Summary
Summary International Corporate Finance
- Course
- Institution
Summary of International Corporate Finance for MA1 Business Engineering at the VUB.
[Show more]
Seller
Follow
Madikan
Reviews received
Content preview
International Corporate FinanceChapter 1: Introduction
International Finance or the Existence of Borders:
What is the truest definition of globalization?
ð Princess Diana’s death:
“An English princess with an Egyptian boyfriend crashes in a French tunnel, driving a
German car with a Dutch engine, driven by a Belgian who was drunk on Scottish whisky,
followed closely by Italian Paparazzi, on Japanese motorcycles; treated by an American
doctor, using Brazilian medicines.”
Borders still matter in Finance:
• Typical economic models: closed economy (no interrelationships with the rest of the
world)
• But we live and do business in a world with distinct countries more or less independent
• Closed economy ↔ Globally integrated entity
Globalization:
The world is becoming increasingly globalized:
ð Globalization: increasing connectivity and integration of countries and corporations
and the people within them in terms of their economic, political, and social activities.
ð The international scope of business creates new opportunities for firms.
The growth of international trade:
• 1960: only about 20% of countries were open to trade (U.S. – U.K. – Western Europe)
• The world was dominated by western culture = 10% of the world’s population having
access to 80% of the resources, while the rest of the world was underdeveloped
• Early 1980s: belief in free markets leads to worldwide deregulation
• 1990: fall of the Iron Curtain + trade liberalizations
à The world becomes open. By 2000 more than 70% of countries are open to trade
à Result: growing trade flows between countries
The globalization of financial markets:
• Financial openness: in the 1980s, many developed countries began liberalizing their
capital markets.
o Countries allow foreigners to invest in their capital markets and allow their
citizens to invest abroad
1
, • Advantages for MNC (Multinational Corporations)’s:
o Access to foreign capital
o Ability to reduce financing costs
Globalization and the MNC:
• Growing trade flows between countries = growing opportunities for MNC’s
o MNC’s are moving their production capacity to underdeveloped countries,
minimizing labor costs, and reexport these goods to the west where they are
sold.
Result of Globalization:
Foreign Direct Investment:
• Highly globalized and integrated world economy
o E.g. financial crisis in 2007 starting in the US housing market, leading to a global
recession
• Continued liberalization of international trade
2
, • Globalized production
• Integrated financial markets
à Important to understand the international setting in which firms are operating and
how corporate financial decisions are made
Return/Risk in an international setting:
• Multinational firms: operations beyond domestic national borders
• Risk and return opportunities outside the domestic market
• How can we maximize the return on firm’s investment, given an acceptable level of risk?
Borders complicate the job of the CFO:
1. Existence of national currencies
à exchange rates & exchange risks
2. Segmentation of goods markets along national lines
3. Existence of separate judicial systems
4. Sovereign autonomy of countries
à Political risk
5. Separate (incompatible?) tax systems → double or triple
taxation
Exchange-rate risk:
Why do most countries have their own money?
1. Printing bank notes is a positive NPV activity
2. National pride: Pound, Danes
3. Monetary policy that is tailored to the local situation
ð Exchange-rate risk: uncertainty about the value of an asset or liability and is
denominated in a foreign currency.
Segmentation of consumer-goods markets – The Big Mac standard:
Three key features of prices:
1. Prices are not homogeneous internationally, even if labeled
into a common currency
• Purchasing-power parity (PPP)
• Short-term vs. Long-term
• Common feature: prices rise with GDP per capita
2. Within a country: prices more homogeneous
3. Sticky prices (price elasticity)
3
, Short-run exchange rate fluctuations:
• Little to do with the international prices in the countries involved
• Appreciation of a currency does not lead to falling prices abroad or soaring prices at
home to keep good prices similar in both countries
• However, there are two main consequences:
1. Affects the competitiveness and attractiveness of a country on the export or import
market.
2. How do you value investments? Cfr. capital budgeting decisions.
Importance of the import market:
Importance of the export market:
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Madikan. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R129,86. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
73091 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now
Recently viewed by you
