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FINS3616

International Business Finance

Dr Bohui Zhang (Week 1-4)

9385 5834

Room: ASB 314

(access from west lobby)

Email: bohui.zhang@unsw.edu.au

Consultation: Wed 16:00 – 18:00

(or by appointment)

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Textbook

Required textbook:

- Bekaert, Geert, and Hodrick, Robert, 2012, International Financial Management: International Edition, 2nd ed. Pearson

- This book is available from the UNSW bookshop located near the Quadrangle.

Other reference:

- Butler, Kirt, 2008, Multinational Finance, John Wiley Publishing, 4th Edition.

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Assessment

Tutorials 10%

- Attendance 5%

- Participation 5%

Mid Session 30%

- Week 7 – Saturday (Sep. 13th)

- Coverage: Week 1 to 6

Group project 25%

Final Examination 35%

- Formal exam period

- Coverage: Week 7-12

Total 100%

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Mid-session Exam

It includes 45 multiple choice questions.

Closed book

One and a half hours

Details will be discussed in week 6.

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Study Tools

Australian Securities Exchange

(http://www.asx.com.au/)

Reserve Bank of Australia

(http://www.rba.gov.au/)

World map(http://maps.google.com/)

Bloomberg.com

(http://www.bloomberg.com/news/)

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Australia's top 10 export markets in 2010

1. Introduction of international business finance

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Three phases of business

Three broad phases in the evolution of a

firm

- Domestic phase : operations are confined

within the boundaries of one country

- International trade phase : the firm imports

materials or export its product or both

- Multinational phase : the firm establishes

operations overseas

Rio Tinto Australian mills

Rio Tinto Chinese mills

Export

Rio Tinto

Grasberg Joint

Venture,

Indonesia

Foreign operation

Local business

Y1905

Y1990

Y2001

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The objective of international business

finance

This course is concerned with multinational

corporations (MNCs)

It takes the perspective of a financial manager

in a multinational corporation

It develops framework for evaluating the

opportunities, costs, and risks of operating in

the world’s markets for goods, services, and

financial assets

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Structure of a multinational corporation

Board of Directors

Management

Share-

holders

Debt

Assets

Equity

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The objective of international business

finance

Goals of an MNC

--Maximize shareholder wealth (US, UK, Australia)

--Maximize stakeholder wealth (Europe and Asia)

Conflict of interest between shareholders and

managers

Independent board of directors; concentrated

ownership; executive compensation; shareholder

activism and litigation; hostile takeovers

2. Opportunities of multinational

operations

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Theoretical support for multinational

operations

Theory of comparative advantage: a country

should produce and export goods if it can

produce with relative efficiency and import

goods from other nations which can produce

more efficiently.

For example:

-- Australia: mining and agricultural industries

-- India: IT industry

-- Japan/Germany: manufacturing

-- Saudi Arabia: oil-based industries

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How do MNCs enter foreign markets?

Four methods

--Licensing: gives local firms right to manufacture their

products in exchange for fees

--Franchising: provides specialized sales or service strategies

in exchange for fees. e.g. McDonald

--Joint venture: jointly invest and operate a business with a

foreign company.

--Foreign direct investment: starts a company from scratch

3. Challenges of multinational operations

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Political risk

- The risk that a host government will change the“rules of the game” under which business isconducted.

- Due to unexpected political changes within a host country or to the host’s relationship with other governments.

Financial risk

- Foreign exchange risk: the risk of an unexpected change in the value of the firm due to an unexpected change in exchange rates

- Financial crises

Cultural risk is the risk of dealing with an unfamiliar culture

Example:

-- Political risk

The dispute between US and Iranian governments in 1970s

--Financial risk

July 2008 1 A$= 0.97 US$

November 2008 1A$=0.61 US$

Now 1 A$=0.93 US$

--Culture risk

Does everyone around the world like Starbucks coffee?

Alcohol in Dubai?

4. MNCs’ international partners

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International Banks

e.g. BGI, Citibank, ANZ, and Commonwealth

International Institutions

--The International Monetary Fund (IMF)

--The World Bank

--Regional development banks e.g. The Asian Development Bank (ADB)

--The World Trade Organization (WTO)

--The Organization for Economic Cooperation and Development (OECD)

--The Bank for International Settlements (BIS)

--The European Union (EU)

Governments

Individual and Institutional Investors

e.g. hedge funds, private equity firms, and sovereign wealth funds

5. Globalization

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Globalization

Definition: increasing connectivity and integration of countries and corporations and the people within them in terms of their economic, political, and social activities

Implication:

- integration of the markets for goods and services

- integration of international financial markets

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Recent integration of global markets for goods & services:

1960s only 20% of countries were open; By 2000, over 70% of countries were open

Free trade agreements: 1995 creation of the World Trade Organization (WTO)

1999 creation of the euro and its adoption by an expanding set of European countries

Outsourcing – shifting of non-strategic functions to specialist firms

WTO

members in

January

2012

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International Trade as a Percentage of GDP

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Recent integration of financial markets:

Financial market liberalization in both developed

and emerging markets in 1980s and 1990s

Increasingly interdependent national financial

markets, including cooperative linkages among

securities exchanges

Derivative contracts and securitization techniques

become more popular

WTO

members

6. How to record a country’s cross-border business?

Can we do it like a firm’s income statement?

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Balance of payments

The balance of payment (BOP)

- records all economic transactions between the residents of the home country and residents of all other countries

E.g. According to Australian Bureau of Statistics, the Australian BOP is a systematic record of economic transaction between residents of Australia and residents of the rest of the world.

- measures all financial and economic transactions over a specified period of time.

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Balance-of-Payments Statistics

Types of accounts and balances:

Current account measures purchases of goods/services, interest and dividend receipts and payments, and transfer payments between countries (e.g., gifts or aid)

Capital account measures cross-border transactions associated with changes in ownership of assets and liabilities

Regular capital account measures transactions on assets except gold and currencies

Official settlement account measures transactions on gold and currencies

Australia’s balance of paymentsCurrent account 2009

Goods: exports 1,068

Goods: imports -1,575

Services: exports 502

Services: imports -370

Receipts from foreign investments 588

Payments on foreign assets in Australia -467

Net unilateral transfers -125

Current account balance -379

Australia’s balance of paymentsCapital account 2009

Regular capital account

Australian assets aboard -89

Foreign assets in Australia -144

Financial derivatives 214

Official settlements account

Australian reserves assets -52

Foreign official assets 450

Capital account balance 379

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Balance-of-Payments Statistics

Double-entry accounting system

Each transaction gives rise to a credit (inflows) and a debit (outflows), both of equal value

An important Balance of Payments identity:

•Current Account + Capital Account = 0