International Finance

Globalization
Arab Academy for Science, Technology &
Maritime Transport
Presented to: Master of Business Administration Program
Prof. Dr. Ahmed Fekry (MBA)

Group Participants:
Fall 2024
• Mohamed Ashraf 22225188
International Finance • Omar Altaher 22225147
Group 4I: International Business • Riham Ahmed Mostafa 22225798
Sub-Group : 1
 AGENDA

o Why Become Multi-national ?!

o The Globalization Process
• Trident Corp: Initiation of the Globalization Process
• Trident’s Foreign Direct Investment Sequence
o The Limits of Financial Globalization
o International Flow of Funds
o Factors Affecting International Trade Flow
o International Capital Flow
o Factors Affecting DFI
o Factors Affecting DPI
o Agencies That Facilitate International Flows
• International Monetary Fund
• World Bank
• Other Agencies
 Why Become Multi-national ?!

• Market seekers produce in foreign markets either to satisfy local demand or to export to markets other than
their home market. U.S. automobile firms manufacturing in Europe for local consumption are an example of
market-seeking motivation. (Comparative Advantage // Imperfect Market // Seeking Growth)
• Raw material seekers extract raw materials wherever they can be found, either for export or for further
processing and sale in the country in which they are found—the host country. Firms in the oil, mining,
plantation, and forest industries fall into this category. (Gain Comparative Advantage)
• Production efficiency seekers produce in countries where one or more of the factors of production are
underpriced relative to their productivity. Labor-intensive production of electronic components in Taiwan,
Malaysia, and Mexico is an example of this motivation. (Gain Comparative Advantage)
• Knowledge seekers operate in foreign countries to gain access to technology or managerial expertise. For
example, German, Dutch, and Japanese firms have purchased U.S.-located electronics firms for their
technology. (Gain Comparative Advantage)
• Political safety seekers acquire or establish new operations in countries that are considered unlikely to
expropriate or interfere with private enterprise. For example, Hong Kong firms invested heavily in the United
States, United Kingdom, Canada, and Australia in anticipation of the consequences of China’s 1997 takeover
of the British colony. (Gain Comparative Advantage)
 The Globalization Process

Global Transition I:
Trident Moves from the Domestic Phase to the International Trade Phase
Trident is a young firm that manufactures and distributes an array of
telecommunication devices. Its initial strategy is to develop a
sustainable competitive advantage in the U.S. market.
Like many other young firms, it is constrained by its small size,
competitors, and lack of access to cheap and plentiful sources of
capital.
Trident sells its products in U.S. dollars to U.S. customers and buys its
manufacturing and service inputs from U.S. suppliers, paying U.S.
dollars. The credit worth of all suppliers and buyers is established
under domestic U.S. practices and procedures.
 The Globalization Process – Cont.

Global Transition I:
Trident Moves from the Domestic Phase to the International Trade Phase
A potential issue for Trident at this time is that although Trident is not
international or global in its operations, some of its competitors,
suppliers, or buyers may be. This is often the impetus to push a firm
like Trident into the first phase of the globalization process—into
international trade. Trident was founded by James Winston in Los
Angeles in 1948 to make telecommunications equipment. The family-
owned business expanded slowly but steadily over the following 40
years. The demands of continual technological investment in the
1980s, however, required that the firm raise additional equity capital
in order to compete.
This need led to its initial public offering (IPO) in 1988. As a U.S.-based
publicly traded company on the New York Stock Exchange, Trident’s
management sought to create value for its shareholders.
 Trident Corp: Initiation of the Globalization Process
The top half of the Exhibit shows Trident in its early domestic phase.
Trident’s Foreign Direct Investment Sequence
 The Limits of Financial Globalization

There is a growing debate over whether many of the insiders and rulers of organizations with enterprises
globally are taking actions consistent with creating firm value or consistent with increasing their own personal
stakes and power.

If these influential insiders are building personal wealth over that of the firm, it will indeed result in preventing
the flow of capital across borders, currencies, and institutions to create a more open and integrated global
financial community.
 International Flow of Funds

Factors affecting international trade flow:

Inflation

National Income

Government Policies

Exchange Rates
 Factors Affecting International Trade Flow

Inflation:
If a country's inflation rate rises compared to its trading partners, its current account is likely to
decrease, all else being equal. This is because consumers and businesses in that country will
tend to buy more foreign goods due to the high local inflation, while exports to other countries
are expected to fall.

National Income:
If a country’s national income grows at a faster rate than that of other countries, its current
account is likely to decrease, assuming other factors remain constant. As real income rises,
consumption of goods also increases, and a portion of that rise will probably lead to greater
demand for foreign products.
 Factors Affecting International Trade Flow

Government Policies:
Governments provide subsidies to their domestic firms, enabling them to produce
Subsidies for Exporters goods at lower costs than their international competitors. As a result, the demand for
exports from these firms increases due to the subsidies.

Governments force tarrifs on imported goods in order to increase the price of foreign
Restriction on Imports goods and limits its consumption. Some industries are more highly protected by tariffs
than others.
Governments enforce Quota (a maximum limit that can be imported) to reduce the
country importation

Lack of restriction on Government can affect international trade flows by its lack of restrictions on piracy.
piracy As a result of piracy, China’s demand for imports is lower.
 Factors Affecting International Trade Flow

Exchange Rates:
If a country’s currency begins to rise in value against other currencies, its current account balance
should decrease, other things being equal. As the currency strengthens, goods exported by that
country will become more expensive to the importing countries. As a consequence, the demand for
such goods will decrease

Because the factors that affect the balance of trade interact, their simultaneous influence on the
balance of trade is complex. For example, as a high U.S. inflation rate reduces the current account, it
places downward pressure on the value of the dollar. Since a weaker dollar can improve the current
account, it may partially offset the impact of inflation on the current account.
 International Capital Flow

• Changes in Restrictions
Factors affecting • Privatization
DFI
• Potential Economic Growth
(Direct Foreign
Investment) • Tax Rates
• Exchange Rates
 International Capital Flow

DFI (Direct Foreign Investment) is One of the most important types of capital flows. Firms commonly
attempt to engage in direct foreign investment so that they can reach additional consumers or can
rely on low-cost labor.

Factors affecting DFI:

1. Changes in Restrictions:
During the 1990s, many countries lowered their
restrictions on DFI, thereby opening the way to
more DFI in those countries. Many U.S.-based
MNCs, including Bausch & Lomb, Colgate-
Palmolive, and General Electric, have been
penetrating less developed countries such as
Argentina, Chile, Mexico, India, China, and
Hungary.
 Factors Affecting DFI

2. Privatization:
Several national governments have recently engaged in privatization, or the selling of some of their operations to
corporations and other investors. Privatization is popular in Brazil and Mexico, in Eastern European countries such
as Poland and Hungary, and in such Caribbean territories as the Virgin Islands. It allows for greater international
business as foreign fi rms can acquire operations sold by national governments.
The primary reason that the market value of a fi rm may increase in response to privatization is the anticipated
improvement in managerial efficiency. Managers in a privately owned fi rm can focus on the goal of maximizing
shareholder wealth, whereas in a state-owned business, the state must consider the economic and social ramifi
cations of any business decision. Also, managers of a privately owned enterprise are more motivated to ensure
profitability because their careers may depend on it. For these reasons, privatized fi rms will search for local and
global opportunities that could enhance their value. The trend toward privatization will undoubtedly create a
more competitive global marketplace.

3. Potential Economic Growth:

Countries that have greater potential for economic growth are more likely to attract DFI because fi rms recognize
that they may be able to capitalize on that growth by establishing more business there.
 Factors Affecting DFI

4. Tax Rates:
Countries that impose relatively low tax rates on corporate earnings are more likely to attract DFI. When assessing
the feasibility of DFI, fi rms estimate the after-tax cash flows that they expect to earn.

5. Exchange Rates:
Firms typically prefer to pursue DFI in countries where the local currency is expected to strengthen against their
own. Under these conditions, they can invest funds to establish their operations in a country while that country’s
currency is relatively cheap (weak). Then, earnings from the new operations can periodically be converted back to
the firm’s currency at a more favorable exchange rate.
 Factors Affecting DPI

Factors affecting • Tax Rates on Interest or

DPI Dividends
(Direct Portfolio • Interest Rates
Investment) • Exchange Rates
 Factors Affecting DPI

Direct Portfolio Investment is the desire by individual or institutional investors to direct international portfolio
investment to a specific country, this is influenced by the following factors:

1. Tax Rates on Interest or Dividends:

Investors normally prefer to invest in a country where the taxes on interest or dividend income from investments
are relatively low. Investors assess their potential after-tax earnings from investments in foreign securities.

2. Interest Rates:
Portfolio investment can also be affected by interest rates. Money tends to flow to countries with high interest
rates, as long as the local currencies are not expected to weaken.
 Factors Affecting DPI

3. Exchange Rates:
When investors invest in a security in a foreign country, their return is affected by (1) the change in the value of
the security and (2) the change in the value of the currency in which the security is denominated. If a country’s
home currency is expected to strengthen, foreign investors may be willing to invest in the country’s securities to
benefit from the currency movement. Conversely, if a country’s home currency is expected to weaken, foreign
investors may decide to purchase securities in other countries. In a period, such as 2006, U.S. investors that
invested in foreign securities benefited from the change in exchange rates. Since the foreign currencies
strengthened against the dollar over time, the foreign securities were ultimately converted to more dollars when
they were sold at the end of the year.
 Agencies That Facilitate International Flows

• International Monetary Fund

Agencies That • World Bank
Facilitate • Official aid agencies
International Flows • Export credit agencies
• Commercial banks
 Agencies That Facilitate International Flows

A variety of agencies have been established to facilitate international trade and financial transactions. These
agencies often represent a group of nations. A description of some of the more important agencies follows:

1. International Monetary Fund:

The major objectives of the IMF, as set by its charter, are to (1) promote cooperation among countries on
international monetary issues, (2) promote stability in exchange rates, (3) provide temporary funds to member
countries attempting to correct imbalances of international payments, (4) promote free mobility of capital funds
across countries, and (5) promote free trade. It is clear from these objectives that the IMF’s goals encourage
increased internationalization of business.

One of the key duties of the IMF is its compensatory financing facility (CFF), which attempts to reduce the impact
of export instability on country economies. Although it is available to all IMF members, this facility is used mainly
by developing countries. A country experiencing financial problems due to reduced export earnings must
demonstrate that the reduction is temporary and beyond its control. In addition, it must be willing to work with
the IMF in resolving the problem.
 International Monetary Fund

Each member country of the IMF is assigned a quota based on a variety of factors reflecting that country’s
economic status. Members are required to pay this assigned quota. The amount of funds that each member can
borrow from the IMF depends on its particular quota. The financing by the IMF is measured in special drawing
rights (SDRs). The SDR is not a currency but simply a unit of account. It is an international reserve asset created by
the IMF and allocated to member countries to supplement currency reserves. The SDR’s value fluctuates in
accordance with the value of major currencies.

Funding Dilemma of the IMF.

The IMF typically specifies economic reforms that a country must satisfy to receive IMF funding. In this way, the
IMF attempts to ensure that the country uses the funds properly. However, some countries want funding without
adhering to the economic reforms required by the IMF.
 Agencies That Facilitate International Flows

2. World Bank:
The International Bank for Reconstruction and Development (IBRD), also referred to as the World Bank, was
established in 1944. Its primary objective is to make loans to countries to enhance economic development. For
example, the World Bank recently extended a loan to Mexico for about $4 billion over a 10-year period for
environmental projects to facilitate industrial development near the U.S. border. Its main source of funds is the
sale of bonds and other debt instruments to private investors and governments. The World Bank has a profit-
oriented philosophy. Therefore, its loans are not subsidized but are extended at market rates to governments (and
their agencies) that are likely to repay them.

A key aspect of the World Bank’s mission is the Structural Adjustment Loan (SAL), established in 1980. The SALs are
intended to enhance a country’s long-term economic growth. For example, SALs have been provided to Turkey and
to some less developed countries that are attempting to improve their balance of trade. Because the World Bank
provides only a small portion of the financing needed by developing countries, it attempts to spread its funds by
entering into co-financing agreements. Co-financing is performed in the following ways:
 World Bank

• Official aid agencies: Development agencies may join the World Bank in financing development projects in low-
income countries.
• Export credit agencies: The World Bank co-finances some capital-intensive projects that are also financed
through export credit agencies.
• Commercial banks: The World Bank has joined with commercial banks to provide financing for private-sector
development. In recent years, more than 350 banks from all over the world have participated in co-financing,
including Bank of America, J.P. Morgan Chase, and Citigroup.

The World Bank recently established the Multilateral Investment Guarantee Agency (MIGA), which offers various
forms of political risk insurance. This is an additional means (along with its SALs) by which the World Bank can
encourage the development of international trade and investment.

The World Bank is one of the largest borrowers in the world; its borrowings have amounted to the equivalent of
$70 billion. Its loans are well diversified among numerous currencies and countries. It has received the highest
credit rating (AAA) possible.
 REFERENCES

1. Fundamentals of Multinational Finance, Fifth Edition, Michael H. Moffett

a. Chapter 1, Pages Nos. (13, 15-16)
2. International Financial Management, Ninth Edition, Jeff Madura
a. Chapter 2, Pages Nos. (39-40, 42)
Thank You