1. What’s Special about International Finance?

Eg: 1.1. Why do we need to study international finance?

- We are now living in a highly globalized and integrated world economy. American

consumers, for example, routinely purchase oil imported from Saudi Arabia and

Nigeria, TV sets from Korea, automobiles from Germany and Japan, garments

from China, shoes from Indonesia, handbags from Italy, and wine from France.

Foreigners, in turn, purchase American-made aircraft, software, movies, jeans,

smartphones, and other products. Continued liberalization of international trade

is likely to further internationalize consumption patterns around the world.

- Like consumption, production of goods and services has become highly

globalized. To a large extent, this has happened as a result of multinational

corporations’ (MNCs) relentless efforts to source inputs and locate production

anywhere in the world where costs are lower and profits are higher. For

example, personal computers sold in the world market might have been

assembled in Malaysia with Taiwanese-made monitors, Korean-made keyboards,

U.S.- made chips, and preinstalled software packages that were jointly developed

by U.S. and Indian engineers. It has often become difficult to clearly associate a

product with a single country of origin.

- Undoubtedly, we are now living in a world where all the major economic

functions—consumption, production, and investment—are highly globalized. It is

thus essential for financial managers to fully understand vital international

dimensions of financial management. This global shift is in marked contrast to a

few decades ago, when international aspects of finance were largely ignored.

1.2. What’s Special about International Finance?

In terms of: Foreign exchange risk/ Political risk / Market imperfections / Expanded

opportunity sets

- Foreign Exchange Risk: In integrated financial markets individuals or households

may also be seriously exposed to uncertain exchange rates. When firms and
 individuals are engaged in cross-border transactions, they are potentially

exposed to foreign exchange risk that they would not normally encounter in

purely domestic transactions. Currently, the exchange rates among such major

currencies as the U.S. dollar, Japanese yen, British pound, and euro fluctuate

continuously in an unpredictable manner. This has been the case since the early

1970s, when fixed exchange rates were abandoned. Exchange rate uncertainty

will have a pervasive influence on all the major economic functions, including

consumption, production, and investment.

- Political Risk: ranges from unexpected changes in tax rules to outright

expropriation of assets held by foreigners. Political risk arises from the fact that a

sovereign country can change the “rules of the game” and the affected parties

may not have effective recourse. Multinational firms and investors should be

particularly aware of political risk when they invest in those countries without a

tradition of the rule of law.

- Market Imperfection: represent various frictions and impediments preventing

markets from functioning perfectly, play an important role in motivating MNCs to

locate production overseas. These barriers include legal restrictions, excessive

transaction and transportation costs, information asymmetry, and discriminatory

taxation. Imperfections in the world financial markets tend to restrict the extent

to which investors can diversify their portfolios.

- Expanded opportunity sets: Sets of opportunities that firms can benefit from such

as: locate production in any country or region of the world to maximize their

performance and raise funds in any capital market where the cost of capital is

the lowest. In addition, firms can gain from greater economies of scale when

their tangible and intangible assets are deployed on a global basis. Individual

investors can also benefit greatly if they invest internationally rather than

domestically.

2. Goals for International Financial Management

Answer:
International Financial Management is written from the perspective that the
fundamental goal of sound financial management is shareholder wealth maximization.
Shareholder wealth maximization means that the firm makes all business decisions and
investments with an eye toward making the owners of the firm—the shareholders—
better off financially, or more wealthy, than they were before.

Whereas shareholder wealth maximization is generally accepted as the ultimate goal of

financial management in “Anglo-Saxon” countries, such as Australia, Canada, the United
Kingdom, and especially the United States, it is not as widely embraced a goal in other
parts of the world. In countries like France and Germany, for example, shareholders are
generally viewed as one of the “stakeholders” of the firm, others being employees,
customers, suppliers, banks, and so forth. In Japan, on the other hand, many companies
form a small number of interlocking business groups called keiretsu, such as Mitsubishi,
Mitsui, and Sumitomo, which arose from the consolidation of family-owned business
empires. Although keiretsu have weakened in recent years, Japanese managers still
tend to regard the prosperity and growth of their keiretsu as the critical goal.

A firm cannot stay in business to maximize shareholder wealth if it treats employees

poorly, produces shoddy merchandise, wastes raw materials and natural resources,
operates inefficiently, or fails to satisfy customers. Only a well-managed business firm
that profitably produces what is demanded in an efficient manner can expect to stay in
business in the long run and thereby provide employment opportunities.

The importance of corporate governance, that is, the financial and legal framework for
regulating the relationship between a company’s management and its shareholders.

3. Globalization of the World Economy: Major Trends and Developments

4. Multinational Corporations

Answer:

A multinational corporation (MNC) is a business firm incorporated in one country that

has production and sales operations in many other countries. A firm obtaining raw
materials from one national market and financial capital from another, producing goods
with labor and capital equipment in a third country, and selling the finished product in
yet other national markets.For example, General Electric (GE), Ford Motor, British
Petroleum (BP), Toyota, BMW, Apple, Johnson & Johnson, Nestlé, Pfizer, and Siemens
are names recognized by most people. Some MNCs have operations in dozens of
different countries. MNCs obtain financing from major money centers around the world
in many different currencies to finance their operations. Global operations force the
treasurer’s office to establish international banking relationships, place short-term
funds in several currency denominations, and effectively manage foreign exchange risk.

MNCs may gain from their global presence in a variety of ways. First of all, MNCs can
benefit from the economy of scale by:

- Spreading R&D expenditures and advertising costs over their global sales

- Pooling global purchasing power over suppliers

- Utilizing their technological and managerial know-how globally with minimum

additional costs, and so forth. Furthermore, MNCs can use their global presence to take
advantage of underpriced labor services available in certain developing countries, and
gain access to special R&D capabilities residing in advanced foreign countries. MNCs can
indeed leverage their global presence to boost their profit margins and create
shareholder value.

In recent years, companies are increasingly using offshore outsourcing as a way of

saving costs and boosting productivity. For example, when Microsoft entered the video
game market, it decided to outsource production of the Xbox gaming console to
Flextronics, a Singapore-based contract manufacturer. Flextronics, in turn, decided to
manufacture all Xbox consoles in China. This outsourcing decision allows Microsoft, a
company mainly known for its strength in software, to benefit from the manufacturing
and logistics capabilities of Flextronics and low labor costs in China. Like Microsoft,
many companies around the world are using outsourcing to enhance their competitive
positions in the marketplace.

EDUNEXT:

HN1.How is a country’s economic well-being enhanced through free international trade

in goods and services?

Answer:

- A country’s economic well-being is enhanced through free international trade in

goods and services when the traded goods and services have comparative
advantages in either global or regional level.
- At the global level, WTO plays a key role in promoting free trade. At the regional
level, the European Union and NAFTA play a vital role in dismantling trade
barriers within regions.
HN2.What considerations might limit the extent to which the theory of comparative

advantage is realistic?

Answer: The theory of comparative advantage was originally advanced by the

nineteenth century economist David Ricardo as an explanation for why nations trade

with one another . The theory claims that economic well - being is enhanced if each

country's citizens produce what they have a comparative advantage in producing

relative to the citizens of other countries , and then trade products . Underlying the

theory are the assumptions of free trade between nations and that the factors of

production ( land , buildings , labor , technology , and capital ) are relatively immobile .

To the extent that these assumptions do not hold , the theory of comparative advantage

will not realistically describe international trade .

HN3. What are multinational corporations (MNCs) and what economic roles do they

play?

Answer:

A multinational corporation (MNC) is a business firm incorporated in one country that

has production and sales operations in many other countries. a firm obtaining raw
materials from one national market and financial capital from another, producing goods
with labor and capital equipment in a third country, and selling the finished product in
yet other national markets. Some MNCs have operations in dozens of different
countries. MNCs obtain financing from major money centers around the world in many
different currencies to finance their operations. Global operations force the treasurer’s
office to establish international banking relationships, place short-term funds in several
currency denominations, and effectively manage foreign exchange risk.

The economic role of multinational corporations (MNCs) is simply to channel physical

and financial capital to countries with capital shortages.

MNCs may gain from their global presence in a variety of ways. First of all, MNCs can
benefit from the economy of scale by:

- spreading R&D expenditures and advertising costs over their global sales

- pooling global purchasing power over suppliers

- utilizing their technological and managerial know-how globally with minimum

additional costs, and so forth. Furthermore, MNCs can use their global presence to take
advantage of underpriced labor services available in certain developing countries, and
gain access to special R&D capabilities residing in advanced foreign countries. MNCs can
indeed leverage their global presence to boost their profit margins and create
shareholder value.