Financial Management in the International Business

指導教授：林達榮博士報告學生：謝逸璇 69533005 方中平 69633004 謝宛真 69633005 陳麗茹 69633009

Index

• Introduction• Investment Decisions• Financing Decisions• Global Money Management ： The Efficiency

Objective• Global Money Management ： The Tax Objective• Moving Money across Borders ： Attaining

Efficiencies and Reducing Taxes• Techniques for Global Money Management• Cases

Introduction

Scope of financial management includes three sets of related decisions:

• Investment decisions– Decisions about what activities to finance

• Financing decisions– Decisions about how to finance those activities

• Money management decisions– Decisions about how to manage the firm’s financial resources

most efficiently

Introduction

• In an international business, 　 investment, financing, and money management decisions are complicated by different：

regulations concerning the flow of capital

across borders

levels of economic and political risk

tax regimes

norms regarding the financing of business

activities

currencies

Introduction

• Financial managers must consider ： 1. when deciding which activities to finance 2. how best to finance those activities 3. how best to manage the firm’s financial resources

4. how best to protect the firm from political and economic risks (including foreign exchange risk)

Investment Decisions

• Capital budgeting

• Project and Parent Cash Flows

• Adjusting for Political and Economic Risk

ReviewCH2

CH3

Discuss how the political, economic ,legal, and cultural

environment of a country can influence the benefits, costs and

risks of doing business there and thus its attractiveness as an

investment site.

CH7 Discuss of the economic theory of foreign direct Investment.

CH8 We looked at the political economy of foreign direct investment

and considered the role that government intervention can play

in foreign Investment.

CH12 We pulled much of this material together when we considered

how a firm can reduce its costs of value creation and / or

increase its value added by investing in productive activities in

other countries.

CH14 We considered the various models for entering foreign markets.

Capital budgeting

• Capital budgeting:– Quantifies the benefits, costs and risks of an

investment– Managers can reasonably compare different

investment alternatives within and across countries• Complicated process:

Development

Identification Selection Follow-up

Implementation

Project and Parent Cash Flows

• Project cash flows may not reach the parent:

– Host country may block cash-flow repatriation

– Cash flows may be taxed at an unfavorable rate

– Host government may require a percentage of cash flows to be reinvested in the host country

Adjusting for Political and Economic Risk

• Political risk:– Expropriation - Iranian revolution, 1979– Social unrest - after the breakup of Yugoslavia, company assets

were rendered worthless– Political change - may lead to tax and ownership changes

• Collapse of communism in Eastern Europe• Attack on the World Trade Center

• Economic risk– Inflation

Financing Decisions

• How the foreign investment will be financed

• How the financial structure of the foreign affiliate should be configured

Financing Decisions and The Global Capital Market

• A capital market brings together those who want to invest money and those who want to borrow money

• Those who want to invest money include– Corporations

– Individuals

– Non-bank financial institutions

• Those who want to borrow money include– Individuals

– Companies

– Governments

Financing Decisions and The Global Capital Market

• Capital market loans to corporations are either

– Equity loans occur when corporations sell stock to investors

– Debt loans occur when a corporation borrows money and agrees to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making

Financing Decisions and The Global Capital Market

• Cost of capital is the price of borrowing money, which is the rate of return that borrowers must pay investors

– In a purely domestic capital market the pool of investors is limited to residents of the country

• Places an upper limit on the supply of funds available• Increases the cost of capital

– A global capital market provides a larger supply of funds for borrowers to draw on

• Lowers the cost of capital

Financing Decisions and The Global Capital Market

Source of Financing

• Global capital markets for lower cost financing.

• Impact of host country - may require projects to be locally financed through debt or equity– Limited liquidity raises the cost of capital– Host government may offer low interest or subsidized loans to attract

investment

• Impact of local currency (appreciation/depreciation) influences capital and financing decisions

Financial Structure

• Financial structure:– Follow local capital structure norms?

• More easily evaluate return on equity relative to local competition

• Good for company’s image

• Best recommendation: adopt a financial structure that minimizes the cost of capital

Global Money Management　　　　 -The Efficiency Objective

• Minimizing cash balances:– Money market accounts - low interest - high liquidity

– Certificates of deposit - higher interest - lower liquidity

• Reducing transaction costs (cost of exchange):– Transaction costs: changing from one currency to another

– Transfer fee: fee for moving cash from one location to another

Global Money Management 　　　　 - The Tax Objective

• Countries tax income earned outside their boundaries by entities based in their country– Can lead to double taxation– Tax credit allows entity to reduce home taxes by amount paid

to foreign government– Tax treaty is an agreement between countries specifying what

items will be taxed by authorities in country where income is earned

– Deferral principle specifies that parent companies will not be taxed on foreign income until the dividend is received

– Tax haven is used to minimize tax liability

Moving Money Across Borders: Attaining Efficiencies and Reducing Taxes

• Unbundling: A mix of techniques to transfer liquid funds from a foreign subsidiary to the parent company without piquing the host country

– Dividend remittances– Royalty payments and fees– Transfer Prices– Fronting loans

• Selecting a particular policy is limited when a foreign subsidiary is part owned by a local joint-venture partner or local stockholders

Dividend Remittances

• Most common method of transfer

• Dividend varies with:

– Tax regulations

– Foreign exchange risk

– Age of subsidiary

– Extent of local equity participation

Royalty Payments and Fees

• Royalties represent the remuneration paid to owners of technology, patents or trade names for their use by the firm– Common for parent to charge a subsidiary for technology, patents

or trade names transferred to it– May be levied as a fixed amount per unit sold or percentage of

revenue earned• Fees are compensation for professional services or

expertise supplied to subsidiary– Management fees or ‘technical assistance’ fees– Fixed charges for services provided

Transfer Prices

• Price at which goods or services are transferred within a firm’s entities– Position funds within a company

• Move founds out of country by setting high transfer fees or into a country by setting low transfer fees

– Movement can be within subsidiaries or between the parent and its subsidiaries

Benefits of ManipulatingTransfer Prices

• Reduce tax liabilities by using transfer fees to shift from a high-tax country to a low-tax country

• Reduce foreign exchange risk exposure to expected currency devaluation by transferring funds

• Can be used where dividends are restricted or blocked by host-government policy

• Reduce import duties (ad valorem) by reducing transfer prices and the value of the goods

Problems With Transfer Pricing

• Few governments like it– Believe (rightly) that they are losing revenue

• Has an impact on management incentives and performance evaluations– Inconsistent with a ‘profit center’

– Managers can hide inefficiencies

Fronting Loans

• Loan between a parent and subsidiary is channeled through a financial intermediary (bank)– Allows circumvention of host country restrictions on remittance of

funds from subsidiary to parent

– Provides certain tax advantages

Tax Advantages of Fronting Loans

Techniques for Global Money Management

　 Firms use two money management techniques in attempting to manage their global cash resources in the most efficient manner: centralized depositories and multilateral netting.

Techniques for Global Money Management --Centralized depositories

• Need cash reserves to service accounts and insuring against negative cash flows

• Should each subsidiary hold its own cash balance?– By pooling, firm can deposit larger cash amounts and earn higher

interest rates– If located in a major financial center, can get information on good

investment opportunities– Can reduce the total size of cash pool and invest larger reserves in

higher paying, long term, instruments• Cash Budget report• Netting Center

以鴻海為例

日本原料

香港

台灣總公司 大陸製造美國原料

淨額中心(Netting Center)

•淨額結算的中央控制點•設置在外匯管制最少的地區•四個地區，四者幣別•人民幣無法主動流通•台灣有外匯限制•香港免徵交易税

Techniques for Global Money Management --Centralized depositories

• Square root of ($1,000,000²+2,000,000²+3,000,000²)

= Square root of 14,000,000

=$3,741,657

• $28 million+(3* $3,741,657) =$39,224,971

• $46 million− $39,224,971=$6,775,029

Techniques for Global Money Management --Multilateral Netting

• Bilateral netting

• Multilateral netting – simply extending the bilateral concept to multiple subsidiaries within an international business

Frenchsubsidia

ry

Mexicansubsidiar

y

$4million

$6 million

$2 million

Techniques for Global Money Management --Multilateral Netting

Techniques for Global Money Management --Multilateral Netting

Cash Flows After Multilateral Netting

• If the transaction costs is 1%• Before multilateral netting, transaction costs is $ 430,000 ($43 million *

1%)• After multilateral netting, transaction costs is $ 50,000 ($5 million* 1%)• A saving of $380,000 achieved through multilateral netting

Case1- Introduction of company

• Procter & Gamble (P&G) is the largest U.S.

consumer products company.• P&G manufactures and markets more than 200

products that it sells in 130 countries.

• Unilever P&G is a dominant global force in laundry detergents, clearing products, personal care products, and pet food products.

Case1- Company failure

• By 1985, after 13 years in Japan, P&G was still losing $40 million a year there.

• It had introduced disposable diapers in Japan and only held 8% share of market.

• In the early 1980s, P&G introduced its Cheer laundry detergent in Japan, but the advertisement is wrong.

Case1- Products succeed

• P&G experience with disposable diapers and laundry detergents in Japan forced the company to rethink its product development and marketing philosophy.

• Succeed brain: Joy (dish soap.)

New laundry detergent.

Case2- Introduction of company

• Merrill Lynch is a investment banking, also the largest underwriter of debt and equity and the third largest mergers and acquisitions adviser.

• Merrill Lynch started a private client business in Japan in 1980s but met with limited success.

Case2- Company failure in Japan

• Because Japan’s big four stockbrokerages, which traditionally had monopolized the Japanese market.

• Restrictive regulations made it almost impossible for Merrill Lynch to offer private clients.

Case2- Reentry Japan

• In the mid-1990s, Japan embarked on a wide-ranging deregulation of its financial services industry.

• The company initially considered a joint venture with Sanwa Bank to sell Merrill Lynch’s mutual fund products.

• The best way to enter the Japanese market is acquired Yamaichi Securities which is bankrupt.

　　 Thank you for your listening