to firms in other countries that are
not subject to the same restrictions.
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21
Impact of Government Policies (cont.)
5. Labor Laws: countries with more restrictive laws will
incur higher expenses for labor, other factors being
equal.
6. Business Laws: Firms in countries with more restrictive
bribery laws may not be able to compete globally in
some situations.
7. Tax Breaks: Though not necessarily a subsidy, but still a
form of government financial support that might benefit
many firms that export products.
8. Country Security Laws: Governments may impose
certain restrictions when national security is a concern,
which can affect on trade.
impose higher costs on local firms, placing them at a global
disadvantage compared to firms in other countries that are
not subject to the same restrictions.
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21
Impact of Government Policies (cont.)
5. Labor Laws: countries with more restrictive laws will
incur higher expenses for labor, other factors being
equal.
6. Business Laws: Firms in countries with more restrictive
bribery laws may not be able to compete globally in
some situations.
7. Tax Breaks: Though not necessarily a subsidy, but still a
form of government financial support that might benefit
many firms that export products.
8. Country Security Laws: Governments may impose
certain restrictions when national security is a concern,
which can affect on trade.
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22
Impact of Exchange Rates
deficit:
When a home currency is exchanged for a foreign currency
to buy foreign goods, then the home currency faces
downward pressure, leading to increased foreign demand for
the country’s products.
trade deficit:
Exchange rates will not automatically correct any
international trade balances when other forces are at work.
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23
Limitations of a Weak Home Currency
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22
Impact of Exchange Rates
deficit:
When a home currency is exchanged for a foreign currency
to buy foreign goods, then the home currency faces
downward pressure, leading to increased foreign demand for
the country’s products.
trade deficit:
Exchange rates will not automatically correct any
international trade balances when other forces are at work.
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23
Limitations of a Weak Home Currency
Solution
1. Competition: foreign companies may lower their prices to
remain competitive.
2. Impact of other currencies: a country that has balance of
trade deficit with many countries is not likely to solve all
deficits simultaneously.
3. Prearranged international trade transactions: international
transactions cannot be adjusted immediately. The lag is
estimated to be 18 months or longer, leading to a J-curve
effect.
4. Intracompany trade: Many firms purchase products that are
produced by their subsidiaries. These transactions are not
necessarily affected by currency fluctuations.
© 2012 Cengage Learning. All Rights Reserved. May not be
1. Competition: foreign companies may lower their prices to
remain competitive.
2. Impact of other currencies: a country that has balance of
trade deficit with many countries is not likely to solve all
deficits simultaneously.
3. Prearranged international trade transactions: international
transactions cannot be adjusted immediately. The lag is
estimated to be 18 months or longer, leading to a J-curve
effect.
4. Intracompany trade: Many firms purchase products that are
produced by their subsidiaries. These transactions are not
necessarily affected by currency fluctuations.
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24
Exhibit 2.6 J-Curve Effect
24
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25
Friction Regarding Exchange Rates
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24
Exhibit 2.6 J-Curve Effect
24
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25
Friction Regarding Exchange Rates
1. All governments cannot weaken their home
currencies simultaneously.
2. Actions by one government to weaken its currency
causes another country’s currency to strengthen.
3. Government attempts to influence exchange rates
can lead to international disputes.
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26
Factors Affecting Direct Foreign Investing (DFI)
1. Changes in Restrictions
currencies simultaneously.
2. Actions by one government to weaken its currency
causes another country’s currency to strengthen.
3. Government attempts to influence exchange rates
can lead to international disputes.
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26
Factors Affecting Direct Foreign Investing (DFI)
1. Changes in Restrictions
removal of government barriers.
2. Privatization
w business opportunities
associated with privatization.
motivated to ensure profitability, further
stimulating DFI.
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27
Factors Affecting Direct Foreign Investing (DFI)
(Cont.)
2. Privatization
w business opportunities
associated with privatization.
motivated to ensure profitability, further
stimulating DFI.
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27
Factors Affecting Direct Foreign Investing (DFI)
(Cont.)
4. Potential Economic Growth
growth are more likely to attract DFI.
5. Tax Rates
corporate earnings are more likely to attract DFI.
6. Exchange Rates
lly prefer to pursue DFI in countries
where the local currency is expected to strengthen
against their own.
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growth are more likely to attract DFI.
5. Tax Rates
corporate earnings are more likely to attract DFI.
6. Exchange Rates
lly prefer to pursue DFI in countries
where the local currency is expected to strengthen
against their own.
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28
Factors Affecting International Portfolio Investment
1. Tax Rate on Interest or Dividends
Investors normally prefer to invest in a country where taxes
are relatively low.
2. Interest Rates
Money tends to flow to countries with high interest rates, as
long as the local currencies are not expected to weaken.
3. Exchange Rates
Investors are attracted to a currency that is expected to
strengthen.
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Factors Affecting International Portfolio Investment
1. Tax Rate on Interest or Dividends
Investors normally prefer to invest in a country where taxes
are relatively low.
2. Interest Rates
Money tends to flow to countries with high interest rates, as
long as the local currencies are not expected to weaken.
3. Exchange Rates
Investors are attracted to a currency that is expected to
strengthen.
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29
Impact of International Capital Flows
1. The United States relies heavily on foreign
investment in:
buildings.
ecurities
2. Foreign investors are especially attracted to the U.S.
financial markets when the interest rate in their home
country is substantially lower than that in the United
States.
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use as
permitted in a license distributed with a certain product or
Impact of International Capital Flows
1. The United States relies heavily on foreign
investment in:
buildings.
ecurities
2. Foreign investors are especially attracted to the U.S.
financial markets when the interest rate in their home
country is substantially lower than that in the United
States.
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30
Exhibit 2.7 Impact of the International Flow of Funds on U.S.
Interest Rates and Business Investment in the United States
30
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31
Agencies that Facilitate International Flows
1. Major Objectives of the IMF
i. promote cooperation among countries on international
classroom use.
30
Exhibit 2.7 Impact of the International Flow of Funds on U.S.
Interest Rates and Business Investment in the United States
30
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31
Agencies that Facilitate International Flows
1. Major Objectives of the IMF
i. promote cooperation among countries on international
monetary issues,
ii. promote stability in exchange rates
iii. provide temporary funds to member countries attempting
to correct imbalances of international payments
iv. promote free mobility of capital funds across countries
v. promote free trade. It is clear from these objectives that
the IMF’s goals encourage increased internationalization
of business
2. Its compensatory financing facility (CFF) attempts to
reduce the impact of export instability on countries.
3. Financing is measured in special drawing rights (SDRs)
International Monetary Fund (IMF)
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use as
permitted in a license distributed with a certain product or
ii. promote stability in exchange rates
iii. provide temporary funds to member countries attempting
to correct imbalances of international payments
iv. promote free mobility of capital funds across countries
v. promote free trade. It is clear from these objectives that
the IMF’s goals encourage increased internationalization
of business
2. Its compensatory financing facility (CFF) attempts to
reduce the impact of export instability on countries.
3. Financing is measured in special drawing rights (SDRs)
International Monetary Fund (IMF)
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32
Agencies that Facilitate International Flows
1. Major Objective- Make loans to countries to enhance
economic development.
2. Structural Adjustment Loans (SALs) are intended to
enhance a country’s long-term economic growth.
3. Funds are distributed through cofinancing agreements:
World Bank (International Bank for Reconstruction and
Development)
classroom use.
32
Agencies that Facilitate International Flows
1. Major Objective- Make loans to countries to enhance
economic development.
2. Structural Adjustment Loans (SALs) are intended to
enhance a country’s long-term economic growth.
3. Funds are distributed through cofinancing agreements:
World Bank (International Bank for Reconstruction and
Development)
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copied, scanned, or duplicated, in whole or in part, except for
use as
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33
Agencies that Facilitate International Flows
1. Major Objective - Provide a forum for multilateral trade
negotiations and to settle trade disputes related to the GATT
accord.
2. Member countries are given voting rights that are used to
make judgments about trade disputes and other issues.
World Trade Organization (WTO)
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33
Agencies that Facilitate International Flows
1. Major Objective - Provide a forum for multilateral trade
negotiations and to settle trade disputes related to the GATT
accord.
2. Member countries are given voting rights that are used to
make judgments about trade disputes and other issues.
World Trade Organization (WTO)
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use as
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34
Agencies that Facilitate International Flows
1. Major Objective - promote private enterprise within
countries.
2. Provides loans to corporations and purchases stock
3. It traditionally has obtained financing from the
World Bank but can borrow in the international
financial markets.
International Financial Corporation (IFC)
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34
Agencies that Facilitate International Flows
1. Major Objective - promote private enterprise within
countries.
2. Provides loans to corporations and purchases stock
3. It traditionally has obtained financing from the
World Bank but can borrow in the international
financial markets.
International Financial Corporation (IFC)
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use as
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35
Agencies that Facilitate International Flows
1. Major Objectives - extends loans at low interest rates
to poor nations that cannot qualify for loans from the
World Bank.
International Development Association (IDA)
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36
Agencies that Facilitate International Flows
classroom use.
35
Agencies that Facilitate International Flows
1. Major Objectives - extends loans at low interest rates
to poor nations that cannot qualify for loans from the
World Bank.
International Development Association (IDA)
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use as
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36
Agencies that Facilitate International Flows
1. Major Objectives - facilitate cooperation among
countries with regard to international transactions.
2. Provides assistance to countries experiencing a
financial crisis.
3. Sometimes referred to as the “central banks’
central bank” or the “lender of last resort.”
Bank for International Settlements (BIS)
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37
Agencies that Facilitate International Flows
countries with regard to international transactions.
2. Provides assistance to countries experiencing a
financial crisis.
3. Sometimes referred to as the “central banks’
central bank” or the “lender of last resort.”
Bank for International Settlements (BIS)
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37
Agencies that Facilitate International Flows
1. Major Objective - Facilitate governance in
governments and corporations of countries with
market economics.
2. It has 30 member countries and has relationships
with numerous countries.
3. Promotes international country relationships that
lead to globalization.
Organization for Economic Cooperation and Development
(OECD)
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38
Agencies that Facilitate International Flows
governments and corporations of countries with
market economics.
2. It has 30 member countries and has relationships
with numerous countries.
3. Promotes international country relationships that
lead to globalization.
Organization for Economic Cooperation and Development
(OECD)
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38
Agencies that Facilitate International Flows
1. Inter-American Development Bank: focusing on the
needs of Latin America
2. Asian Development Bank: established to enhance
social and economic development in Asia
3. African Development Bank: focusing on
development in African countries
4. European Bank for Reconstruction and
Development: created in 1990 to help the Eastern
European countries adjust from communism to
capitalism.
Regional Development Agencies
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needs of Latin America
2. Asian Development Bank: established to enhance
social and economic development in Asia
3. African Development Bank: focusing on
development in African countries
4. European Bank for Reconstruction and
Development: created in 1990 to help the Eastern
European countries adjust from communism to
capitalism.
Regional Development Agencies
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39
SUMMARY
current account and the capital account. Current account -
broad measure of the country’s international trade balance.
Capital account - measure of the country’s long-term and
short-term capital investments.
Outsourcing,
subcontracting with a third party in a foreign country for
supplies or services they previously produced themselves, has
increased. Thus increasing international trade activity.
inflation,
national income, government restrictions, and exchange rates.
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copied, scanned, or duplicated, in whole or in part, except for
SUMMARY
current account and the capital account. Current account -
broad measure of the country’s international trade balance.
Capital account - measure of the country’s long-term and
short-term capital investments.
Outsourcing,
subcontracting with a third party in a foreign country for
supplies or services they previously produced themselves, has
increased. Thus increasing international trade activity.
inflation,
national income, government restrictions, and exchange rates.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
40
SUMMARY (Cont.)
factors that influence direct foreign investment or portfolio
investment. Direct foreign investment tends to occur in those
countries that have no restrictions and much potential for
economic growth. Portfolio investment tends to occur in those
countries where taxes are not excessive, where interest rates
are high, and where the local currencies are not expected to
weaken.
nds by
promoting international trade and finance, providing loans to
enhance global economic development, settling trade disputes
between countries, and promoting global business
relationships between countries.
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
40
SUMMARY (Cont.)
factors that influence direct foreign investment or portfolio
investment. Direct foreign investment tends to occur in those
countries that have no restrictions and much potential for
economic growth. Portfolio investment tends to occur in those
countries where taxes are not excessive, where interest rates
are high, and where the local currencies are not expected to
weaken.
nds by
promoting international trade and finance, providing loans to
enhance global economic development, settling trade disputes
between countries, and promoting global business
relationships between countries.
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
International Financial Management
11th Edition
by Jeff Madura
1
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copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
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International Financial Management
11th Edition
by Jeff Madura
1
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use as
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2 2
Part 1
The International Financial Environment
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3
1 Multinational Financial Management: An Overview
structure of the Multinational Corporation (MNC).
classroom use.
2 2
Part 1
The International Financial Environment
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3
1 Multinational Financial Management: An Overview
structure of the Multinational Corporation (MNC).
business
international business
3
Chapter Objectives
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4
international business
3
Chapter Objectives
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4
Managing the MNC
1. Managers are expected to make decisions that
will maximize the stock price.
2. Focus of this text: MNCs whose parents fully
own foreign subsidiaries (U.S. parent is sole
owner of subsidiary.)
3. Finance decisions are influenced by other
business discipline functions:
© 2012 Cengage Learning. All Rights Reserved. May not be
1. Managers are expected to make decisions that
will maximize the stock price.
2. Focus of this text: MNCs whose parents fully
own foreign subsidiaries (U.S. parent is sole
owner of subsidiary.)
3. Finance decisions are influenced by other
business discipline functions:
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5
Agency Problems
The conflict of goals between managers and
shareholders
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6
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service or otherwise on a password-protected website for
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5
Agency Problems
The conflict of goals between managers and
shareholders
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6
Agency Costs
1. Definition: Cost of ensuring that managers
maximize shareholder wealth
2. Costs are normally higher for MNCs than for purely
domestic firms for several reasons:
countries is more difficult.
ubsidiary managers raised in different cultures
may not follow uniform goals.
problems.
-U.S. managers tend to downplay the short-term
effects of decisions.
1. Definition: Cost of ensuring that managers
maximize shareholder wealth
2. Costs are normally higher for MNCs than for purely
domestic firms for several reasons:
countries is more difficult.
ubsidiary managers raised in different cultures
may not follow uniform goals.
problems.
-U.S. managers tend to downplay the short-term
effects of decisions.
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7
Control of Agency Problems
1. Parent control of agency problems
Parent should clearly communicate the goals for each subsidiary
to ensure managers focus on maximizing the value of the
subsidiary.
2. Corporate control of agency problems
Entire management of the MNC must be focused on maximizing
shareholder wealth.
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7
Control of Agency Problems
1. Parent control of agency problems
Parent should clearly communicate the goals for each subsidiary
to ensure managers focus on maximizing the value of the
subsidiary.
2. Corporate control of agency problems
Entire management of the MNC must be focused on maximizing
shareholder wealth.
3. Sarbanes-Oxley Act (SOX)
Ensures a more transparent process for managers to report on
the
productivity and financial condition of their firm.
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8
SOX Methods to Improve Reporting
among subsidiaries
Ensures a more transparent process for managers to report on
the
productivity and financial condition of their firm.
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8
SOX Methods to Improve Reporting
among subsidiaries
unusual discrepancies relative to norms
s by which all departments and
subsidiaries have access to all the data they need
statements
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9
Management Structure of MNC
s by which all departments and
subsidiaries have access to all the data they need
statements
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9
Management Structure of MNC
1. Centralized (See Exhibit 1.1a)
Allows managers of the parent to control
foreign subsidiaries and therefore reduce the
power of subsidiary managers
2. Decentralized (See Exhibit 1.1b)
Gives more control to subsidiary managers
who are closer to the subsidiary’s operation
and environment
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Allows managers of the parent to control
foreign subsidiaries and therefore reduce the
power of subsidiary managers
2. Decentralized (See Exhibit 1.1b)
Gives more control to subsidiary managers
who are closer to the subsidiary’s operation
and environment
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10
Exhibit 1.1a Management Styles of MNCs
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11
Exhibit 1.1b Management Styles of MNCs
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10
Exhibit 1.1a Management Styles of MNCs
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11
Exhibit 1.1b Management Styles of MNCs
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12
Why Firms Pursue International Business
1. Theory of Competitive Advantage: specialization
increases production efficiency.
2. Imperfect Markets Theory: factors of production are
somewhat immobile providing incentive to seek out
foreign opportunities.
3. Product Cycle Theory: as a firm matures, it
recognizes opportunities outside its domestic
market.
© 2012 Cengage Learning. All Rights Reserved. May not be
classroom use.
12
Why Firms Pursue International Business
1. Theory of Competitive Advantage: specialization
increases production efficiency.
2. Imperfect Markets Theory: factors of production are
somewhat immobile providing incentive to seek out
foreign opportunities.
3. Product Cycle Theory: as a firm matures, it
recognizes opportunities outside its domestic
market.
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13
Exhibit 1.2 International Product Life Cycles
13
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14
How Firms Engage in International Business
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13
Exhibit 1.2 International Product Life Cycles
13
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14
How Firms Engage in International Business
1. International trade
2. Licensing
3. Franchising
4. Joint Ventures
5. Acquisitions of existing operations
6. Establishing new foreign subsidiaries
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15
International Trade
2. Licensing
3. Franchising
4. Joint Ventures
5. Acquisitions of existing operations
6. Establishing new foreign subsidiaries
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15
International Trade
by firms to
– no capital at risk
ernet facilitates international trade by
allowing firms to advertise their products and
accept orders on their websites.
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– no capital at risk
ernet facilitates international trade by
allowing firms to advertise their products and
accept orders on their websites.
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use as
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16
Licensing
(copyrights, patents, trademarks, or trade names)
in exchange for fees or some other specified
benefits.
markets without a major investment and without
transportation costs that result from exporting
y
control in foreign production process
© 2012 Cengage Learning. All Rights Reserved. May not be
Licensing
(copyrights, patents, trademarks, or trade names)
in exchange for fees or some other specified
benefits.
markets without a major investment and without
transportation costs that result from exporting
y
control in foreign production process
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use as
permitted in a license distributed with a certain product or
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17
Franchising
service strategy, support assistance, and possibly
an initial investment in the franchise in exchange
for periodic fees.
Allows penetration into foreign markets without a
major investment in foreign countries.
© 2012 Cengage Learning. All Rights Reserved. May not be
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
17
Franchising
service strategy, support assistance, and possibly
an initial investment in the franchise in exchange
for periodic fees.
Allows penetration into foreign markets without a
major investment in foreign countries.
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copied, scanned, or duplicated, in whole or in part, except for
use as
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18
Joint Ventures
two or more firms. A firm may enter the foreign
market by engaging in a joint venture with firms
that reside in those markets.
cooperative advantages in a given project.
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18
Joint Ventures
two or more firms. A firm may enter the foreign
market by engaging in a joint venture with firms
that reside in those markets.
cooperative advantages in a given project.
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use as
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19
Acquisitions of Existing Operations
firms to have full control over their foreign
businesses and to quickly obtain a large portion of
foreign market share.
investment.
subsidiary performs poorly.
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19
Acquisitions of Existing Operations
firms to have full control over their foreign
businesses and to quickly obtain a large portion of
foreign market share.
investment.
subsidiary performs poorly.
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20
Establishing New Foreign Subsidiaries
operations in foreign countries.
allows operations to be tailored exactly to the
firms needs.
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20
Establishing New Foreign Subsidiaries
operations in foreign countries.
allows operations to be tailored exactly to the
firms needs.
existing firm.
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21
Summary of Methods
that requires a direct investment in foreign
operations is referred to as direct foreign
investment (DFI)
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21
Summary of Methods
that requires a direct investment in foreign
operations is referred to as direct foreign
investment (DFI)
included
foreign subsidiaries represent the largest portion of
DFI.
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22
Exhibit 1.3 Cash Flow Diagrams for MNCs
22
foreign subsidiaries represent the largest portion of
DFI.
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22
Exhibit 1.3 Cash Flow Diagrams for MNCs
22
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use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
23
Exhibit 1.3 Cash Flow Diagrams for MNCs
international trade. International cash flows result from
paying for imports or receiving cash flow from exports.
international arrangements. Outflows include expenses
such as expenses incurred from transferring technology or
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
23
Exhibit 1.3 Cash Flow Diagrams for MNCs
international trade. International cash flows result from
paying for imports or receiving cash flow from exports.
international arrangements. Outflows include expenses
such as expenses incurred from transferring technology or
funding partial investment in a franchise or joint venture.
Inflows are receipts from fees.
foreign investment. Cash flows exist between the parent
company and the foreign subsidiary.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
24
Uncertainty Surrounding MNC Cash Flows
1. Exposure to international economic conditions – If
Inflows are receipts from fees.
foreign investment. Cash flows exist between the parent
company and the foreign subsidiary.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
24
Uncertainty Surrounding MNC Cash Flows
1. Exposure to international economic conditions – If
economic conditions in a foreign country weaken, purchase
of products decline and MNC sales in that country may be
lower than expected.
2. Exposure to international political risk – A foreign
government may increase taxes or impose barriers on the
MNC’s subsidiary.
3. Exposure to exchange rate risk – If foreign currencies
related to the MNC subsidiary weaken against the U.S.
dollar, the MNC will receive a lower amount of dollar cash
flows than was expected.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
of products decline and MNC sales in that country may be
lower than expected.
2. Exposure to international political risk – A foreign
government may increase taxes or impose barriers on the
MNC’s subsidiary.
3. Exposure to exchange rate risk – If foreign currencies
related to the MNC subsidiary weaken against the U.S.
dollar, the MNC will receive a lower amount of dollar cash
flows than was expected.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
25
How Uncertainty Affects the MNC’s cost of Capital
A higher level of uncertainty increases the return on
investment required by investors and the MNC’s
valuation decreases.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
26
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
25
How Uncertainty Affects the MNC’s cost of Capital
A higher level of uncertainty increases the return on
investment required by investors and the MNC’s
valuation decreases.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
26
Exhibit 1.5 Organization of Chapters
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
27
Summary
wealth. When managers are tempted to serve their own
interests instead of those of shareholders, an agency
problem exists. MNCs tend to experience greater agency
problems than do domestic firms. Proper incentives and
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
27
Summary
wealth. When managers are tempted to serve their own
interests instead of those of shareholders, an agency
problem exists. MNCs tend to experience greater agency
problems than do domestic firms. Proper incentives and
communication from the parent may help to ensure that
subsidiary managers focus on serving the overall MNC.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
28
Summary
International business is justified by three key theories.
1. The theory of comparative advantage suggests that each
country should use its comparative advantage to
specialize in its production and rely on other countries to
subsidiary managers focus on serving the overall MNC.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
28
Summary
International business is justified by three key theories.
1. The theory of comparative advantage suggests that each
country should use its comparative advantage to
specialize in its production and rely on other countries to
meet other needs.
2. The imperfect markets theory suggests that because of
imperfect markets, factors of production are immobile,
which encourages countries to specialize based on the
resources they have.
3. The product cycle theory suggests that after firms are
established in their home countries, they commonly
expand their product specialization in foreign countries.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
2. The imperfect markets theory suggests that because of
imperfect markets, factors of production are immobile,
which encourages countries to specialize based on the
resources they have.
3. The product cycle theory suggests that after firms are
established in their home countries, they commonly
expand their product specialization in foreign countries.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
29
Summary
international business are international trade, licensing,
franchising, joint ventures, acquisitions of foreign firms, and
formation of foreign subsidiaries. Methods such as licensing
and franchising involve little capital investment but
distribute some of the profits to other parties. The
acquisition of foreign firms and formation of foreign
subsidiaries require substantial capital investments but offer
the potential for large returns.
29
Summary
international business are international trade, licensing,
franchising, joint ventures, acquisitions of foreign firms, and
formation of foreign subsidiaries. Methods such as licensing
and franchising involve little capital investment but
distribute some of the profits to other parties. The
acquisition of foreign firms and formation of foreign
subsidiaries require substantial capital investments but offer
the potential for large returns.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
30
Summary
value is favorably affected when its expected foreign cash
inflows increase, the currencies denominating those cash
inflows increase, or the MNC’s required rate of return
decreases. Conversely, the MNC’s value is adversely
affected when its expected foreign cash inflows decrease,
the values of currencies denominating those cash flows
copied, scanned, or duplicated, in whole or in part, except for
use as
permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for
classroom use.
30
Summary
value is favorably affected when its expected foreign cash
inflows increase, the currencies denominating those cash
inflows increase, or the MNC’s required rate of return
decreases. Conversely, the MNC’s value is adversely
affected when its expected foreign cash inflows decrease,
the values of currencies denominating those cash flows
decrease (assuming that they have net cash inflows in
foreign currencies), or the MNC’s required rate of return
increases.
Organization Development
2
3
Organization Development
The Process of Leading Organizational Change
Fourth Edition
foreign currencies), or the MNC’s required rate of return
increases.
Organization Development
2
3
Organization Development
The Process of Leading Organizational Change
Fourth Edition
Donald L. Anderson
University of Denver
4
FOR INFORMATION:
SAGE Publications, Inc.
2455 Teller Road
Thousand Oaks, California 91320
E-mail: [email protected]
SAGE Publications Ltd.
1 Oliver’s Yard
55 City Road
London EC1Y 1SP
University of Denver
4
FOR INFORMATION:
SAGE Publications, Inc.
2455 Teller Road
Thousand Oaks, California 91320
E-mail: [email protected]
SAGE Publications Ltd.
1 Oliver’s Yard
55 City Road
London EC1Y 1SP
United Kingdom
SAGE Publications India Pvt. Ltd.
B 1/I 1 Mohan Cooperative Industrial Area
Mathura Road, New Delhi 110 044
India
SAGE Publications Asia-Pacific Pte. Ltd.
3 Church Street
#10-04 Samsung Hub
Singapore 049483
Copyright © 2017 by SAGE Publications, Inc.
All rights reserved. No part of this book may be reproduced or
utilized in any form or by any means,
electronic or mechanical, including photocopying, recording, or
by any information storage and retrieval
system, without permission in writing from the publisher.
SAGE Publications India Pvt. Ltd.
B 1/I 1 Mohan Cooperative Industrial Area
Mathura Road, New Delhi 110 044
India
SAGE Publications Asia-Pacific Pte. Ltd.
3 Church Street
#10-04 Samsung Hub
Singapore 049483
Copyright © 2017 by SAGE Publications, Inc.
All rights reserved. No part of this book may be reproduced or
utilized in any form or by any means,
electronic or mechanical, including photocopying, recording, or
by any information storage and retrieval
system, without permission in writing from the publisher.
Printed in the United States of America
Library of Congress Cataloging-in-Publication Data
ISBN: 978-1-5063-1657-4
This book is printed on acid-free paper.
Acquisitions Editor: Maggie Stanley
Editorial Assistant: Neda Dallal
eLearning Editor: Katie Ancheta
Production Editor: Bennie Clark Allen
Copy Editor: Diane Wainwright
Typesetter: C&M Digitals (P) Ltd.
Proofreader: Talia Greenberg
5
Library of Congress Cataloging-in-Publication Data
ISBN: 978-1-5063-1657-4
This book is printed on acid-free paper.
Acquisitions Editor: Maggie Stanley
Editorial Assistant: Neda Dallal
eLearning Editor: Katie Ancheta
Production Editor: Bennie Clark Allen
Copy Editor: Diane Wainwright
Typesetter: C&M Digitals (P) Ltd.
Proofreader: Talia Greenberg
5
Indexer: Jeanne Busemeyer
Cover Designer: Gail Buschman
Marketing Manager: Ashlee Blunk
6
Brief Contents
1. Preface
2. Acknowledgments
3. 1. What Is Organization Development?
4. 2. History of Organization Development
5. 3. Core Values and Ethics of Organization Development
6. 4. Foundations of Organizational Change
7. 5. The Organization Development Practitioner and the OD
Process
8. 6. Entry and Contracting
9. 7. Data Gathering
Cover Designer: Gail Buschman
Marketing Manager: Ashlee Blunk
6
Brief Contents
1. Preface
2. Acknowledgments
3. 1. What Is Organization Development?
4. 2. History of Organization Development
5. 3. Core Values and Ethics of Organization Development
6. 4. Foundations of Organizational Change
7. 5. The Organization Development Practitioner and the OD
Process
8. 6. Entry and Contracting
9. 7. Data Gathering
10. 8. Diagnosis and Feedback
11. 9. An Introduction to Interventions
12. 10. Individual Interventions
13. 11. Team Interventions
14. 12. Whole Organization and Multiple Organization
Interventions (Part 1)
15. 13. Whole Organization and Multiple Organization
Interventions (Part 2)
16. 14. Sustaining Change, Evaluating, and Ending an
Engagement
17. 15. Global Issues in Organization Development
18. 16. The Future of Organization Development
19. References
20. Author Index
21. Subject Index
22. About the Author
7
Detailed Contents
Preface
Exercises and Activities
11. 9. An Introduction to Interventions
12. 10. Individual Interventions
13. 11. Team Interventions
14. 12. Whole Organization and Multiple Organization
Interventions (Part 1)
15. 13. Whole Organization and Multiple Organization
Interventions (Part 2)
16. 14. Sustaining Change, Evaluating, and Ending an
Engagement
17. 15. Global Issues in Organization Development
18. 16. The Future of Organization Development
19. References
20. Author Index
21. Subject Index
22. About the Author
7
Detailed Contents
Preface
Exercises and Activities
Ancillaries
Acknowledgments
1. What Is Organization Development?
Organization Development Defined
Making the Case for Organization Development
What Organization Development Looks Like
What Organization Development Is Not
Who This Book Is For
Overview of the Book
Analyzing Case Studies
Summary
2. History of Organization Development
Laboratory Training and T-Groups
Action Research, Survey Feedback, and Sociotechnical Systems
Management Practices
Quality and Employee Involvement
Organizational Culture
Change Management, Strategic Change, and Reengineering
Organizational Learning
Organizational Effectiveness and Employee Engagement
Summary
Acknowledgments
1. What Is Organization Development?
Organization Development Defined
Making the Case for Organization Development
What Organization Development Looks Like
What Organization Development Is Not
Who This Book Is For
Overview of the Book
Analyzing Case Studies
Summary
2. History of Organization Development
Laboratory Training and T-Groups
Action Research, Survey Feedback, and Sociotechnical Systems
Management Practices
Quality and Employee Involvement
Organizational Culture
Change Management, Strategic Change, and Reengineering
Organizational Learning
Organizational Effectiveness and Employee Engagement
Summary
3. Core Values and Ethics of Organization Development
Defining Values
Why Are Values Important to the OD Practitioner?
Core Values of Organization Development
Changes to OD Values Over Time and the Values Debate
Challenges to Holding Organization Development Values
Statement of Organization Development Ethics
Summary
Appendix
Case Study 1: Analyzing Opportunities for Organization
Development Work at Northern County
Legal Services
4. Foundations of Organizational Change
Levels and Characteristics of Organizational Change
Models of Organizational Change: Systems Theory and Social
Construction Approaches
8
Organizations as Systems
Organizations as Socially Constructed
Summary
Defining Values
Why Are Values Important to the OD Practitioner?
Core Values of Organization Development
Changes to OD Values Over Time and the Values Debate
Challenges to Holding Organization Development Values
Statement of Organization Development Ethics
Summary
Appendix
Case Study 1: Analyzing Opportunities for Organization
Development Work at Northern County
Legal Services
4. Foundations of Organizational Change
Levels and Characteristics of Organizational Change
Models of Organizational Change: Systems Theory and Social
Construction Approaches
8
Organizations as Systems
Organizations as Socially Constructed
Summary
5. The Organization Development Practitioner and the OD
Process
The Consulting Relationship and Types of Consulting
The Organization Development Consulting Model
OD Practitioners: Who Are They and Where Do They Work?
The Organization Development Consulting Profession
The OD Consulting Process and Action Research
A Dialogic Approach to OD
Summary
6. Entry and Contracting
Entry
Contracting
Summary
7. Data Gathering
The Importance of Data Gathering
Presenting Problems and Underlying Problems
Data Gathering Process
Data Gathering Methods
Creating a Data Gathering Strategy and Proposing an Approach
Ethical Issues With Data Gathering
Summary
Case Study 2: Proposing a Data Gathering Strategy at TLG
Process
The Consulting Relationship and Types of Consulting
The Organization Development Consulting Model
OD Practitioners: Who Are They and Where Do They Work?
The Organization Development Consulting Profession
The OD Consulting Process and Action Research
A Dialogic Approach to OD
Summary
6. Entry and Contracting
Entry
Contracting
Summary
7. Data Gathering
The Importance of Data Gathering
Presenting Problems and Underlying Problems
Data Gathering Process
Data Gathering Methods
Creating a Data Gathering Strategy and Proposing an Approach
Ethical Issues With Data Gathering
Summary
Case Study 2: Proposing a Data Gathering Strategy at TLG
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