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Questions and Answers
What are the key dimensions that distinguish international finance from domestic finance?
What are the key dimensions that distinguish international finance from domestic finance?
Which primary factor influences the worth of investments when converted to domestic currency?
Which primary factor influences the worth of investments when converted to domestic currency?
Why was there a shift away from fixed exchange rates in the early 1970s?
Why was there a shift away from fixed exchange rates in the early 1970s?
How does an unpredictable appreciation of the foreign currency impact investments?
How does an unpredictable appreciation of the foreign currency impact investments?
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If $1 = ¥100 and a year later $1 = ¥120 while the share price increases by 10%, what is the final dollar value of a ¥110,000 investment?
If $1 = ¥100 and a year later $1 = ¥120 while the share price increases by 10%, what is the final dollar value of a ¥110,000 investment?
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What aspect of political risk affects multinational corporations the most?
What aspect of political risk affects multinational corporations the most?
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Which of the following is NOT a factor contributing to market imperfections?
Which of the following is NOT a factor contributing to market imperfections?
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What change did Nestlé implement regarding its common stock classes in 1988?
What change did Nestlé implement regarding its common stock classes in 1988?
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How can investors benefit from engaging in international markets?
How can investors benefit from engaging in international markets?
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Which of the following statements is true regarding political risk in countries without a tradition of the rule of law?
Which of the following statements is true regarding political risk in countries without a tradition of the rule of law?
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What is the fundamental goal of sound financial management?
What is the fundamental goal of sound financial management?
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In which type of corporate governance issue might managers act against shareholders' interests?
In which type of corporate governance issue might managers act against shareholders' interests?
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Which of the following reflects how Continental Europe views shareholders?
Which of the following reflects how Continental Europe views shareholders?
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Which factor was not listed as contributing to the emergence of globalized financial markets?
Which factor was not listed as contributing to the emergence of globalized financial markets?
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What do multinational corporations (MNCs) typically do?
What do multinational corporations (MNCs) typically do?
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What is a major weakness of the public corporation related to management?
What is a major weakness of the public corporation related to management?
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Which of the following is a notable trend in the globalization of the world economy?
Which of the following is a notable trend in the globalization of the world economy?
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How have multinational corporations typically structured their operations?
How have multinational corporations typically structured their operations?
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In Japan, what have managers traditionally aimed to maximize?
In Japan, what have managers traditionally aimed to maximize?
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Which of the following is not a financial innovation mentioned in relation to globalized financial markets?
Which of the following is not a financial innovation mentioned in relation to globalized financial markets?
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Study Notes
Globalization and the Multinational Firm
- Globalization involves the integration of markets for goods, services, and finances.
- Key economic functions (consumption, production, investment) are now globalized.
- Multinational corporations (MNCs) operate across borders, engaged in production and sales globally.
- International finance differs from domestic finance due to:
- Foreign exchange risk: Profits in foreign currency can be impacted by exchange rate movements. Fluctuations are unpredictable.
- Political risk: Sovereign countries can alter rules, affecting businesses. This is especially problematic in countries with weak legal systems where investor rights are not well-protected. Examples range from tax changes to outright expropriation of foreign assets.
- Market imperfections: Frictions like legal restrictions and high transaction costs prevent complete market integration. Information asymmetry also presents challenges.
- Expanded opportunity set: Firms and investors may benefit from greater global reach and access to lower cost capital.
Foreign Exchange Risk Example
- Illustrative example involving Toyota stock and yen depreciation. Initial investment in yen can lose value when the yen weakens against the dollar, despite price gains for the stock.
Market Imperfections Example
- Nestlé's use of two stock classes (bearer and registered shares) is provided as an example to highlight how certain market imperfections like discriminatory taxation and regulatory controls on foreign investors can exist, impacting market pricing.
Expanded Opportunity Set
- MNCs can increase productivity by gaining economies of scale and access a wider range of capital markets to reduce borrowing costs.
- Investors can diversify their portfolios expanding to international markets to benefit from lower risks or higher returns.
Goals for International Financial Management
- Global financial management aims to maximize benefits from a global opportunity set. Factors to consider include exchange rate management and managing various market imperfections.
- Fundamental goal of financial management remains maximizing shareholder wealth. Firms' decisions/investments target increasing shareholder value. This is often viewed as the goal in many developed nations, but may not always universally adhered to internationally.
Goals for International Financial Management (Specific regions)
- Continental Europe (e.g., France, Germany): Shareholders are considered one among many stakeholders in the firm (employees, suppliers, customers, banks, etc). Long term relationships may be prioritized over short-term gains.
- Japan: Managers often seek to maximize value and growth of the keiretsu, or associated groups of firms.
Corporate Governance
- Managers may pursue self-interest at the expense of shareholders if not properly monitored.
- Corporate governance issues are particularly severe in jurisdictions with inadequate legal protection of shareholders.
- Strong corporate governance minimizes agency problems for shareholders and maximizes shareholder wealth.
Globalization of the World Economy: Major Trends and Developments
- Emergence of globalized financial markets (e.g., deregulation, financial innovations like currency futures, multi-currency bonds, cross-border stock listings, and international mutual funds, technological advances).
- Multinational Corporations (MNCs) expand operations worldwide.
- Privatization: Countries selling state-owned businesses to the free market, often to improve efficiency and raise foreign exchange reserves.
- Trade liberalization and integration: Reduction of trade barriers (GATT/WTO); regional integration efforts (EU, NAFTA).
- Global financial crisis of 2008-2009: Subprime mortgage crisis escalating to a global event as households/institutions bore large risks, amplified by financial instruments like securitization.
Trade Liberalization and Economic Integration
- The argument for international trade is built upon comparative advantage. Countries gain by specializing in what they produce most efficiently.
- International trade provides a mutual benefit and overall enhanced well-being for countries.
Optional Reading
- "International Financial Management" by Cheol Eun, Bruce Resnick and Tuugi Chuluun, 10th Edition, 2024, Chapter 1
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Description
Explore the essentials of globalization and how multinational corporations operate across borders. This quiz delves into key economic functions, international finance challenges, and the impact of market imperfections on MNCs. Test your understanding of these critical concepts in global business.
