International finance

1. INTERNATIONAL FINANCE –
AFU 08112
BY
HARRISON FRIBACK NGOWI
ADA, CPA(T), MSc Fin.
2019

2. COURSE OVERVIEW
• Course Objective
– To provide a framework for making corporate
financial decisions in an international context
• Why study International Finance?
– We live in a highly globalized and integrated world
• Consumption, production of goods and services have
become globalized
• Financial markets have also become highly integrated
– Diversification of portfolio internationally
– Shares cross listed on foreign stock exchanges
2

3. COURSE OVERVIEW
International
Financial
Management
Foreign
Exchange
Markets
Sourcing
Capital in
Global Markets
Managing
FOREX
Exposure
Foreign
Investment
Decisions
Synthesis
3

4. WHAT IS SPECIAL ABOUT
INTERNATIONAL FINANCE?
• Foreign exchange risk
–E.g., an unexpected devaluation adversely
affects your export market…
• Political risk
–E.g., an unexpected overturn of the
government that jeopardizes existing
negotiated contracts…
• Market imperfections
–E.g., trade barriers and tax incentives may
affect location of production…
H. NGOWI 2018 4

5. WHAT IS SPECIAL ABOUT
INTERNATIONAL FINANCE?
 Expanded opportunity sets
 E.g., raise funds in global markets, gains from
economies of scale…
 In global mkt; investment opportunities
increases, financing opportunities increases
and value of MNC increases
In combination, multinational operations
potentially can both increase the investment
opportunity set and decrease the cost of capital.
H. NGOWI 2018 5

6. GOALS FOR
INTERNATIONAL FINANCE
• The focus of the course is to equip the
reader with the “intellectual toolbox” of an
effective global manager—but what goal
should this effective global manager be
working toward?
• Maximization of shareholder wealth?
or
• Other goals?
H. NGOWI 2018 6

7. MAXIMIZE
SHAREHOLDER WEALTH
• Long accepted as a goal but
complications arise.
–Who are and where are the
shareholders?
–In what currency should we maximize
their wealth?
H. NGOWI 2018 7

8. OTHER GOALS
H. NGOWI 8
In other countries (France and Germany)
shareholders are viewed as merely one
among many “stakeholders” of the firm
including:
❑ Employees
❑ Suppliers
❑ Customers
In Japan, managers have typically sought
to maximize the value of the keiretsu—a
family of firms to which the individual firms
belongs.

9. OTHER GOALS
H. NGOWI 2018 9
No matter what the other goals, they cannot be
achieved in the long term, if the maximization
of shareholder wealth is not given due
consideration.
A firm that
❑ Treats employees poorly,
❑ Produces shoddy merchandise
❑ Wastes raw materials
❑ Operates inefficiently
❑ Fails to satisfy customers
Cannot maximize shareholders wealth

10. GOAL OF THE FIRM
H. NGOWI 2017 10
Goal - Maximize Shareholder Wealth
maximize Capital Gains and Dividends
taking into account risk
A company’s stock price is very important
(incorporates all relevant information)
This goal applies in the Anglo-American
World / Anglo-Saxon countries [U.S., U.K.,
Canada, Australia and New Zealand]

11. BACKGROUND TO
INTERNATIONAL FINANCE
 International finance as a subject is not
new in the area of financial management,
it has been widely covered earlier in
international economics and it is only the
fast growth of international business in
the post-world war II and the associated
complexities in the international
transactions that made the subject as an
independent area of study.
H. NGOWI 2018 11

12. BACKGROUND Cont….
 For several centuries, international economists
have used the classical economic theory
of comparative advantage to explain the trade
movements between nations.
 Adam Smith and David Ricardo
◼ Specialization
 The theory supported free trade arguments, such
as the North American Free Trade Agreement
(NAFTA)
H. NGOWI 2018 12

13. WHAT IS INTERNATIONAL
FINANCE?
• International finance is the branch of
economics that studies the dynamics of
exchange rates, foreign investment,
global financial system, and how these
affect international trade.
• It also studies international projects,
international investments and capital
flows, and trade deficits.
H. NGOWI 2018 13

14. WHAT IS INTERNATIONAL
FINANCE?
• It includes the study of futures, options
and currency swaps. International
finance is a branch of international
economics.
• International Finance can be broadly
defined, as the study of the financial
decisions taken by a multinational
corporation in the area of international
business i.e. global corporate finance.
H. NGOWI 2018 14

15. REASONS TO STUDY
INTERNATIONAL FINANCE
 To understand the global economy and
its relation to:-
• The end of the cold war
• The emergency of growing markets among the
developing countries and
• The increasing globalization of the international
economy
• The great change of recent years has been the
rapid industrialization and economic growth
 To understand the effect of Global
Finance on business
 To make intelligent decisions
H. NGOWI 2018 15

16. WHY STUDY INTERNATIONAL
FINANCE?
 Exchange Rate
 Cross-border Barriers that include
⚫Economic barriers
⚫Cultural barriers
⚫Political and Legal barriers
⚫Ethical Issues
⚫Financing Opportunities in Global
Market
H. NGOWI 2018 16

17. EXCHANGE RATE RISK
 Changing value of TZS versus other
currencies.
⚫Declining TZS good for TZ.
exporters, but bad for imports
⚫Rising TZS good for TZ.
imports/outsourcing, but bad for
exports
H. NGOWI 2018 17

18. ECONOMIC BARRIERS TARIFFS,
IMPORT DUTIES, QUOTA
RESTRICTIONS
 Restrictions on remittance of profits and
repatriation of capital
 Restrictions on foreign equity
participation
 Trading blocks
H. NGOWI 2018 18

19. CULTURAL BARRIERS
Examples of Language Barriers
 “Please leave your values at the desk”
(France)
 “The manager has personally passed all
the water served here” (Mexico; to assure
safety of drinking water at the hotel)
 “You are invited to take advantage of the
chambermaid” (Japan)
 “Ladies are requested not to have children
in the bar” (Norway)
H. NGOWI 2018 19

20. Examples of Language Barriers
 “Because of the impropriety of
entertaining guests of the opposite sex in
the bedroom, it is suggested that the
lobby be used for this purpose”
(Switzerland)
 “We will execute customers in strict
rotation.” (Greece)
H. NGOWI 2018 20

21. BENEFITS OF STUDYING IF
• Among the events that affect the firm and that
must be managed are changes in exchange
rates, inflation rates, and asset values (and
these events are often themselves related).
• Because of the integration of financial markets,
events in distant lands have effects that
reverberate in other regions of the world
(domino effects, contagion, systemic risk).
H. NGOWI 2018 21

22. BENEFITS CONT….
• Even companies with a domestic focus are
affected by the global financial environment as
they compete with firms that are internationally
active.
• Inflation, jobs, economic growth rates, bonds and
stock prices, oil and food prices, government
revenues and other important financial variables
are all tied to exchange rates and other
developments in the increasingly integrated
financial market.
H. NGOWI 2018 22

23. FACTORS BEHIND THE
GROWTH OF IF
• Growth of International Trade (finance
associated to commercial trade)
• Growth of Multinational Corporations
(finance associated to FDIs and M&A activity)
and Multinational Banking
• Growth of the eurodollar market
• Growth of International Finance per se (finance
associated to the growth of global saving
and the need to improve risk-return trade-offs)
H. NGOWI 2018 23

24. FUNCTIONS OF FINANCIAL
MANAGER
 The main functions of the financial
manager are:
◼ making financing decisions, and
◼ investing decisions and eventually returning
the funds to the providers of such funds
(shareholders) on international perspective.
H. NGOWI 2018 24

25. FUNCTIONS OF FINANCIAL
MANAGER
 In order to achieve the firm’s primary goal of
maximizing stockholder wealth, the financial
manager performs three major functions:
◼ financial planning and control (supportive
tools);
◼ the efficient allocation of funds among various
assets (investment decisions); and
◼ the acquisition of funds on favorable terms
(financing decisions).
◼ corporate strategic matters – from basic issues such as the nature of their
company’s business to complex issues such as mergers and acquisitions
H. NGOWI 2018 25

26. MAIN COMPONENTS OF
GLOBAL FINANCE
• Currencies
• Market and policy variables (exchange rates, interest
rates, risk, ratings)
• Assets/financial instruments (cash and deposits,
bonds, stock, loans,
• derivatives, insurance contracts, etc.)
• Players (international organizations, central banks,
supervisory authorities, accounting standard setting
bodies, rating agencies, commercial and investment
banks, institutional investors, sovereign funds, MCEs,
financial lobbies, etc.)
• Markets: the (physical or virtual) places or ‘centres’
where financial transactions take place
H. NGOWI 2018 26

27. THE GLOBAL FINANCIAL SYSTEM
SUPERVISORY
AUTHORITIES
CURRENCIES
EXCHANGE
RATES
COMMERCIAL
BANKS
FINANCIAL
MARKETS
CENTRAL
BANKS
ACCOUNTING
STANDARD
BODIES
INTERNATIONAL
FINANCIAL
INSTITUTIONS
INVESTMENT
BANKS
INSTITUTIONAL
INVESTORS
GOVERNMENT
TREASURIES
MULTINATIONAL
ENTERPRICES
(MCE)
SOVEREIGN
FUNDS
RATING
AGENCIES

28. A WORLD OF CURRENCIES
• When dealing with IF one has to face the problems of
having different currencies and how to exchange one
for another (through exchange rates).
• The number of national currencies remains very high
notwithstanding 17 national currencies have
disappeared with the introduction of the euro.
• Not only money and bank deposits but also financial
assets are denominated in a national currency.
• Reserve currencies are those mostly used in
international transactions (US $, Euro, yen, .........
H. NGOWI 2018 28

29. A WORLD OF CURRENCIES
• The US $ is still used to price oil.
• Central banks normally hold relevant quantities of
reserve currencies to use in the money and exchange
markets for their operations in addition to gold.
• The IMF Special Drawing Rights (SDR) is an
international currency albeit it is not physical but only
serves as an accounting unit.
• The US $ still accounts for 60% of all international
reserves (Table on distribution of international
reserves) H. NGOWI 2018 29

30. INTERNATIONAL TRADE
VERSUS INTERNATIONAL
FINANCE
• International trade focuses on transactions
of real goods and services across nations.
 These transactions usually involve a physical movement
of goods or a commitment of tangible resources like
labor services.
• International finance focuses on financial or
monetary transactions across nations.
 For example, purchases of US dollars or financial assets
by Tanzanians.
H. NGOWI 2018 30

31. H. NGOWI 2018 31
THE MULTINATIONAL
ENTERPRISE
 A multinational corporation is a company engaged in
producing and selling goods or services in more than
one country. Usually, it consists of a parent company
located in the home country and several foreign
subsidiaries.
 A multinational is characterized more by attitude than
the physical reality of an integrated system of
marketing and production activities worldwide.
 “Where in the world should we build our plants, sell our
products, raise capital, and hire personnel?” i.e. a
global perspective, rather than the perspective of the
home country, where the parent is located.

32. H. NGOWI 2018 32
RELEVANCE OF
INTERNATIONAL FINANCE
 Many of the problems of multinational firms are due to the
use of different currencies used in different countries and the
consequent need to exchange them.
 There are political divisions as well as currency divisions
between countries.
 A financial manager has to decide how international events
will affect a firm and what steps can be taken to exploit
positive developments and insulate the firm from harmful
ones.

33. H. NGOWI 2018 33
RELEVANCE OF
INTERNATIONAL FINANCE
 Relevant variables are changes in exchange
rates, interest rates, inflation rates and asset
values.
 However, these variables are interconnected.
 Hence foreign exchange risk is not simply
added to other business risks. The amount of
risk depends crucially on the way exchange
rates and other financial prices are connected.

34. H. NGOWI 2018 34
RELEVANCE OF INTERNATIONAL
FINANCE
 Even companies that operate only
domestically but compete with firms producing
abroad and selling in their local market are
affected by international developments.
 Thus, US appliance manufacturers with no
overseas sales will find US sales and profit
margins affected by exchange rates which
influence the dollar prices of imported
appliances.

35. H. NGOWI 2018 35
SPECIALIZED FACTORS OF
PRODUCTION
 If some factors are specialized, i.e. relatively more efficient
in the production of one commodity rather than the other,
the prices of the factors that specialize in the commodity that
is exported will gain because of greater demand, once trade
begins.
 This is because demand for a factor is a derived demand and
is based on demand for the goods that the factors produce.
 US producers of coal that cannot switch to wheat production
will be hurt, since the demand for their product will drop.
 The greater the gains from trade for a country overall, the
greater the cost of trade to those factors of production that
specialize in producing the commodity, now imported.

36. H. NGOWI 2018 36
THE ROLE OF THE
MULTINATIONAL FIRM
 Does the Multinational Corporation represent
movement of capital?
 The theory of comparative advantage rests on
factor differences across countries. However,
when countries become increasingly
homogenous, other factors might determine
trade.

37. H. NGOWI 2018 37
THE ROLE OF THE
MULTINATIONAL FIRM
 Economies of scale might require a
transnational entity.
 Improved communications permit intermediate
commodities to be traded – the example of the
Barbie doll.
 Cultural predilections, historical accidents and
government policies, differences in attitudes to
labor/unions.
 Development of International Finance – raising
capital abroad, sharing risk across borders, tax
arbitrage, need for diversification.

38. H. NGOWI 2018 38
FINANCIAL ISSUES FOR THE
MULTINATIONAL FIRM
 foreign exchange risk management
 managing working capital and the
internal financial system
 financing foreign units
 capital budgeting
 evaluation and control

39. REVIEW QUESTIONS
 Why do multinational companies perform better
than domestic companies?
 Differentiate between Global company and
Multinational company
H. NGOWI 2018 39

40. ASSIGNMENT – 1A4 page
With examples differentiate
between Exchange rate
‘regime’ and Exchange Rate
‘System’
Using financial evidence link
‘Interest rates and financial
crises’
H. NGOWI 2018 40

41. THE END
THANK YOU
H. NGOWI 2018 41