International Business Finance

Course structure:
Lectures/Tutes/Tests/Presentations

Examiner: Associate Professor Sarath Delpachitra Assessments: see the Topic Guide Examination: See the Topic Guide Study materials: Text

Differences between domestic and international financial management Who needs international financial management? Why IFM different from DFM? Why IFM decisions differs from FM? Why MNE are operating? Is multinational investment safe? What are the risks?

Who needs international financial management?

Multinational corporations Joint ventures Acquisition of existing operations Firms engaging licences and management Exporters and Importers Domestic firms with off-shore investment capital and equity markets

Why IFM different from DFM?

Operate within & across different political, legal, legislative and cultural systems Use different currencies so active in FE market Have access a range of domestic & international capital markets Operate with and across a range of product and factor market each with different level of productivity, efficiency and competition.

Why IFM decisions differs from FM?

The degree of difference depends on the following factors The degree of involvement in the international monetary system The degree of involvement in the international economic environment The degree of difference between domestic and international economy

Why MNE are operating?

MNE are operating in a risky global environment. But the continue to thrive because: Market imperfections are common between countries so opportunities are there for exploitation. MNE could exploit their advantages in
Economies of scale and scope Managerial & technical expertise Ability to differentiate products Strong financial backing and ability to raise capital

Reasons for firms to become MNE

Market seekers- increase global market share Raw material seekers extract raw material cheaply Production efficiency Product Cycle Theorem Knowledge seekers fill the gaps Political safety Taiwan, HK Tax heaven

Is multinational investment safe?

As in any other business there are risks attached to multinational investment. However further risk premiums should be added because: FE risk FE risk premium Political risk - further increase in the premiums

What are the political risks?

Micro risks
Corruption most LDCs Goal conflicts

Macro risks
Expropriation Ethnic stripe

Historical overview of the International monetary system

The gold standards Bretton Wood System and SDR Adjustments to SDR/devaluation/revaluation Floating exchange rate system

Corporate Wealth Maximisation

Accumulation of corporate wealth Shareholders wealth maximisation

Corporate Governance

BOP account

Current currency regimes

National currencies: Aus$, Jap , US $. Artificial currencies: SDRs Composite currencies: Euro (With Euro replacing all national currencies of EU) For details of other currency arrangement see the text.

Fixed vs Floating X
Most countries now use floating X rates or its variations but few others still use fixed X rate. Fixed X rate systems:
Stabilise international prices so less risks for all businesses Thus anti-inflationary because prices will note change due to exchange rate fluctuations (less volatile) Need reserve banks to maintain enough int. reserves (foreign currency) to settle the balance of payment.

Variations to floating X rate systems

Free float (floating X): The X rate is decided in response to daily demand and supply for foreign currency. Manage or dirty float (Managed X). X rate is allowed to move within a specified range. If the X rate is fixed RB or central bank must ensure BOP near zero [ie. Transactions (payments and receipts) between the country and the rest of the worlds sum to zero]. This is not required for Floating ER.

Essential Readings
Chapters one and two of the text