IBF301- INTERNATIONAL FINANCE

CHAPTER 1
Globalization and the Multinational Firm

Taught by Que Anh Nguyen - FPT School of

Business (FSB)

Original Slides by Cheol S. Eun and Bruce G.

Resnick, 8th

Based on: Cheol S. Eun and Bruce G. Resnick, 9th,

International Financial Management
AGENDA

Part 1: Introduction to the course

Part 2: Chapter 1- Globalization and the Multinational Firm

Part 1: Introduction to the course
Instructor: MSc. Que Anh Nguyen
[email protected]
1. COURSE OBJECTIVES

▪ Upon completion of this course, students should be able to:

✓ Discuss the financial operations of a firm within the international environment.

✓ Demonstrate basic understanding of foreign exchange market, exchange rate and currency
risk exposure.

✓ Apply key hedging techniques to manage currency risks of international projects.

✓ Demonstrate the ability to produce a clear oral report and/or academic written report, which
follows research ethic, that applies understanding of key concepts in international finance.

✓ Practice ability to interact and cooperate effectively with others in the conduct of business.
2. ASSESSMENT REQUIREMENTS

Type Assessment % contribution Coverage Due time

Class participation 10%

Mid-term Test 15% Chap 1-5 S9

Individual Assignment 15% Chap 6-7 S12

Final Essay Test 15% Chap 9-10 S19

Group Report S18

15%
Assignment Presentation S19-S20

Final Exam 30%

3. OVERVIEW OF SEMESTER WORK

Foundation FX & Derivative Markets FX Exposure Management

• Globalization & MNCs • FX Market • Transaction Exposure
• International Monetary System • Parity Relationships • Economic Exposure
• Balance of Payment • Derivatives on FX • Translation Exposure
• Corporate Governance
4. SUGGESTED STUDY APPROACH

The subject is structured on the basis of the below activities:

a) Class-based activities:
✓ Attendance: at the beginning of EACH SLOT, NO CHANGE AFTER 24H
✓ Attendance will be printed out after each slot for later evidence.
✓ NO RETAKES is provided once you have missed any assessment. 0.5
mark will be granted.
b) Consultation:
✓ Student could have discussion with each others and with instructor via e-
mail, forums or face-to- face consultation.
5. TEXTBOOK

International Financial Management, Cheol S. Eun and Bruce G. Resnick, 9th ,

Copyright 2021, McGraw-hill/Irwin

Link to download:
Part 2: Chapter 1- Globalization and the
Multinational Firm
1. What’s Special about International Finance?
2. Goals for International Financial Management
3. Globalization of the World Economy: Major Trends and Developments
4. Multinational Corporations
1. What is special about international finance?

Foreign exchange risk

an unexpected devaluation adversely affects your export market…
Link: https://www.youtube.com/watch?v=hTWLEhlq1cQ
Tequila Crisis, Dec. 1994
Political risk
an unexpected overturn of the government that jeopardizes existing
negotiated contracts…

Market imperfections
Enron Development Corporation in India 1995
trade barriers and tax incentives may affect location of production…

Expanded opportunity sets

raise funds in global markets, economies of scale…

1. What is special about international finance?
1.1. Foreign exchange risk
1. What is special about international finance?
1.2. Market imperfections
 2. Goals for International Financial Management

Maximization of
shareholder wealth?
Other goals?

Shareholder wealth maximization the firm

makes all business decisions and investments • In other countries (France and Germany)
to make the shareholders more wealthy. shareholders are merely one “stakeholders”
including:
→Long accepted as a goal in the Anglo-Saxon • Employees
countries (Australia, Canada, and specially the US)
but: • Suppliers
1. Who are and where are the shareholders? • Customers
2. In what currency should we maximize their • In Japan, managers have typically sought to
wealth? maximize the value of the keiretsu—a family
of firms to which the individual firms belongs.
Chaebol: https://www.youtube.com/watch?v=jRzysFhyZ8Y&t=704s
Keiretsu: https://www.youtube.com/watch?v=jHLnAOB-SHI
2. Goals for International Financial Management
2.1. Corporate governance
• Corporate governance: the financial and legal framework for regulating the relationship between a
company’s management and its shareholders.
• No matter what the other goals, they cannot be achieved in the long term, if the maximization of
shareholder wealth is not given due consideration.
• A firm that
• Treats employees poorly,
• Produces shoddy merchandise
• Wastes raw materials
• Operates inefficiently
• Fails to satisfy customers

Cannot maximize shareholders wealth

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

• Several key trends and developments of the world economy:

• (i) the emergence of globalized financial markets,
• (ii) the emergence of the euro as a global currency,
• (iii) Europe’s sovereign debt crisis of 2010,
• (iv) trade liberalization and economic integration,
• (v) large-scale privatization of state-owned enterprises,
• (vi) the global financial crisis of 2008–2009.
3. Globalization of the World Economy
3.1. The emergence of globalized financial markets
▪ In the 1980s and 90s, the governments of major countries began to deregulate their foreign
exchange and capital markets. (E.g. Japanese FX deregulation in 1980, LSE allowance for
foreign firms, Big Bang in 1986)
→ gave London the most open and competitive capital markets in the world.
→ provided financial innovations and the introduction of various instruments.
▪ Advances in computer and telecommunications technology gave investors around the
world immediate access to the most recent news and information.
3. Globalization of the World Economy
3.2. The emergence of the euro as a global currency
▪ Transactions domain of the euro in 19 countries since its inception in 1999 may become
larger than that of the U.S. dollar in the future.
▪ The common monetary policy for the euro zone is now formulated by the European Central
Bank (ECB) that is located in Frankfurt.
▪ Since the end of WWI, the ascendance of the US dollar reflects the dominant size of the U.S.
economy, mature and open capital markets, price stability, and the political and military power.
 3. Globalization of the World Economy
3.3. Europe’s sovereign debt crisis of 2010

▪ The crisis started in December 2009 when the

new Greek government revealed that its budget
deficit for the year would be 12.7% of GDP, not
the 3.7% previously forecast (max 3% GDP).
▪ The panic spread to other weak European
economies (i.e. Ireland, Portugal, and Spain).
▪ In the spring of 2010, both Standard & Poor’s
and Moody’s, credit rating agencies downgraded
the government bonds of the affected countries,
making borrowing and refinancing more costly.
3. Globalization of the World Economy
3.3. Europe’s sovereign debt crisis of 2010

▪ The sovereign debt crisis in Greece, which accounts for only about 2.5% of eurozone
GDP, quickly escalated to a Europe-wide debt crisis, threatening the nascent
recovery of the world economy from the severe GFC of 2008–2009.
▪ International Monetary Fund (IMF), put together a massive €750 billion package to
bail out Greece and other weak economies.
▪ Europe’s sovereign-debt crisis of 2010 revealed a profound weakness of the euro as
the common currency: Euro-zone countries have achieved monetary integration by
adopting the euro, but without fiscal integration.
3. Globalization of the World Economy
3.4. Trade liberalization and economic integration

▪ Over the same time period, international trade increased nearly three times as fast as
world GDP, some countries grew faster.
3. Globalization of the World Economy
3.4. Trade liberalization and economic integration
▪ Theory of comparative advantage by David Ricardo 1817: it is mutually beneficial
for countries if they specialize in the production of those goods they can produce
most efficiently and trade those goods among them.
→ Liberalization of international trade will enhance the welfare of the world’s citizens.

The Uruguay Round launched in 1986 aimed to

(i) reduce import tariffs worldwide averaging at 38%,
(ii) increase the proportion of duty-free products from 20%
to 44% for industrialized countries,
(iii) extend the rules of world trade to cover agriculture,
services such as banking and insurance, and intellectual
property rights.
 3. Globalization of the World Economy
3.4. Trade liberalization and economic integration

Deng Xiaoping’s pragmatic policies Early 1990s

“to get rich is glorious” → China gradually dismantling the “license-

began to implement market- raj” or quota system in India
oriented economic reforms in the
late 1970s.
3. Globalization of the World Economy
3.5. Privatization of state-owned enterprises

Denationalization process
→ sale of state-owned businesses brings to the national treasury hard-currency foreign
reserves
→ pay down sovereign debt that has weighed heavily on the economy
→ privatization improves efficiency and reduces operating costs by as much as 20 percent.
 3. Globalization of the World Economy
3.6. The global financial crisis of 2008–2009

▪ The defining moment of the crisis came on

September 14, 2008, when Lehman Brothers,
a major U.S. investment bank with a global
presence, went bankrupt.
▪ Subprime mortgage:
https://www.investopedia.com/terms/s/subprime_
mortgage.asp
▪ Securitization: mortgage-backed securities
and sold to various institutional investors in
the US and abroad
 3. Globalization of the World Economy
3.6. The global financial crisis of 2008–2009

Causes of GFC:
1. Households and financial institutions borrowed too much and took too much risk due to
ample supply of liquidity and credit. Liquidity came from (i) the “easy money” policy of the
Federal Reserve Bank, and also (ii) the massive inflow of foreign money from Asian
countries
2. Securitization allows loan originators to avoid bearing the default risk, which leads to a
compromised lending standard and increased moral hazard.
3. The “invisible hands” of free markets apparently failed to self-regulate (SEC, Fed) its
excesses, contributing to the banking crisis.
4. Defaults of subprime mortgages in the US threatened the solvency of the teachers’
retirement program in Norway which invested in U.S. mortgage-backed securities.

GFC: https://www.youtube.com/watch?v=eD9ry2Lgglw
3. Globalization of the World Economy
3.7. Brexit

▪ Brexit is likely to weaken the United Kingdom and the European Union, both
economically and politically.
▪ London’s position as the dominant center of European finance may deteriorate if
the U.K. loses unrestricted access to Europe’s single market.

(i) a customs union between the United Kingdom and

the EU until an alternative long-term relationship can
be established;
(ii) an end to free movement of people;
(iii) no hard border between Northern Ireland, a part of
the (U.K.) and the Republic of Ireland.
 4. Multinational Corporations

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

has production and sales operations in many other countries.
• Also, 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.
• MNCs obtain financing from major money centers around the world in many different
currencies to finance their operations
→ treasurer’s office to establish international banking relationships, place short-term funds
in several currency denominations, and effectively manage foreign exchange risk.
Summary
IBF301 – Chapter 1
Summary

This chapter provided an introduction to International Financial Management.

1. It is essential to study “international” financial management because we are now living in a highly
globalized and integrated world economy. Owing to the (a) continuous liberalization of international trade
and investment, and (b) rapid advances in telecommunications and transportation technologies, the world
economy will become even more integrated.
2. Three major dimensions distinguish international finance from domestic finance. They are (a) foreign
exchange and political risks, (b) market imperfections, and (c) an expanded opportunity set.
3. Financial managers of MNCs should learn how to manage foreign exchange and political risks using
proper tools and instruments, deal with (and take advantage of) market imperfections, and benefit from
the expanded investment and financing opportunities. By doing so, financial managers can contribute to
shareholder wealth maximization, which is the ultimate goal of international financial management.
4. The theory of comparative advantage states that economic well-being is enhanced if countries produce
those goods for which they have comparative advantages and then trade those goods. The theory of
comparative advantage provides a powerful rationale for free trade. Currently, international trade is
becoming liberalized at both the global and the regional levels. At the global level, WTO plays a key role
in promoting free trade. At the regional level, the European Union and NA FTA play a vital role in
dismantling trade barriers within regions.
Summary

5. The subprime mortgage crisis in the United States that began in the summer of 2007 led to a
severe credit crunch. The credit crunch, in turn, escalated to a major global financial crisis in
2008–2009. The global financial crisis may be attributable to several factors, including
• (i) excessive borrowing and risk taking by both households and banks,
• (ii) failure of government regulators to detect the rising risk in the financial system and take
timely preventive actions, and
• iii) the interconnected and integrated nature of financial markets.
• In addition, the world economy was buffeted by Europe’s sovereign-debt crisis. The crisis
started in Greece in December 2009 when it was disclosed that the country’s budget deficit
would be far worse than previously forecasted. The panic spread among weak European
economies. The interest rates in these countries rose sharply and, at the same time, the euro
depreciated sharply in currency markets, hurting its credibility as a major global currency.
Summary

• 6. A major economic trend of the recent decades is the rapid pace with which former state-
owned businesses are being privatized. With the fall of communism, many Eastern Bloc
countries began stripping themselves of inefficient business operations formerly run by the
state. Privatization has placed a new demand on international capital markets to finance the
purchase of the former state enterprises, and it has also brought about a demand for new
managers with international business skills.
• 7. In modern times, it is not a country per se but rather a controller of capital and know-how that
gives the country in which it is domiciled a comparative advantage over another country. These
controllers of capital and technology are multinational corporations (MNCs). Today, it is not
uncommon for an MNC to produce merchandise in one country, on capital equipment financed
by funds raised in a number of different currencies, through issuing securities to investors in
many countries and then selling the finished product to customers all over the world.