Multinational Financial Management: FIN310

Multinational Financial Management

• FIN310
• DR.SORN SUTTHIKHUN ORUNRUK

Significance and Environment of International Finance

• Importance and environment of international finance

Definition of International Business

• International business refers to business operations conducted by state or private entities across national borders.
• Private entities seek profits, while state entities may or may not.

Activities in Global Business

• Importing and exporting
• Production under license
• Joint ventures
• Management and operation contracts
• Turnkey contracts
• Provision of international services in various fields

Importance of Global Business

Daily Life

• Direct effects: An open economy facilitates global trade.
• Indirect effects: Higher costs due to expensive imported raw materials, such as increased oil prices.

Changes Over Time

• The past 40 years have seen significant changes impacting the global economic and financial structure, leading to substantial adjustments in international business operations.
• Positive impact: Promotes the expansion of global business.
• Negative impact: Increases risks for international trade and investment.

Impact of Change

• The global monetary system has shifted from fixed to floating exchange rates.
• Financial and capital markets worldwide are becoming more integrated.

Evolution of International Business

• International business evolution involves international trade, foreign investment, and multinational shareholding, requiring adaptability to accepted products within countries.
• Steps:
• Develop products accepted in the host nation.
• Import goods from foreign countries.
• Export goods to international markets via an agent.
• Export goods to external markets directly.
• Establish sales representatives abroad.
• Obtain licensing.
• Obtain joint ventures with joint ventures.
• Joint ventures arise.
• Establish branch factories that are entirely foreign own subsidiaries, in other countries.
• International businesses with local executives exist.
• International businesses with local shareholders also exist.

Methods of Conducting International Business

• Forms for conducting business internationally:
• Direct investment
• Joint ventures
• Foreign licensing
• Franchising
• Management contracts
• Technical agreements
• Turnkey operations

Examples of Companies

• Multinationals that have invested in Thailand include Toshiba, Thai Arrow Products, Colgate-Palmolive, Wacoal and Electrolux.
• Examples of franchises in Thailand includes A&W.
• Examples of franchises in the USA includes Subway and 7-Eleven.

Reasons for Conducting International Business

Theory of Comparative Advantage

• Each country should produce goods and services it excels at efficiently and export them to countries in need, while importing goods it produces less efficiently from other countries.
• Assumptions:
• Each country should produce goods and services that it is most efficient, and is able to export goods to other countries that are in need.
• Imports are also vital, where countries should import what they are less efficient at producing by comparison.
• Example: England excels at wheat but has poor fabric. It should make excess wheat but import fabric. It is the other way round in France.

Weaknesses in Theory of Comparative Advantage

• Focus on the importance of production factors: raw materials and labor.
• Competitive advantage is not solely dependent on the structure of overheads, but also on other factors.

The Oligopoly Model

• This is used to explain motivations in world trade
• Used to study the behaviours of business organizations in foreign investment
• Businesses will usually take advantage of anything that their brand name brings that their host business is lacking

Factors Influencing Trading

• Brand related factors:
• Brand Image: How appealing their brand name is
• Brand Reputation: Positive track record for name
• Quality related factors:
• Product Qualities: Having better quality
• Technology
• Marketing and brand related factors:
• A good technique for sales, good logo, and good marketing

The Product Life Cycle Model

• Consumer desires change
• This shows that manufacturers develop their own products, with four major stages of product completion

Stages of Progression

• Stage 1: New phase for the product
• Manufacturers develop personal products
• Stage 2: Product’s growth begins
• Products begin their natural life
• Stage 3: Maximisation of products
• Most growth can come from exports
• Stage 4: Phase of exports
• Phase is a former possible source of imports

Foreign Direct Investment Theories

• These emphasise many traits
• Investment in product development
• Investment in semi-monopolies
• Provision of financial services between countries

Economic Integration

Objectives

• The reasons for economic integration within the world stage are:
• Desire for economic growth
• Desire to accelerate growth
• A better allocation of resources
• Full employment
• Revenue distribution between countries

Reasons for Integration

• Having similar geographical and political standing together
• E.g. Europe’s common market
• Having communications, technological advancement in communications and convenient international relations
• Economic and political needs
• Since Europe went into a recession and the economic market fell, it was pushed to start collaborating

Merits of Collaberation

• Increased power when negotiating
• Increased output due to increased skill
• Defence from new industries

Models of Business Collaboration

• Models of Business Collaboration can be achieved through:
• Giving trade preferences
• Establishing free trade zones
• Establishing tax unions
• Having a “common marketplace”
• Consolidating economic unions
• A complete package for trade regulations

Key Trends of International Financial Management

• There have been changes in the economy and global finance (both good and bad) that have greatly affected international business and what it needs to accommodate too
• This results in:
• The increasing role of major multinational corporations (MNCs) on the global stage for economy.
• The international monetary (Floating Exchange Rate) has changed to a floating format that increases the risk from foreign exchange rates.
• There is increasing integration amongst financial markets within the many regions across the world.

Opportunities of International Business

Multinational Businesses Continue to Grow

• Market Imperfection describes this: International Trade, International Investment, and more increases the profitability of multinational corporations.
• Theory of Comparative Advantage: a country should produce goods it excels at, and use it to facilitate trades for importing products that are better handled elsewhere

Multinational Businesses Still Expand

• Risk Diversification will increase Earnings, Cash Flow, lower Foreign Exchange Risk and Increase Bargaining Power

Continued Business Expansion

• Multinationals may use fluctuations for their own gain, especially since the world is not perfect.
• It may be useful to also export more goods abroad by shifting production in countries that are more affordable

Open Markets

• The markets make capital costs less expensive
• A financial system relies on the movement of funds indirectly from people or institutions and markets.

International Currency

• International currency exchanges involve the exchange of currencies from different countries, an essential aspect of conducting international business.
• Exchanges should occur at commercial banks with set exchange rates.
• There may be two rates, the buying or selling variant.

Current Money

• In Thailand, the exchange rate is determined by central banks and pegged by other countries. The rate is set under conditions that the current government sets.
• Current Money can fluctuate based on many conditions from low to high strength.

Balance of Payment

• Balance of Payment refers to the record of economic transactions between residents of one country and residents of other countries over a specific period.
• It shows movements into and outside the country and includes economic transactions.

Aspects of Balance of Payment

Types

• Surplus (positive balance): receipts exceed payments
• Deficit (negative balance): payments exceed receipts
• Equilibrium (balanced): receipts equal payments

Importance

• The balance of payments (BOP) helps determine trade and service status or whether there's a current account surplus
• If imports > exports then there is a trade deficit.
• If imports < exports then there is a trade surplus.

Other Aspects of Balance of Payment

• BOP can show movements of capital within country, that moves with the current balance to transfer from country to local sectors

Core Components

• Consist of five accounts:
• Current Account
• Capital Account
• Transfer Account
• Errors and Omissions Account
• Official Reserves Account

Core accounts

• Current account deals with the trade and services rendered
• Capital and transfers deals with foreign trade

Components of Current Account

• Includes merchandise and service account
• Merchandise balance focuses on goods entering and exiting to increase capital or lower capital with foreign nations
• Service account deals with the service sector by assessing international items that have a positive or potentially negative effect.

Capital Account

• Involves long term investments (direct investments) and short term (indirect) investments (bonds / money)
• Involve commercial and state sectors

The Transfer Payment

• Deals with recording grants for aid between foreign countries

Further Information

• Error and Omission: Inaccurate information that will not be gathered
• Reserve Account: Shows that assets are kept from foreign accounts
• Foreign Assets can include different holdings such as gold funds through other accounts

Summary Aspects of Balance of Power

• More Exports allows easier printing of bank notes.
• Maintenance of the exchange between world currencies
• A "tool" for trade and exchange
• Also offers trade flexibility

Final Considerations

• The balance of payments deficits can alter when they are met with a capital reserve.
• By dealing with currency values during exchange this process is regulated and then stabilised