GLOBLIZATIONThe movement towards theexpansion of economic andsocial ties between countriesthrough the spread ofthrough the spread ofcorporate institutions andthe capitalist philosophythat lead to the shrinking ofthe world in the economicterms

Opening of the economies� Most of the developed nations opened up because of the state of the art technologies in the production process which is increased their production capacities. Thus, they their production capacities. Thus, they globalized in search of new markets

� The developing nation globalize as a result of economic pressures being generated by deficient resources

� As a consequences of opening up, the world is integrating and is becoming smaller interdependent

Why do firms go GLOBAL???�A firm may globalize as a raw material seeker

�As a technologies seeker

�To obtain a competitive edge over its domestic counterpartsdomestic counterparts

�As a knowledge seeker

Growth of World Trade

�Developed Economies –

Increased production capacities of nation Increased production capacities of nation

�Developing Economies –

Its their necessity

Framework of International Finance� International finance is the branch of economics

that studies the dynamics of exchangerates, foreign investment, and how theserates, foreign investment, and how theseaffect international trade

� It also studies international projects, internationalinvestments and capital flows, and trade deficits

�It includes the study of futures, options andcurrency swaps

Reasons for increase in importance of International Finance

�Specialization of nation and trade

�Opening of economies

�Globalization of firm�Globalization of firm

�Emergence of new forms of business organizations

�Growth of world trade

�Need of development process of nation

What’s Special about “International Finance”???�Foreign Exchange Risk

�Political Risk

�Market Imperfections�Market Imperfections

�Expanded Opportunity Set

Foreign Exchange Risk�The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements

�Suppose $1 = ¥100 and you buy 10 shares of �Suppose $1 = ¥100 and you buy 10 shares of Toyota at ¥10,000 per share

�One year later the investment is worth ten percent more in yen: ¥110,000

�But, if the yen has depreciated to $1 = ¥120, your investment has actually lost money in dollar terms

Political Risk�Sovereign governmentshave the right to regulatethe movement of goods,capital, and people acrosscapital, and people acrosstheir borders

�These laws sometimeschange in unexpectedways

Market Imperfections

�Legal restrictions on the movement of goods,people, and money

�Transactions costs�Transactions costs

�Shipping costs

�Tax arbitrage

Expanded Opportunity Set�It doesn’t make sense to play in only one corner of the sandbox

�True for corporations as well as individual investors

Globalization of World EconomyMajor Trends

�Emergence of Globalized Financial Markets

�Emergence of the Euro as �Emergence of the Euro as a Global Currency

�Trade Liberalization and Economic Integration

�Privatization

Emergence of Globalized Financial Market�Deregulation of Financial Markets coupled with

�Advances in Technology

have greatly reduced information and have greatly reduced information and transactions costs, which has led to:

�Financial Innovations, such as

�Currency futures and options

�Multi-currency bonds

�Cross-border stock listings

�International mutual funds

Emergence of Euro as Global Currency�A momentous event in the history of worldfinancial systems

�Currently more than 300 million Europeans in�Currently more than 300 million Europeans in15 countries are using the common currencyon a daily basis

�In May 2004, 10 more countries joined theEuropean Union and adopted the euro

�The “transaction domain” of the euro maybecome larger than the U.S. dollar’s in thenear future

Euro Areas� Austria

� Belgium

� Cyprus

� Ireland

� Italy

� Luxembourg

� Finland

� France

� Germany

� Greece

� Malta

� The Netherlands

� Portugal

� Slovenia

� Spain

Economic Integration

�Over the past 50 years, international tradeincreased about twice as fast as world GDP

�There has been a sea change in the attitudesof many of the world’s governments who haveabandoned mercantilist views and embracedfree trade as the surest route to prosperity fortheir citizens

Liberalization of Protectionist Legislation� The General Agreement on Tariffs and Trade (GATT) a multilateral agreement among member countries has reduced many barriers member countries has reduced many barriers to trade

� The World Trade Organization has the power to enforce the rules of international trade

� On January 1, 2005 the end of the era of quotas on imported textiles ended

� This is an event of historic proportions

NAFTA� The North American Free Trade Agreement(NAFTA) calls for phasing out impediments totrade between Canada, Mexico and the UnitedStates over a 15-year period beginning inStates over a 15-year period beginning in1994

� For Mexico, the ratio of export to GDP hasincreased dramatically from 2.2% in 1973 to29% in 2006

� The increased trade has resulted in increasednumbers of jobs and a higher standard ofliving for all member nations

Privatization

�The selling off state-run enterprises to investors is also known as “Denationalization”“Denationalization”

�Often seen in socialist economies in transition to market economies

�By most estimates this increases the efficiency of the enterprise

�Often spurs a tremendous increase in cross-border investment

Multinational Corporations

�A firm that has incorporated on one country and has production and sales operations in other countriesother countries

�There are about 60,000 MNCs in the world

�Many MNCs obtain raw materials from one nation, financial capital from another, produce goods with labor and capital equipment in a third country and sell their output in various other national markets

Top 10 MNCs1. General Electric - United States

2. Vodafone Group PLC - United Kingdom

3. General Motors - United States

4. British Petroleum Co. PLC - United Kingdom4. British Petroleum Co. PLC - United Kingdom

5. Royal Dutch/Shell Group - UK/Netherlands

6. Exxon Mobile Corporation - United States

7. Toyota Motor Corporation - Japan

8. Ford Motor Company - United States

9. Total - France

10.Eléctricité de France - France

GOALS…

�Maximization of shareholder wealth?

OR

�Other Goals?

Maximization of shareholders wealth�Who are and where are the shareholders?

�In what currency should we �In what currency should we

maximize their wealth?

Other GOALS�In other countries shareholders are viewed asmerely one among many “stakeholders” of thefirm including:

�Employees�Employees

�Suppliers

�Customers

�In Japan, managers have typically sought tomaximize the value of the keiretsu—a familyof firms to which the individual firms belongs

Other GOALS (contd.)

�As shown by a series of recent corporatescandals at companies like Enron, WorldCom,and Global Crossing, managers may pursuetheir own private interests at the expense oftheir own private interests at the expense ofshareholders when they are not closelymonitored

�These calamities have painfully reinforced theimportance of corporate governance i.e. thefinancial and legal framework for regulatingthe relationship between a firm’s managementand its shareholders

Other GOALS (contd.)

�These types of issues can be much moreserious in many other parts of the world,especially emerging and transitionaleconomies, such as Indonesia, Korea, andeconomies, such as Indonesia, Korea, andRussia, where legal protection of shareholdersis weak or virtually non-existing

�No matter what the other goals, they cannotbe achieved in the long term if themaximization of shareholder wealth is notgiven due consideration

Good effects of Globalization of IF � The globalization of trade and finance is changinginternational relationships at several levels of interaction.One expects changing relationship in the conduct ofcommercial activities, and some people accept thatcommercial activities, and some people accept thatcompromises are both desirable and necessary in relation tolabour standards, the protection of the physicalenvironment, and other socially and politically sensitiveissues

� There are policy proposals related to globalization, as wellas provisions in existing multilateral and bilateral free tradeagreements that hold the potential for the imposition ofsubstantial curtailments on state sovereignty

Good Effects (contd.)�Increased choice

�Greater potential for growthgrowth

�Increase international economies of scale

�Greater employment opportunities

Good Effects (contd.)�Globalization has made it easier to raisefinance through individuals and firms outsidethe country. The International Monetary Fundis a good example of an International Instituteis a good example of an International Institutewhich lends money to countries in need forfinance

Bad effects of Globalization of IF �The majority of entrants to the global marketplace lack developed financial structures, poor legal, accounting and structures, poor legal, accounting and regulatory framework

�Due to this are in huge debt (to increase GDP and growth rate)

Bad Effects Cont…

� Higher financial risks

� Problem for IMF to regulate � Problem for IMF to regulate

in all the countries as per its

principles

VSNL GLOBAL ENTRY�Products and services:-

Retail Enterprise

Dialup internet access Global roaming on internet

International private leased circuit (IPLC), Internet leased Global roaming on internet

accountBroadband access

circuit (IPLC), Internet leased line (ILL), Bandwidth on demand

Global roaming on Net telephony

Wireless fidelity services Corporate dial-up solutions

Net telephony National long distance (NLD) leased line

Calling cards Videoconferencing

Financial AnalysisBefore 2002

� VSNL’s revenues, which were US$ 1.6 billion in 1999, have fallen over the years

Post 2002

� Entry of private players like Bharti and Reliance caused the market share of the company, which stood at

years� VSNL was the sole provider of ILD services to & from India, its principal business & contributed more than 90 per cent to its revenues in the year 2002

�Monopoly of the company was terminated in the year 2002 (two years ahead of schedule) by the GOI

company, which stood at more than 90 per cent in 2002 to comedown to 50 per cent in 2005

� Fierce competition from the private players, the overall ILD rates have also come down substantially since 2002

Re-engineered VSNL business model �Overseas acquisitions, Introducing new products and services, Tapping new market segments and Attaining global scale

Sales have improved in 2005 as the �Sales have improved in 2005 as the company’s data business, which accounts for nearly 40 per cent of sales has grown and now services more than 1000 clients

�VSNL has established a separate business unit called TIEBU (Tata Indicom Enterprise Business Enterprise Unit) to cater to the corporate sector..

Go-Global�VSNL’s international operations are carried out through its global operating division VSNL International

�Division has offices in the US (Virginia, New Jersey), Europe (London, Paris, Madrid, Amsterdam, Frankfurt), Singapore and IndiaCustomized and scalable connectivity solutions for the �Customized and scalable connectivity solutions for the key global business hubs of North America, Europe and Asia

�Set up operations in Sri Lanka, Nepal, Singapore, Hong Kong, UK and USA and is soon entering South Africa

�VSNL Lanka Limited, Incorporated in 2003 as a wholly owned subsidiary of VSNL, External Gateway Operator (EGO) license

Presented by –

�Sarang Ohol…………………………8160Sarang Ohol…………………………8160

�Priyanka Arya.….………………….8145

�Vikrant Singh Tomar….…………8176

�Shailesh Shukla.…………………..8163

�Shailesh Kumar….…………………8162

�Romit Bhalla………………………..8156