Global Finance, Cases and Notes

Francisco Carrada-Bravo

• Publisher: Taylor & Francis
• Year: 2018
• Print ISBN: 9781138315570
• eBook ISBN: 9780429851179
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Published in 1999, this text aims to target International Finance and give the basic currency markets: the eurocurrency, the spot, the forward, the futures, and the options markets. It focuses on global financial management, foreign exchange markets, exchange rate determination, financing globalization, managing echange rate exposure, arbitrage and swaps, financing international trade, and the international monetary systems. It includes case studies at the end of each chapter.

1 Managing globalization

Introduction

Globalization of industry refers to the transnational operations undertaken by multinational corporations. These actions are aimed at sourcing, manufacturing, marketing, financing, and organizing the development of new products.¹

A distinctive characteristic of globalization is the partition of the firm’s operations into separate company divisions implemented simultaneously in different countries. The most peculiar features of globalization are international trade, transnational investment, and cross-country alliances.²

Historically, the expansion of multinationals was instrumented mainly through international trade. In the 1980s, international trade was replace by foreign direct investment and inter-firm collaboration as the main engine of world growth. Most recently, firms have been employing trade, investment, and inter company alliances as the tools to globalize.

Purpose

The aim of this note is to provide the student with the analytical tools required to identify, design, and evaluate business opportunities in the global market place.

Factors shaping the globalization of industries

Globalization has been characterized by easier access to overseas factors of production and markets —especially for US, Japanese, and European multinationals— and the facilities granted to multinationals to transfer technology between parent companies and their subsidiaries.

Easier access to factors of production and foreign markets has been the direct consequence of both deregulation and the agreement reached at the end of the Uruguay Round to lower trade barriers.³

Deregulation has taken place all over the world, leading to a reduction of investment restrictions virtually everywhere. Since 1991, there have been around the globe some 570 liberalization changes in regulations that govern foreign direct investment. By 1998, there were more than 1,330 bilateral investment treaties involving 162 countries. This number represented a 300 percent increase in treaties of this nature in half a decade.⁴

The process of liberalization also got rid of duties and exchange controls on imported goods and services. Between 1994 and 1997, the duties existing in the emerging nations fell from 34 to 14 percent. Between 1970 and 1997, the number of countries reducing restrictions on imports of goods and services grew from 35 to 137.

Under the Uruguay Round agreement, the tariffs imposed by the advanced nations on imports of manufactured goods will be reduced to less than 4 percent by the year 2001.

Technology transfer has been also the direct result of improvements in infrastructure. Computing costs are lower, software is better and cheaper, and international communications are easier and faster. For instance, between 1960 and 1990, the cost of a unit of computer power declined 99 percent. In the period between 1930 and 1990, average revenue per mile in air transport fell from $0.68 to $0.11. In a similar fashion, the cost of a three-minute telephone call between New York and London fell from $244 to $3.25.⁵

The process of globalization

International expansion starts with the evaluation of demand in overseas markets for the firm’s products. If the demand exists, the next step is to identify the most efficient way to serve the foreign market. The effectiveness of a new operation is measured based on how much it contributes to cut costs, to improve international coordination, to diversify the firm’s business activities, to expand the firm’s presence in foreign markets. But more importantly, perhaps, is by how much the new operation contributes to raise the stock price of the parent company.

The analysis of demand conditions in foreign markets

To evaluate demand conditions overseas, firms must consider the degree of distinctiveness of corporate products (δ), the price of corporate products abroad relative to the price of substitute products overseas (Ph/Pf), and per capita purchasing power abroad measured by gross domestic product per capita (γ). That is:

$Qf=f(\delta ,Ph/Pf,\gamma )$

Once international demand is believed to exist, a firm must decide on the most efficient way to serve the foreign market.

Domestic globalized operations

A domestic globalized operation is best described by a transaction where a local firm supplies foreign firms at home. In this instance, the supplying local firm is acting as a supporting or related industry of a large multinational corporation.⁶ Transactions between Japanese firms and the non-Japanese motor vehicle industry often fall in this classification.

Limited to moderately globalized operations

A limited to moderately transnational operation is the preferred form of expansion for multinationals belonging to the fast food industry, This type of transactions involve sales of corporate products through foreign intermediaries or marketing affiliates. Licensing rights to foreign competitors to produce corporate products overseas and the final assembly of electronic items in plants belonging to these competitors also fall within the range of this classification.

Globalized operations

This way to expand is preferred by companies heavily involved in the design, development, financing, and manufacturing of key core products. Firms belonging to the computer industry are the best example of companies using this approach.⁷

Rules to globalize

There are no established rules to internationalize the business of a firm. Transnationalization does not begin with exports and end up with the establishment of a full-fledged subsidiary. In many instances, the process starts with foreign investment and concludes with exports. In the 1960s, Chrysler initiated operations in Spain with an assembly plant in Villaverde, near Madrid. In the 1970s, due to the poor performance of the Spanish subsidiary and the overall financial conditions of the parent company, Chrysler shut down the plant and left the Spanish market. In the late 1980s, the US auto maker returned to Spain. In its second venture, however, the company’s strategy was to export from the US to the European nation.

Exporting

Exporting is a viable strategy to internationalize the operations of a company, if the ratio of the difference between the price of the product in foreign markets (P_f ) and the average cost of producing at home (AC_h) to the cost of transportation (T...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication Page
• Table of Contents
• List of Tables
• Acknowledgments
• Preface
• Introduction
• 1 Managing Globalization
• 2 Comparative Advantages and International Trade
• 3 Theories of International Trade and Production
• 4 The Instruments of Trade Policy
• 5 Tendencies in Global Financing, Some Stylized Facts
• 6 Interest Rate Parity and the Foreign Exchange Market
• 7 Purchasing Power Parity and the Foreign Exchange Market
• 8 The Foreign Exchange Market
• 9 SKF in Poland: Foreign Exchange Rate Corporate Reporting
• 10 The Fundamentals of the Time Value of Money
• 11 The Present Value of Annuities and Perpetuities
• 12 Wendy’s Franchising in Argentina
• 13 Transnational Investment
• 14 Cuetara in Morocco
• 15 Exchange Rate Risk Management
• 16 Cemex: Debt and Exchange Rate Risk
• 17 Managing Transaction Exposure with Spot and Forward Contracts
• 18 Managing Transaction Exposure with Futures and Options
• 19 Controlling Economic Risk
• 20 Giant Manufacturing and Globalization
• 21 International Arbitrage
• 22 Note on International Currency Swaps
• 23 The Balance of Payments
• 24 National Income and the Balance of Payments
• 25 Monetary and Fiscal Policy, Output and Exchange Rate
• 26 The Collapse of the Mexican Peso
• 27 The International Monetary System