1. To succeed internationally, MNEs must have access to capital
markets in different countries to finance expansion. Indeed,
finance is integral to firms’ international strategies.
The Finance Function
• Make financing decisions—especially regarding capital
structure (the proper mix of debt and equity) and long-term
financing (selecting, issuing, and managing long-term debt and
equity capital, including location—home country or elsewhere—
and currency— home or foreign)
• Make investment decisions—typically in the context of capital
budgeting, which will be discussed in Chapter 19
• Manage short-term capital needs (which will be discussed in
Chapter 19)—managing the MNE’s currency assets and liabilities
(cash, receivables, marketable securities, inventory, trade
receivables and payables, and short-term bank debt):
2. The Role Of The CFO
• The CFO acquires financial resources—that is, he or she
generates funds either internally or from external sources at the
lowest possible cost—and allocates them among the
company’s activities and projects.
• For instance, when GPS began, the founders needed outside
investors with significant resources to fund the start-up as well
as lend credibility to potential clients.
• Then it shifted to internally generated cash to fund operations.
Allocating resources (investsing) means increasing
stockholders’ wealth through the allocation of funds to
different projects and investment opportunities
3. Factors Affecting The Choice Of Capital Structure
Debt and Exchange Rates:
As with the Asian financial crisis of 1997, the global crisis of 2007–2009
highlighted foreign-exchange risk. Leading up to the crisis, many individuals,
banks, and companies borrowed in dollars or euros because of the relatively
lower interest rates in the United States and Europe.
Regulatory Risk:
As pointed out in the opening case, regulatory reform has complicated access
to debt financing. As noted below, bonds are a great way for companies to
raise capital Regulatory Risk As pointed out in the opening case, regulatory
reform has complicated access to debt financing. As noted below, bonds are a
great way for companies to raise capital .
4. Global Capital Market
1.Eurocurrencies And The Eurocurrency Market:
The Eurocurrency market is an important source of debt financing to
complement what MNEs can find in their domestic markets. A Eurocurrency
or offshore currency, is any currency banked outside its country of origin.
Major Sources of Eurocurrencies: There are four major sources of
Eurocurrencies:
• Foreign governments or individuals who want to hold dollars outside the
United States
• Multinational enterprises that have cash in excess of current needs
• European banks with foreign currency in excess of current needs
• Countries such as China, Japan, the EU, Saudi Arabia, Russia, and Taiwan
that have large foreign exchange reserves
5. Characteristics of the Eurocurrency Market
Because the Eurocurrency market is a wholesale (companies and other
institutions) rather than a retail (individuals) market, transactions are very
large. Public borrowers such as governments, central banks, and
publicsector corporations are the major players.
MNEs are involved in the Eurodollar market, but it has historically been an
interbank market. Since the late 1990s, however, London banks have
shifted to using nonbank customers for Eurodollar transactions, partly
because of the introduction of the euro, the subsequent fall in foreign
transactions, and consolidation in the banking sector.
The Eurocurrency market is both short- and medium-term. Short-term
borrowing is composed of maturities of less than one year. Anything from
one to five years is considered a Eurocredit, which may be a loan, a line of
credit, or another form of medium- and long-term credit.
This would include syndication, in which several banks pool resources to
extend credit to a borrower and spread the risk. Short-term borrowings,
called eurocommercial paper, are unsecured loans issued by a bank or
corporation in the offshore money market and typically in the currency that
is different from the corporation’s domestic currency
6. International Bonds
Foreign Bonds :
Foreign bonds are sold outside the borrower’s country but denominated in the
currency of the country of issue. A French company floating a bond issue in
the United States in U.S. dollars, say, would be issuing a foreign bond. These
also have creative names, such as Yankee bond (issued in the United States),
Samurai bond (Japan), Bulldog bond (England), and Panda bond (China).
Eurobond: A Eurobond is usually underwritten (placed in the market for
the borrower) by a syndicate of banks from different countries and sold in a
currency other than that of the country of issue. A bond issue in dollars floated
by a U.S. company in London, Luxembourg, or Switzerland is a Eurobond.
7. Equity Securities
• Another source of financing is equity securities, whereby an
investor takes an ownership position in return for shares of
stock in the company and the promises of capital gains and
dividends.
• A company that wants to raise equity capital to fund
operations, especially a startup, may work with private
investors who want to take an equity interest in the company
rather than just loan money to the company.
• Or it might raise equity capital through an Initial Public
Offering where it goes directly to a stock market. If the
company wants to issue an IPO, it has to decide if it wants to
raise capital in its domestic market or abroad
8. Taxation of Foreign-Source Income
Taxation has a strong impact on several choices:
• Location of operations
• Choice of operating form, such as export or import, licensing
agreement, or overseas investment
• Legal form of the new enterprise, such as branch or subsidiary
• Possible facilities in tax-haven countries to raise capital and
manage cash
• Method of financing, such as internal or external sourcing, and
debt or equity
• Capital budgeting decisions
• Method of setting transfer prices
9. Offshore Financing and Offshore Financial Centers
Offshore financing :is the provision of financial services by banks and
other agents to nonresidents. In its simplest form, this involves borrowing
money from and lending to the nonresidents.
Offshore financial centers (OFCs) :are cities or countries that provide large
amounts of funds in currencies other than their own and are used as
locations in which to raise and accumulate cash.
10. Characteristics of OFCs
• A large foreign-currency (Eurocurrency) market for deposits
and loans (in London, say)
• A market that functions as a large net supplier of funds to the
world financial markets (such as in Switzerland)
• A market that functions as an intermediary or pass-through for
international loan funds (e.g., the Bahamas and the Cayman
Islands) • Economic and political stability
• An efficient and experienced financial community
• Good communications and support services
• An official regulatory climate favorable to the financial industry,
in the sense that it protects investors without unduly restricting
financial institutions.