566-1 - Chapter 1 - Globalization and the Multinational...

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Chapter 1 - Globalization and the Multinational Firm Finance: 1) Corporate Finance (Demand for Capital) and 2) Investments (Supply of Capital). Internal vs. External finance. Corporate Finance: Internal Issues like dividend policy, capital structure, working capital management, strategy/policy, optimal growth rate, etc. Investment Decisions: Investors, fund managers, commercial and investment banks, pension funds shopping globally for investments. GOAL OF FIRM? WHY STUDY INTL FINANCE? Highly globalized and integrated world economy. Between 1980-1995, volume of world trade doubled. International trade has been increasing much faster than world output. 1950-1995, world output increased 6x, world trade increased 16x, world currency activity has increased something like 50x. Example: GM produces cars in 50 countries, sells cars in almost 150 countries. GM is a typical multinational corporation (MNC). Much of intl. trade is for inputs, parts, supplies, raw materials, NOT finished goods. Intense global competition has resulted in relentless cost cutting measures - finding cheapest cost of production by relocating production to the cheapest country, outsourcing purchase of parts, etc. Economic problem = coordination problem. Result of global economy: few products are made exclusively in one country anymore. IBM computers might be assembled in Malaysia, with Taiwanese monitors, Korean keyboards, US made microchips, with software developed by US and Indian engineers, advertising services of a UK company, financing from banks in Holland and Germany. US cars vs. "foreign" cars?? Financial markets are also highly and increasingly integrated. Capital flows instantly around the world, seeks the highest return, stays were it is well treated, leaves when it is not well treated. MNCs have shares of stock cross- listed on foreign stock exchanges. Advantages?? More liquid, access to more capital. All major economic functions - consumption, production, investment - are highly globalized. We consume, invest, produce, work and sell in a global economy/marketplace. Financial managers and MGT 566: International Finance – CH 1 Professor Mark J. Perry 1
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investors have to understand international dimensions of finance. Even twenty years ago, it wasn't necessary to study int'l finance/econ, now it is essential, due to the "global shift . " WHAT IS DIFFERENT ABOUT INT'L FINANCE/ECONOMICS? 1. Foreign Risks: Int'l trade/investment requires dealing with foreign currency, receiving €s (in the future) or paying in €s (in the future), which exposes a company/investor to CURRENCY RISK. Risk of an adverse exchange rate movement. See Exhibit 1.1 for ex-rate volatility on page 6. Exporter: Receiving € in 6 months. Worried about? Importer:
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566-1 - Chapter 1 - Globalization and the Multinational...

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