International Finance and Globalization
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Questions and Answers

What does political risk primarily result from?

  • Technological advancements
  • Government policy alterations (correct)
  • Market competition
  • Changes in global economic conditions

Which of the following is NOT considered a market imperfection?

  • Transaction costs
  • Information symmetry (correct)
  • Discriminatory taxation
  • Legal restrictions

What was a significant change that Nestlé implemented regarding its shares?

  • Increased prices of registered shares
  • Completely abolished bearer shares
  • Allowed foreigners to hold registered shares (correct)
  • Restricted Swiss residents from owning bearer shares

How can multinational corporations expand their opportunity set?

<p>By locating production globally to increase performance (B)</p> Signup and view all the answers

Which factor can restrict investors from effectively diversifying their portfolios?

<p>High transaction costs (A)</p> Signup and view all the answers

Why are countries without a tradition of rule of law particularly risky for investors?

<p>Investors' rights may not be effectively protected (D)</p> Signup and view all the answers

What generally characterizes the behavior of foreign investors concerning political risks?

<p>They tend to avoid investing in politically unstable regions (A)</p> Signup and view all the answers

What is one motivation for multinational corporations to locate production overseas?

<p>To maximize economies of scale (A)</p> Signup and view all the answers

Which country had the highest exports as a percentage of GDP in 2020?

<p>Thailand (C)</p> Signup and view all the answers

What was the primary purpose of the General Agreement on Tariffs and Trade (GATT)?

<p>To eliminate trade barriers among member countries (B)</p> Signup and view all the answers

Which trade agreement replaced NAFTA in 2018?

<p>U.S.-Mexico-Canada Agreement (B)</p> Signup and view all the answers

In which year did China join the World Trade Organization (WTO)?

<p>2001 (B)</p> Signup and view all the answers

What global event was primarily triggered by the subprime mortgage crisis in the U.S.?

<p>The Great Recession (D)</p> Signup and view all the answers

What key issue stalled the WTO’s latest round of trade talks, known as the Doha Round?

<p>Disagreements between developed and developing nations (C)</p> Signup and view all the answers

Which of the following statements about trade liberalization is true?

<p>NAFTA aimed to reduce trade impediments over 15 years (D)</p> Signup and view all the answers

What is the fundamental goal of sound financial management?

<p>Shareholder wealth maximization (D)</p> Signup and view all the answers

How are shareholders viewed in Continental Europe compared to the U.S.?

<p>As one of many stakeholders (C)</p> Signup and view all the answers

What is a major characteristic of a multinational corporation (MNC)?

<p>It has production and sales operations in multiple countries (D)</p> Signup and view all the answers

What is referred to as the 'agency problem' in corporate governance?

<p>Managers pursuing personal interests over shareholders' interests (D)</p> Signup and view all the answers

Which of the following factors contributed to the emergence of globalized financial markets?

<p>Technological advancements (D)</p> Signup and view all the answers

What is one of the main goals of global financial managers?

<p>To minimize risks while maximizing benefits (C)</p> Signup and view all the answers

How did the global financial crisis of 2008-2009 affect international finance?

<p>It caused significant distrust in financial systems (D)</p> Signup and view all the answers

What role does corporate governance play in a public corporation?

<p>Regulating the relationship between management and shareholders (D)</p> Signup and view all the answers

What is one of the primary risks associated with international finance that does not typically affect domestic finance?

<p>Foreign exchange risk (D)</p> Signup and view all the answers

Which of the following best describes the term 'expanded opportunity set' in international finance?

<p>Access to a wider range of investment options across different countries (B)</p> Signup and view all the answers

What impact does foreign exchange risk have on economic functions such as investment and consumption?

<p>It influences future profitability and purchasing power across borders (D)</p> Signup and view all the answers

After an investment in Toyota shares valued in yen sees a 10% increase, what happens when the yen depreciates significantly?

<p>The investment loses value in dollar terms despite the share price increase (C)</p> Signup and view all the answers

What is one of the primary reasons fixed exchange rates were abandoned in the early 1970s?

<p>To allow greater flexibility against market fluctuations (B)</p> Signup and view all the answers

Political risks in international finance primarily refer to which of the following?

<p>The impact of governmental policies on business operations (A)</p> Signup and view all the answers

What is one consequence of appreciating a domestic currency against a foreign currency?

<p>Foreign investments yield lower returns when repatriated (B)</p> Signup and view all the answers

How do market imperfections influence international finance?

<p>They lead to inefficiencies in the allocation of resources (B)</p> Signup and view all the answers

How do MNCs typically benefit from economy of scale?

<p>By pooling their global purchasing power over suppliers (D)</p> Signup and view all the answers

What is the primary effect of privatization on state-owned enterprises?

<p>It improves efficiency and reduces operating costs (A)</p> Signup and view all the answers

What do 'A-shares' on Chinese stock exchanges primarily represent?

<p>Shares reserved for Chinese citizens (C)</p> Signup and view all the answers

In terms of international trade, what is the theory of comparative advantage primarily concerned with?

<p>Mutual benefit from specialization and trade (A)</p> Signup and view all the answers

What impact did China’s issuance of stock for state-owned enterprises have on privatization?

<p>It marked a significant step toward private ownership (B)</p> Signup and view all the answers

What is often associated with the privatization of state-owned businesses?

<p>Increased hard-currency foreign reserves (D)</p> Signup and view all the answers

How does trade liberalization enhance the welfare of world citizens?

<p>By promoting specialization and comparative advantage (D)</p> Signup and view all the answers

Which of the following statements about MNCs is incorrect?

<p>They often operate only in developing countries. (B)</p> Signup and view all the answers

Flashcards

Shareholder Wealth Maximization

Maximizing firm value for its owners.

Agency Problem

The tension between managers and shareholders due to potential conflicts of interest.

Corporate Governance

The financial and legal framework that regulates the relationship between a company's management and its shareholders.

Multinational Corporation (MNC)

A company incorporated in one country with production and sales operations in other countries.

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Emergence of Globalized Financial Markets

The interconnectedness of global financial markets due to factors like deregulation, financial innovation, and technology.

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Privatization

The process of transferring state-owned businesses to private ownership.

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Trade Liberalization and Economic Integration

Reducing trade barriers and promoting free trade between countries.

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Global Financial Crisis of 2008 to 2009

The global economic crisis that started in 2008, characterized by financial market instability and economic recession.

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Globalization of the World Economy

The global interconnectedness of markets for goods, services, and finance, leading to a more integrated world economy.

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Foreign Exchange Risk

The risk arising from uncertain future exchange rates, which can impact the value of profits earned in foreign currency.

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Political Risks

The potential for political instability or government policies to affect the profitability of foreign investments.

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Market Imperfections

Financial market imperfections, including transaction costs, information asymmetry, and regulatory differences, that create challenges in international finance.

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Expanded Opportunity Set

The expanded opportunities for profit and growth that come with engaging in international business.

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Exchange Rate Fluctuations

The continuous and unpredictable changes in exchange rates among major global currencies.

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Abandonment of Fixed Exchange Rates (Early 1970s)

The period when fixed exchange rates, where currencies were pegged to a specific value, were abandoned, leading to more flexible and fluctuating exchange rates.

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Economy of Scale

The ability of a company to reduce its per-unit costs by producing and selling larger quantities of goods and services.

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How MNCs Benefit from Global Know-How

MNCs can utilize their expertise in technology and management across various countries without significant extra spending.

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MNCs Benefit from Global Resources

MNCs can access lower wages and specialized research capabilities in different countries.

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Privatization and Foreign Reserves

Selling state-owned businesses to private companies can generate foreign currency reserves for a country.

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Privatization and Efficiency

Privatization is often seen as a solution to inefficient government-run businesses.

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Comparative Advantage

The theory that countries should specialize in producing goods they are most efficient at and trade with other countries, leading to overall economic benefits.

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International Trade as an 'Increasing-Sum Game'

International trade is beneficial for all participating countries, as it allows them to access goods and services at lower prices and increases overall wealth.

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What is GATT?

A multilateral agreement that has reduced trade barriers between member countries.

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What is the WTO?

The World Trade Organization (WTO) replaced the GATT and has the power to enforce global trade rules.

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What is the Doha Round?

A series of trade negotiations aimed at reducing trade barriers and improving trade rules. It has stalled due to disagreements between developed and developing countries.

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What is the European Union (EU)?

A group of 27 European countries that have eliminated barriers to trade, capital, and people.

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What is NAFTA?

An agreement that phased out trade barriers between Canada, Mexico, and the United States over a 15-year period starting in 1994.

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What is the USCMA?

A new accord that replaces NAFTA, signed in 2018 by the United States, Mexico, and Canada.

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What is the Global Financial Crisis of 2008 - 2009?

A severe financial crisis that originated in the U.S. subprime mortgage market and spread globally.

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What is Securitization?

The process of bundling and selling different types of loans, especially mortgages, in a single package. It played a role in amplifying the Global Financial Crisis.

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Legal Restrictions

A specific type of market imperfection where certain groups of people or businesses face restrictions or limitations. For example, foreigners might not be allowed to invest in certain types of shares.

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Locating Production Globally

Companies can choose the best location globally to manufacture their products, taking advantage of lower costs or improved efficiency. It can also lead to larger-scale production, potentially lowering costs further.

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Raising Funds Globally

Companies can raise money from investors in different countries, potentially finding lower interest rates or easier access to capital compared to only raising funds in their home country.

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International Diversification

Investing in assets across different countries can reduce overall risk for investors, as they don't rely solely on their home country's economy. Additionally, investing internationally may offer higher returns due to diverse growth opportunities.

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Expanding via Specialization

When a company focuses on a specific product or service, and then uses its expertise to expand that business on a global scale by reaching new markets and customers.

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Study Notes

Globalization and the Multinational Firm

  • International Finance is crucial to understand globalized markets
  • The global economy is highly integrated in markets for goods and services, as well as financial markets
  • Major economic functions (consumption, production, investment) are globalized
  • International finance differs from domestic finance due to four main factors:
    • Foreign exchange risk: profits in a foreign currency can be lost due to unpredictable exchange rate movements
    • Political risk: sovereign countries can change the "rules of the game" affecting businesses and investors
    • Market imperfections: frictions like legal restrictions, transaction/transport costs, information asymmetry, and discriminatory taxation prevent free movements of people, goods, services, and capital
    • Expanded opportunity set: enables firms to locate production globally to maximize performance, benefit from economies of scale, and raise funds in any market to lower capital costs; also allows investors to diversify internationally to potentially reduce risk or increase return
  • Fixed exchange rates were abandoned in the early 1970s
  • Goals of international financial management are similar across many countries, but sometimes shareholder wealth maximization isn't the only concern worldwide

Overview of International Financial Management

  • The goal of sound financial management is to maximize shareholder wealth
  • Different countries have different perspectives.
    • Continental Europe: shareholders are viewed as one stakeholder among many (and this includes employees, suppliers, customers, and banks)
    • Japan: maximizing value and growth of keiretsu firms

Corporate Governance

  • Managers may pursue their own private interests
  • Agency problems can be a weakness, particularly where legal protection of shareholders is weak or nonexistent
  • Governance is the financial and legal framework regulating the relationship between a firm's management and its shareholders

Globalization of the World Economy

  • Major Trends & Developments:
    • Emergence of globalized financial markets
    • Rise of multinational corporations
    • Privatization
    • Trade liberalization and economic integration
    • Global financial crisis of 2008-2009

Emergence of Globalized Financial Markets

  • Factors contributing to globalized financial markets:
    • Deregulation of financial markets
    • Financial innovations (currency futures & options, multi-currency bonds, cross-border stock listings, international mutual funds)
    • Advances in technology

Multinational Corporations

  • A MNC is a firm incorporated in one country with production and sales operations in others
  • MNCs gain several advantages from economies of scale
    • Spreading R&D, advertising costs over global sales
    • Pooling global purchasing power
    • Utilizing technology/management globally
    • Access to underpriced labor or special R&D in certain countries

Privatization

  • Privatization is when a country divests itself of business ventures to the free market
  • May be seen as denationalization
  • Selling state-owned businesses helps bring in foreign currency reserves
  • Generally seen as reducing bureaucratic inefficiency and waste
  • May improve efficiency by up to 20%

Trade Liberalization and Economic Integration

  • At the Global Level:
    • General Agreement on Tariffs and Trade (GATT), founded in 1947, reduced trade barriers
    • The World Trade Organization (WTO) replaced GATT, having stronger enforcement power
    • China joined WTO in 2001
    • Doha Round (WTO talks) stalled amid developed-developing country disagreements
  • At the Regional Level:
    • European Union (EU) eliminated barriers to free flow of goods, capital, and people
    • North American Free Trade Agreement (NAFTA) phased out trading impediments between Canada, Mexico, and the US, later replaced by the USMCA

Global Financial Crisis of 2008-2009

  • Started from the subprime mortgage crisis in the US
  • Factors that drove the crisis include excessive borrowing and risk-taking by households and financial institutions
  • Securitization (transferring risk to parties other than originators by converting ownership of financial assets into securities) amplified the global crisis
  • Led to poor lending standards, increasing moral hazard

Optional Reading

  • Cheol Eun, Bruce Resnick, and Tuugi Chuluun, "International Financial Management," 10th edition, 2024, Chapter 1

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Description

This quiz explores the key concepts of international finance and the factors that differentiate it from domestic finance. Understand the major aspects of globalization that impact multinational firms, including foreign exchange risk, political risk, and market imperfections. Test your knowledge on how these factors influence global economic functions.

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