Features of financial management in transnational companies
The concept of transnational companies. Finding ways to improve production efficiency. International money and capital markets. The difference between Eurodollar deposits and ordinary deposit in the United States. The budget in multinational companies.
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Features of financial management in transnational companies
Currently, the United States is not more dominant in the world economy, and inventions, new technologies and the flow of capital across national borders. Most large modern company engaged in research work in foreign laboratories, receive capital from foreign investors and hire foreign workers to the most responsible positions. Now, many of America's largest industrial companies, including the «Dow Chemical», «Colgate-Palmolive», «Gillette», «Hewlett-Packard» and «Xerox», sell more of their products outside the U.S. than at home. Do not fall behind and service sector firms, such as «Citicorp», «Disney», «McDonalds» and «Time Warner», they all get more than 20% of its revenue from overseas operations.
This trend is even more pronounced in the profits. In the last three years, «Coca-Cola» to get more money in the Pacific and Western Europe than in the U.S. Since up to half or more sales revenue and profits of the companies was coming from abroad, they are trying to comply with international demands to get the benefits and avoid the political skirmishes.
At the same time, foreign-based multinational companies arrive on American shores in greater numbers than before. Swedish firm ABB, the Dutch «Philips», the French «Thomson» and the Japanese «Fujitsu» - all marketing campaign, to be registered in the U.S. because they hire Americans, transfer technology to the United States to promote the growth of the trade balance and the overall economic well-being USA. Very few Americans know or may worry that «Thomson» owns RCA, «General Electric» called his name consumer electronics, and «Philips» owns «Magnavox».
These new «global company» creates a lot of new challenges for governments, concerns over the economic destiny of their countries. For example, whether any difference of nationality, if it creates a lot of jobs? Which country controls the technology by transnational corporations? What are the obligations laid the rules set by Washington, Paris or Tokyo for international operations, the operations of these companies? And if the U.S. firm makes copy machines in Japan and exports it to the United States should the operation be considered in the balance of trade deficit in the article the same way as the import of cars «Toyota» from Japan?
Managers of multinational companies face a wide range of problems that are not there, if the company is only in one country. In this term paper, I highlight key differences between multinational and local corporations and discuss the effect of these differences on financial management enterprises in the USA.
1. Financial management of transnational corporations
1.1 The concept of transnational companies
The term multinational corporation is used to describe a firm that operates in two or more countries. Since the Second World War, developed new and fundamentally different forms of international business, and they are very much contributed to the growth of economic and political interdependence in the world. Now instead of just buying from foreign corporations multinational firms make direct investments in fully integrated operations, from extraction of raw materials, production of finished products to the delivery of its products to consumers worldwide. Today, a network of transnational corporations control a significant and growing share of the world market of technology, marketing and production resources.
In both the U.S. and overseas companies are becoming international following reasons.
1. Search for new markets. Once a company has saturated the local market, the opportunities for growth are often much more abroad. Thus, these firms grew into the domestic market, as «Coca-Cola» and «McDonalds», actively took to foreign markets, and foreign firms such as «Sony» and «Toshiba», and now dominate the consumer electronics market in the U.S.
2. Search for sources of raw materials. Not surprisingly, many U.S. oil companies, such as «Exxon», have many subsidiaries around the world, to ensure access to basic resources needed to support core business.
3. Search for new technologies. No country has a dominant advantage on all kinds of technology; companies are scouring the globe for the best scientific and engineering ideas. For example, «Xerox» in the United States began to produce more than 80 different copy machines that have been designed and built by its joint venture «Fuji Xerox» in Japan. Similarly kind of detergent, pioneered «Procter and Gamble» and Japan in response to a competitor's product, now sold under the name «Ariel» in Europe under the brand names «Cheer» and «Tide» in the U.S.
4. Finding ways to improve production efficiency. Company from high-cost production moving their production to countries where similar costs low. For example, «General Electric» has works for the production and assembly plants in Mexico, South Korea and Singapore, and Japanese industrial companies move part of their production to countries with lower costs in the Pacific Ocean. Even BMW firm in response to high production costs and Germany announced that it is building a plant in South Carolina. The ability to shift production from one country to another is essential to the cost of labor in all countries. For example, when the «Xerox» threatened to move its plant to repair copiers for Mexico, its union in Rochester, New York, agreed to develop measures to improve the regulation of work and labor productivity growth for the sake of production capacity in the United States. Some multinational companies are almost daily decisions about where tolerated ¬ Sit production. When the «Dow Chemical» said that in Europe reduced demand for some solvents, the company reduced their production at a plant in Germany and moved here production of other chemicals, which had previously been imported from the U.S. Relying for the decision on a sophisticated computer model, «Dow Chemical» increased capacity utilization at the plant and thus maintained a lower cost of capital.
5. Bypass political barriers and controls. The main motive of the Japanese automobile firms for production of motor vehicles in the United States was to bypass the import quota for this product. Now «Honda», «Nissan», «Toyota», «Mazda» and «Mitsubishi» collect cars or trucks in the United States. One of the factors that pushed the drug company U.S. firm «SmithKline» and the British firm «Beecham» to a merger; it was their desire to avoid licensing and regulatory obstacles in its largest markets - in Western Europe and the U.S. The company is now «SmithKline Beecham» may itself determine its participation in the domestic markets, both in Europe and in the United States. Finally, when the German BASF launched biotechnology research at home, she faced with the legal and political claims of the environmental concerns of the movement «green». In 1990. BASF moved its research on cancers and diseases of the immune system in two laboratories in the suburbs of Boston. This place was attractive not only because of the large number of engineers and scientists, but also because these practice better ways of litigation in this area, including security protection of animals and the environment. «We decided it would be better to have a laboratory located where we will have less worry about what will happen in the future» - said Rolf-Dieter Acker, director of biotech research company BASF.
6. Diversification. Organizing production and distribution network around the world, companies can hedge against adverse changes in economic trends in any one country. For example, «General Motors» to cushion the fall in sales volume in the U.S. during the recession in 1990, 1991 he. Due to the increase in sales volume of its European subsidiaries. In general, geographic diversification is working for the company, since the economic ups and downs in different countries is not fully connected to each other, despite the close relationship in the world economy.
The past decade has demonstrated the growing investment of foreign corporations in the United States. These «reverse» investment, which are the subject of growing attention to the official U.S. government officials, and in fact grew more rapidly in the past few years than the foreign investment of U.S. corporations. Similar trends are important because of their significance to blur the traditional doctrine of independence and self-reliance, which has always been the hallmark of U.S. policy. As U.S. corporations, with their huge foreign operations are said to use their economic power to exert political and economic influence in the government of the host country in many parts of the world, there are fears that foreign corporations will try to get the same effect on U.S. policy. However, this development involves increasing the degree of interaction and interdependence between businesses and countries, to which the United States has no defense.
In the last three years there have been very dramatic international developments, including the beginning of a transition to a market economy in the former Co Soviet Union, the collapse of communism in Eastern Europe, the reunification of Germany. In the future establishment of the European Community single European currency, a mechanism will help hungry goods and capital mills in Eastern Europe. There was also a war with Iraq and the continued unrest in the Middle East. These, as well as future developments will have an impact on the world economy.
Important questions have been raised on an economic meeting in July 1991. In London. Leaders of the Group of Seven: the U.S., Japan, UK, France, Italy, Canada, Germany, discussed the major changes in East-West relations, as well as ways to assist countries of the former Soviet Union to lift their economies. Particularly important were the discussions about how to prepare for this «new» world order, where the trade quickly, not politics, will determine the relationship between peoples and nations.
1.2 Features of financial management in transnational companies
There are some problems that are connected with the international environment, which increases the complexity of the manager in a transnational corporation and are often forced to change his ways to evaluate and compare alternative courses of action. Six major factors distinguish the financial management of the company, which operates in several countries, from financial management, which is practiced by firms operating in only one country.
1. Different currencies. Cash flows from different parts of transnational corporations will be expressed in different currencies. Consequently, the analysis of exchange rates and the impact of fluctuations in the value of currencies should be included in the financial analysis.
2. Variety of economic and legal systems. Each country, in which a firm operates, has its own unique political and economic institutions, and institutional differences between countries can create significant difficulties when a corporation tries to coordinate and monitor the operations of its subsidiaries around the world. For example, differences in tax laws between countries can lead to the economic transaction will have surprisingly uneven economic results after taxes, depending on where the transaction occurred. Similarly, differences in the legal systems of host countries, such as the common law system in the UK compared to the French Civil Code, complicate many things from simple record of the transaction to the role played by the Court in the resolution of disputes. Such differences may limit the flexibility of transnational corporations in the allocation of resources at its discretion and may even make illegal procedures performed by one division of a company, for its other divisions. These differences can also create difficulties for the performers, trained in one country, while performing operations in another country.
3. Language differences. The ability to communicate is critical for all business transactions, and U.S. citizens are often in a worse position, because we tend to possess good only in English, while the business people from Europe to Japan usually know several languages, including English. Thus, they can log on to our market more easily than we penetrate their market. The importance of this factor cannot be over-emphasized.
4. Cultural differences. Even within geographic regions that have long been considered to be relatively homogeneous, different countries have unique cultural heritage that forms the value and impact on the role of business in society. Transnational corporations are finding that issues such as the definition of suitable targets firm attitude to risk-taking, relationships with employees, the ability to cut unprofitable operations, etc., can vary quite considerably from country to country.
5. Role of Government. Most of the traditional models in finance suggest the existence of a competitive market in which the terms of trade are determined by the participants. Because of its power to set ground rules the government is involved in the market process, but his participation is minimal. Thus, the market is a primary barometer of success and an indicator of the actions that must be taken to remain competitive. This view of the market process reasonably correct for the United States and other major Western industrialized countries, but it accurately describes the situation in most countries of the world. Often the environment in which the company competes, the actions to be taken or avoided, the terms of trade for a variety of transactions are not determined at the scene of these market operations, and through direct negotiations between the host country and the multinational corporation. This political process is vital, and it should be treated as such. Thus, our traditional financial models should be revised to include the political and other non-economic aspects of the decision process.
6. Political risk. The distinguishing characteristic of the country is that it exercises sovereignty over the people and property in the territory. Consequently, the country is free to impose restrictions on the transfer of resources and even corporations to expropriation of assets of a foreign company without compensation. This is called political risk, and it tends to remain largely constant, not a variable quantity that can be changed by negotiation. Political risk varies from country to country, and it should be right to include in any financial analysis. Another aspect of political risk - is terrorism against U.S. firms or their employees abroad. For example, the American of staff repeatedly kidnapped and held for ransom in a number of South American countries.
These six factors complicate the financial management of multinational corporations and increase the risks faced by firms involved in international business. But the prospects of high profits often make acceptable for companies making these risks and the need to study how to minimize them, or at least get along with them.
2. International monetary system
Since the end of World War II until August 1971. System applied in the world of fixed exchange rates, which was controlled by the International Monetary Fund. In this system, the U.S. dollar was pegged to gold ($35. Per ounce - 31.1 g), and other currencies were pegged to the dollar. Exchange rates between the dollar and other currencies tightly controlled within a narrow range, but occasionally they are corrected. For example, in 1964. The British pound sterling was changed to a value of 2.80 dollars for 1F. Art. with possible fluctuations around the course to within 1%.
Currency fluctuations are due to changes in demand and supply of U.S. dollars, pounds sterling and other currencies. These changes in demand and supply are two primary sources. First, changes in demand and in the currency independent of changes in import and export of goods and services. For example, U.S. importers have to buy British pounds sterling to buy British goods, while the British importers must buy dollars to pay for American goods. If the U.S. imports from the UK than the U.S. exports to the UK, the demand for the pound will exceed demand for the dollar, it will increase the price of the pound relative to the dollar prices. In terms of Table 1 dollar price of the pound to rise to, say, 1.7725 to 2.0000 dollars. They say that the dollar is devalued, while the pound sterling to revalue. In this example, the root cause of change - the U.S. trade deficit with Britain. Of course, if U.S. exports to the UK will be higher than the U.S. imports from the UK, the UK will have a trade deficit with the United States.
Changes in the demand for foreign currency and, therefore, fluctuations in the exchange rate also depend on the movement of capital between countries. For example, assume that interest rates in the UK than in the U.S. To benefit from the high interest rates in the UK, U.S. banks and even knowledgeable individual entrepreneurs will buy pounds for dollars and then use those pounds to buy high-yielding securities the UK. These purchases will set the trend to higher prices in pound sterling.
Prior to August 1971 fluctuations in exchange rates held in a narrow range of 1% as a result of the UK governments regular intervention in market processes. When the value of the pound sterling declined, the Bank of England into the game and buying pounds, offering in exchange for gold or foreign currency. These government purchases pushed up the pound sterling. Conversely, when the pound sterling was too high, the Bank of England sold pounds. Other central banks have acted similarly.
Of course, the ability of central banks to control the exchange rate of its currency was limited to its reserves in gold and foreign currencies for sale. With the approval of IMF country to devalue its currency, which meant that the formal reduction of its price relative to other currencies, if the country has experienced continued difficulties over a long period in the protection of the exchange rate of its currency from falling for the lower limit and if the central bank exhausted its reserves of gold and foreign rates, but which could be used to buy its own currency and thus maintain its price. For these very reasons the British pound was devalued from 2.80 to 2.50 dollars per pound in 1967. This reduced the price of British goods in the United States and the world, as well as increased the prices of foreign goods in the UK and thus halts the growth of the trade deficit the United Kingdom, which is primarily exerted pressure on the pound. Conversely, a country with an excess of exports and a strong currency may revalue its currency, as Germany did it twice in 1960.
Devaluation and revaluation until 1971 occurred very rarely. Usually they are accompanied by severe financial collisions, partly because these countries have sought to delay the necessary measures, while economic pressure does not create an explosive situation. For this and other reasons, the old international monetary system came to a dramatic end in the beginning to 1970. When the U.S. dollar - the basis on which to keep all other currencies, was taken away from the gold standard, and in fact was put into the «free floating».
Currently, the United States and other major countries have a system of floating exchange rates in which the prices of currencies allowed to seek their own value without significant government intervention. The central bank of each country, however, interfered with the foreign exchange markets by buying and selling their currency for mitigating exchange rate fluctuations to some extent, and, in addition, there are agreements between groups of countries to support the relative value of their currencies within agreed fluctuations. Thus, the agreement between the two countries: the Group of Seven concluded at the economic summit meeting in Seoul in October 1985. Led to a significant drop in the U.S. dollar against other major currencies. This action was approved as a necessary measure for the economic summit meeting in Washington in September 1987. Group of Seven countries also initiated help stabilize the falling value of the dollar at the beginning of 1938.
Central banks try to keep the average exchange rate of its currency at a level that seems to be desirable from the point of view of the Government's economic policy. This is important as exchange rate has a major impact on the level of imports and exports, which in turn affect the level of employment in the country. For example, if in the country, the problem of high unemployment, the Central Bank can encourage the depreciation of the currency. This will lead to reduction in price of its products on the world markets and thus stimulate exports, production and employment in the country. On the contrary, the central bank, which is running at full capacity and is experiencing inflation, may try to increase the rate of its currency to reduce the export and import growth. However, under the present system of floating exchange rates such intervention (currency intervention) can influence the situation is only temporary, since market forces are winning in the long term.
Fluctuations in exchange rates can have a significant impact on the Anniversary International monetary transaction. For example, in 1985. Company «Honda Motors» special production model in Japan and its delivery by sea to the United States dispensed at cost 2.38 million yen. In the U.S. model had a sticker price of 12 thousand dollars. Since this is the sale price of the company at 12 thousand dollars was the equivalent of 238 yen per $ 1. * 12000 dollars. = 2.856 million yen, the automaker made an allowance of 20% for the sale price in the U.S. However, three years later, the dollar fell to 128 yen. Now, if the model is still sold for 12 thousand dollars. The number of yen, helping out «Honda Motors», would be equal to only 128 yen per $ 1. * 12000 dollars. = 1,536 million yen and the automaker would lose about 35% on each vehicle sold. Even if the firm kept its price in the U.S. dollar's depreciation by 46% against the yen would turn profits into losses. In reality, for «Honda Motors» while maintaining its 20% premium sale price in the U.S. was supposed to be 2.856 million yen / 128 yen EA $ 1. = 22312.50 dollars. Not surprisingly, the now «Honda Motors» building a plant for the production of its most popular model, «chord» in Merisvil, Ohio!
You might think that making significant currency fluctuations take years. However, they can occur in a very short period. Assume that on 1 January 1986. German investor wants to earn a relatively high interest rate on U.S. Treasury securities, getting 6-month treasury bills for 9700 dollars. maturing at $ 10,000. in late June. The deal promised about 6% per annum. In January exchange rate was 2.44 marks to the dollar, so the Treasury bill cost the investor 23,668 marks (2.44 * 9700 dollars.). In late June, rate was only 2.23 marks per dollar, so the investor's profit in grades was 2.23 * $ 10,000. = 22,300 marks. Thus, exchange rate fluctuations have made the expected 6% revenue loss of 12% of capital.
An integral feature of currency - the mobility at the system of floating exchange rates increases the uncertainty of calculation of cash flows for the multinationals. Since these cash flows are formed in many parts of the world, they are denominated in different currencies. Because exchange rates vary, the dollar equivalent of the consolidated cash flow can fluctuate. This is known as foreign exchange risk, or the risk of changes in exchange rates, and this risk is a major factor in the difference between a multinational corporation and exclusively domestic corporation. But there are many ways in which multinational corporations control and limit the risk of changes in exchange rates, and some of them will be discussed in the next section.
Before concluding our discussion of the international monetary system, it should be noted that not all currencies are convertible. Currency is convertible when the issuing country allows it to circulate on the market rates, and wants to redeem its currency at market rates. This means that in addition to the limited influence of the Central Bank, the government has lost control over the price of the currency. The lack of convertibility creates serious problems for international trade. For example, consider the situation faced by the company «PepsiCo», when she wanted to open a set of restaurants «Pizza Hut» in the USSR. Soviet ruble was inconvertible and «PepsiCo» could not receive and take profits from its restaurants in the Soviet Union in the form of rubles. Therefore, «PepsiCo» suggested using denominated profits from restaurants to buy Russian vodka, which is then shipped to the United States and sold. Profits from the sale of vodka in the U.S. included both the operating profit of the restaurants in the Soviet Union, as well as extra profits from the business of imported vodka.
2.1 International money and capital markets
Ownership of shares U.S. multinationals that have direct investments in foreign countries - is one of the ways in which the citizens of the United States to invest in international markets. The other way - the purchase of stocks, bonds or money market instruments of various put into circulation in foreign countries. U.S. citizens do make investments in significant amounts in stocks and bonds of large corporations with headquarters in Europe, and to a lesser extent, in company with headquarters in the Far East and South America. They also buy securities issued by foreign governments. Such investments in foreign corporations are called portfolio investment, and should be distinguished from direct investments in tangible assets that make U.S. corporations.
Eurodollar - is the U.S. dollar, placed on deposit in a bank outside the U.S. The bank, which put the deposit can be a financial institution of the host country, such as «Barclays Bank» in London, a foreign bank branch in United States, such as the Paris branch of the «Citibank», or even a foreign bank branch of a third country, such as the separation of «Barclay Bank «in Munich. Most of the Eurodollar deposits have a value of 500 thousand dollars. And more, they have a term of from one night to five years.
The main difference between Eurodollar deposits and ordinary deposit in the United States is their geographic location. These two types of deposits do not cover different currencies - in both cases are on deposit dollars. However Eurodollars are outside the direct control of the U.S. monetary authorities, so that the U.S. banking regulation, including such measures as partial reserves, premiums of the Federal Deposit Insurance Corporation, are not applicable. The absence of these costs means that the interest rate paid on Eurodollar deposits tend to be higher than domestic rates on deposits equivalent to the U.S.
Although the dollar is the key international currency, the German mark, Swiss franc, Japanese yen and other currencies are also placed on deposits outside their countries, and these euro currency used in the same way as Eurodollars. Eurodollars are borrowing U.S. and foreign corporations and governments who need dollars for various purposes, especially to pay for companions, exported from the United States, and to invest in the U.S. stock market. The U.S. dollar is also used as an international currency, or international medium of exchange, and many Eurodollars are used for the same purposes. Interestingly, Eurodollars were actually «invented» the Soviet Union in 1946. International traders distrusted Soviet ruble traders or so Soviet traders bought some dollars (or gold), put them on deposit with the Bank of Paris, and then use them to purchase goods on world markets. Everyone liked the idea, and soon the Eurodollar market began to grow in leaps and bounds.
Eurodollars are usually kept in accounts, interest-bearing. Rate paid on these deposits depends on: 1) the rate of interest on loans, as the percentage that the bank earns on lending, determines its willingness and ability to pay interest on deposits 2) the rate of return that can be achieved for money market instruments in the U.S. If the rate on deposits machine in the U.S. was higher than the rate on Eurodollar deposits, the money would be sent back and invested in the U.S., and vice versa. Based on the existence of the Eurodollar market, ease-ne retook dollars from the U.S. and back, it is easy to understand why interest rates in the U.S. cannot howl isolated from the rates in other parts of the world.
Rates on Eurodollar deposits are tied to the standard interest rate, known by the acronym LIBOR, which is defined as «the rate the seller on the London banking market deposits.» LIBOR - the rate of interest is offered to a large and influential London banks on dollar deposits respectable size. In April 1992. LIBOR rate was more than half a percentage point higher than the internal rate of U.S. banks on deposits of the same duration - 8.47% for three-month certificates of deposit U.S. vs. 4.06% for LIBOR rate on certificates of deposit. Eurodollar market is mainly money market operations, most of the deposits and loans to stir for a period of one year.
International bond market
Any bond sold outside the country of origin of the borrower is called an international bond. However, there are two main types of international bonds: foreign bonds and Eurobonds. Foreign bonds - are bonds sold by a foreign borrower but denominated in the currency in which the bonds are sold. For example, «Bell Canada» may need U.S. dollars to finance the operations of its subsidiary in the United States. If she decided to take the necessary capital in the domestic bond market in the U.S., these bonds will receive a guarantee placement with a syndicate of American investment bankers, expressed in U.S. dollars, and then they will be sold, this bond is not different from bonds issued in similar appeal U.S. corporations. Since «Bell Canada» is a foreign corporation, the bonds will be called foreign bonds. Eurobond term used to refer to any bond sold in a country other than the currency in which this bond is expressed. Examples would be the issue of the British firm bonds denominated in sterling and distributed in Germany, or sale of the German company in Switzerland denominated in Deutsche Mark bonds, or that is in France bond issue «Ford Motor», expressed in dollars. Institutional arrangements, which traded Eurobonds differ from the rules established for most other bond issues, the most important difference is the much lower level of disclosure requirements than usually found for bonds issued in the domestic market, in particular, and the United States. Governments tend to be less strict when regulating securities denominated in foreign currencies, than with respect to securities denominated in local currency, as buyers of bonds for the most part more «wiser by the experience.» Lower disclosure requirements result in lower total transaction costs for Eurodollar bonds.
Eurobonds are attractive to investors for several reasons. Usually they come in the form of bearer bonds, but not in the form of registered bonds. Individuals, who wish to remain anonymous for personal reasons or to avoid taxation, find Eurobonds satisfy their desires. Similarly, most governments do not charge tax on interest income earned on Eurobonds. If the investor requires the effective yield of 10%, the Eurobonds due to its exemption from taxation is sufficient to have a coupon rate of 10%. Another type of bonds - domestic bond issue, subject to the imposition of a 30% tax on interest paid by foreign holders of bonds, in which case the required coupon rate is at 14.3%, to generate income after tax at 10%. Investors who prefer privacy and will not make a declaration placed on paid taxes, tend to buy Eurobonds.
More than half of Eurobonds denominated in dollars, most of the remaining loans are bonds in the Japanese yen, the German mark, and the Dutch guilder. Although they are concentrated in Europe, Eurobonds are truly international. Their underwriting syndicates include investment bankers from all over the world, and the bonds are sold to investors, not only in Europe but also in places as far away as Bahrain and Singapore. Until recently, the Eurobonds issued only multinational firms, international financial institutions and national governments. Today, however, the Eurobond market has already begun to use a purely American firm, such as the electrical system of the public, who found that with overseas loans they can lower their cost of servicing the debt.
2.2 Capital budget in multinational companies
Up to this point we have discussed the general environment in which multinational corporations operate. In the remainder of this chapter we look at how international factors affect the key decisions in the corporation, especially in the capital budget. While the same basic principles of capital budgeting analysis are applied to domestic or foreign operations, there are also key differences. First, estimates of cash flows are much more complex for foreign investment.
Most of the multinational companies have an independent subsidiary in each foreign country in which they operate, and the corresponding cash flow to the parent company - this type of dividend payments and royalties received from a subsidiary company and exported to the motherland. Second, these flows must be converted into the currency of the country of origin of the parent company and, therefore, they are subject to future changes in exchange rates. For example, the German subsidiary of the «General motors» can make a profit of 100 million marks in 1995, but the value of this profit to «General Motors» will depend on the exchange rate on the dollar mark. How many dollars will cost the 100 million marks? This is a very relevant and important issue for managers and shareholders «General Motors».
Third, dividends and royalties are usually taxed by both foreign and local governments. Furthermore, a foreign State may limit the amount of cash proceeds that can be repatriated to the country of origin of the parent company.
For example, some governments have set a limit of transferred parent company cash dividends, which is expressed as a percentage of the equity of the subsidiary. Such restrictions are usually aimed at forcing global company reinvest earnings in foreign countries, but sometimes they are imposed for the sake of preventing large capital outflows, which can affect the exchange rate.
Whatever the motives of the host country, the result of such that the parent company cannot use the cash flows of cash held in a foreign country, for the payment of current dividends to its shareholders or to reinvest in other regions of the world where the expected return can be higher. Therefore, from the perspective of the parent company relevant for assessing the effectiveness of foreign investment are the cash flows that a subsidiary can legally send back to the parent company. The present value of these flows is using the appropriate discount rate and compared to the investment required to determine the NPV of the project.
In addition, because of the greater or lesser price riskiness of foreign capital for the project may vary from the equivalent of internal capital project. More at risk due to two reasons: 1) the risk of changes in foreign exchange rates and 2) political risk, while lower risk may be the result of international diversification.
Risk of changes in foreign exchange cursor reflects fatal to foreign investment uncertainty regarding the magnitude of cash flows in the currency of the country that will flow back to the parent company. In other words, foreign project has an additional element of risk due to the fact that the main cash flow will be measured in the currency of the country of origin of the parent company. Flows in foreign currencies, which are translated into the parent company, to be converted into U.S. dollars by exchanging them for the expected future exchange rate. The analysis must be conducted so as to determine the effect of exchange rate changes, on the basis of this analysis should assess the prize for avoiding currency risk, which is added to the domestic price of capital to reflect the risk of currency fluctuations inherent in these investments. As we have seen, sometimes you can be insured by hedging against currency fluctuations, but this is not always possible in full, especially in long-term projects, and in addition to that the cost of hedging is to be deducted from the income projections for the project.
Political risk associated with any action by the government of the host country, which reduces the value of the investment company. These actions include both extreme expropriation without compensation for the assets of the company, but also less dramatic actions that reduce the value of investments of the parent company in a foreign subsidiary, such as raising taxes, exchange control or the control of exports (repatriation) of profits to the restrictions on price changes. The risk of expropriation of assets of U.S. firms abroad is quite small in such traditionally friendly to and stable countries like the UK or Switzerland. However, in Latin America, Africa, the Far East and Eastern Europe, this risk can be considerable. The recent cases of expropriation of assets include the nationalization of companies ITT and «Anaconda» in Chile, «Gulf Oil» in Bolivia, «Occidental Petroleum» in Libya, «Enron» in Peru, as well as the assets of many companies in Iran, Iraq and Cuba.
In general, the political risk premium is added to the price of capital to account for this risk. If management companies are seriously concerned about what this country can expropriate foreign assets, they just do not carry a significant investment in this country. Expropriation is regarded as catastrophic or disruptive event, and the managers did not tend to be that risk, if there is a possibility of huge losses. However, the company can take some steps to reduce potential losses from expropriation in three main ways: 1) by financing its subsidiary together with local capital, and 2) the structuring of transactions so that the subsidiary had value only as part of an integrated system of corporations, and 3) purchase insurance against economic losses from the expropriation of the source, as a corporation for foreign private investment. In the latter case, the premium for the insurance to be added to the cost of the project.
3. International aspects of working capital
3.1 Funds management
Purpose of money management in transnational corporations in general are the same as in the local corporations: 1) acceleration of fundraising and the maximum deceleration of the outflow, i.e., maximizing balance with current cash outflows, and 2) the acceleration of movement of funds of the types of businesses where they are not needed for those who need them, and 3) to maximize your return on cash flows, calculated taking into account taxes and risk adjustment. Transnational corporations use the same general procedure for achieving these goals, as well as local corporations, but because of the longer distances and more serious delays when moving money becomes even more important to use the postal services and electronic transfers.
Although local and multinational corporations have the same goals and use similar procedures, the last face much more difficult tasks. As previously mentioned in the discussion of the political risks, foreign governments often impose restrictions on the transfer of funds out of the country, so IBM can transfer money from his office in Salt Lake City in the bank by pressing a button, but a similar translation of the office in Buenos Aires to have much more difficult. Cash held in Buenos Aires, expressed in Austral, to be converted into dollars before doing the translation. If there happens to the dollar shortage in Argentina or the Argentine government wants to keep dollars in the country to use them to purchase strategic materials, the conversion and, therefore, transfers can be frozen. Even if there is no shortage of dollars in Argentina, its government may restrict the outflow of money from the country, if the funds are profit or depreciation, as opposed to funds intended for the purchase of materials or equipment, so many countries, especially the least developed ones, insist on reinvesting profits in their country in order to stimulate economic growth.
Once it is determined what funds may be transferred out of the country in which a multinational corporation operates, it is important to transfer these funds to where they can make higher profits. While local corporations tend to favor domestic security, the transnational corporation is more concerned about the evaluation of investment opportunities around the world. Most of the multinational corporations use one or more banks for the concentration of assets placed in the money centers such as London, New York, Tokyo, Zurich and Singapore, and the staff working with international bankers, who know and are able to take advantage of the best rates of credit available around the world.
3.2 Receivables Management
As with most other aspects of fiscal policy, work with debtors in multinational companies is generally similar, but also much more complex than in a purely local corporation. First, the credit sale is more risk in the international context, since in addition to the normal risk of default transnational corporation must also worry about exchange rate fluctuations between the time when the sale transaction has taken place, and the moment of collection of receivables. For example, if IBM sells PC Japanese consumer for 147.85 million yen, when the exchange rate was 147.85 yen per dollar, it expects 147.85 million yen: 147.85 yen per $ 1. = 1 million. However, if she sold a computer on credit, with payment in 6 months and during this time the yen against the dollar will go down to the level of 184.8125 yen per dollar, the IBM on receipt of payment will be only 147.85 million yen: 184.8125 yen per $ 1. = 800 thousand dollars. As noted earlier, hedging can help to reduce this type of risk, but it costs money.
In general, the policy of lending to customers is much more important for transnational corporations than for purely domestic firm, for two reasons. First, many U.S. firms selling to the poor, less developed countries, and in this situation the loan is generally a prerequisite for doing business. Second, in many ways these reasons, the developed countries, whose economic status is dependent on exports often, help their industrial companies to compete in global markets by providing loans to foreign countries. For example, in Japan, the major industrial firms have direct ties to the property with large trading houses engaged in international trade, as well as with powerful commercial banks. Besides, the government agency - Ministry of International Trade and Industry - helps Japanese firms to study potential export markets and contributes to potential consumers in obtaining credit for the purchase of goods from Japanese firms. In fact, huge revenues from international trade are used by Japan to finance the export of goods, thereby preserving the trade surplus. U.S. tried to counter this Export-Import Bank, funded by Congress, but the fact of the country's large current account deficit is a clear indication that we have at least succeeded in international markets in recent years compared to some countries.
The huge debt that countries such as Brazil, Mexico and Argentina, are confronted by international banks, including many U.S. banks - a well-known fact, and this situation illustrates how monetary policy (in the case of banks) could have very negative consequences. Banks met with extremely unpleasant problem on these loans, because when you do not pay a sovereign state, the banks cannot make a claim on the assets of the country, they could have done it in the event of late payment by the debtor corporation. Also note that, although the news of bank loans to foreign countries take up the most titles printed edition, many multinational corporations are also worried about the outcome of the provision of its loans to companies, consumers in those countries in which banks gave loans to governments, as firms in these countries also have a strong position.
Focusing on the provision of international credit risk, we do not claim that such a loan is bad. On the contrary, as the potential gains from international transactions is usually much greater than the risk, at least for companies and banks, not regretting the time and resources to conduct a detailed examination of such operations.
3.3 Inventory Management
As with most other aspects of fiscal policy, inventory management in a transnational corporation is similar, but much more difficult than in a purely local company. First of all, there is a problem with the placement of stocks. For example, where the company «Exxon», place reserves of crude oil and petroleum products? The company has refineries and marketing centers, located throughout the world, and one of the alternatives - store products concentrated in a few strategic warehouses, where they can then be sent to the respective regions as the need arises. This strategy can minimize the total amount of reserves required for the implementation of global business, and thus reduce the total investment in the company stock. Note, however, that in considering this issue should take into account potential delays in the delivery of goods from the warehouse to the location of the central locations of consumers abroad. Both operational and insurance stocks in the local stock must be maintained at a level sufficient to meet the needs in the region concerned. Problems such as the Iraqi occupation of Kuwait and the subsequent trade embargo, which has led to a reduction in the world's supply of oil by 25%, further complicate this operation.
Fluctuations in exchange rates also affect the management policy reserves ¬ themselves. If it is assumed that the local currency will rise against the dollar, the U.S. Company operating in Denmark, will seek to increase local supplies of goods until the recovery rate of the crown and to act on the contrary, if you intend to drop the crown.
Another factor that must be considered - the possibility of the establishment of import or export quotas and tariffs. For example, recently the company «Apple Computer» memory chips got 256 KB of Japanese suppliers at negotiated prices. Chip makers in the United States immediately accused Japanese firms in dumping prices, and tried to force the Japanese to raise prices, so «Apple» has decided to increase the availability of chips.
Then PC sales slowed and some stocks unclaimed. As a result, profits suffered «Apple», and its stock price fell, demonstrating once again the importance of careful management of stocks.
As mentioned earlier, another danger in some countries is the threat of expropriation. If the threat is high, the value of stocks should be minimized and the goods will be delivered as needed. Similarly, if the transaction includes the extraction of raw materials such as oil or bauxite processing plants can be transferred to an offshore zone and not be placed close to the production site.
It should also take into account the taxes that have a dual effect on inventory management in transnational corporations. As you know, countries often impose a tax on the company's property, including stocks, and if that is the case, the tax base is the value of the stock on a certain date, say, January 1 or March 1. These rules make profitable for transnational corporations conducting graphics core of the production process so as to reduce the size of stocks at a specified date, and when the set date of collection of the tax varies from country to country within the same region, it is necessary to keep strategic reserves in different countries at different times during the year.
Finally, multinational corporations may consider stockpiling on ships at sea. Petroleum, chemical, grain, and other companies that deal with the massive cargo transported in containers such as tanks, tanker can often buy at a price including the cost of renting or buying land is not much more than the cost of storage, located on land. Loaded tankers may then be in the sea or near the coast in some strategic places. This reduces the risk of expropriation, minimizes the problem of property tax and maximizes flexibility in the delivery of the vessels to the places where the need is great in the product or the price higher.
In this discussion, only slightly affected by the problem of inventory management in multinational corporations - this task is much more complex than purely domestic companies. However, the greater degree of difficulty, the greater the benefit of a good performance management process, so if you want to achieve potentially high payoff, go to the international arena.
Importers and exporters are exposed to credit risk to a much greater extent than businesses that operate only in the domestic market. This is due to time delays, costly information, and long distances. To lower this risk has been developed quite an effective system of letter of credit, from which derive their profits, the economy of scale of operations, and large multinational banks that provide credit, the possibility of co-funding and currency exchange. In situations where the letters are not available, businesses may resort to other methods. To export a major capital expenditure projects in countries with weak market system or code no credit markets and currency exchanges, it is useful to take advantage of forfaiting. In other situations, a suitable way can be acquired by credit insurance or receive direct government guarantees.
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