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International Business
Environments & Operations

15e

Daniels ● Radebaugh ● Sullivan

International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan

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Chapter 10

Global Capital Markets

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Learning Objectives

Describe the finance function and how it fits in the

MNE’s organizational structure

Show how capital structure varies internationally
Describe the different ways to access debt internationally
Show how companies can raise capital on stock markets outside their home countries
Highlight tax issues facing MNEs

The Learning Objectives for this chapter are:

To describe the finance function and how it fits in the MNE’s organizational structure

To show how capital structure varies internationally

To describe the different ways to access debt internationally

To show how companies can raise capital on stock markets outside their home countries

To highlight tax issues facing MNEs

To explore how offshore financial centers are used to raise funds and manage cash flows

Introduction

Learning Objective:

Describe the finance function and how it fits in the

MNE’s organizational structure

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Learning Objective:

To describe the finance function and how it fits in the

MNE’s organizational structure

The Finance Function

The CFO, controller, and treasurer determine the objectives of the global financial management by:

Making the financing decisions

Making investment decisions

Managing short-term capital needs

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The CFO, controller, and treasurer determine the objectives of the global financial management by:

Making the financing decisions

Making investment decisions

Managing short-term capital needs

Capital Structure

Leveraging Debt Financing
The degree to which a firm funds the growth of business by debt is known as leverage
It may not be the best option when:
Excessive reliance on long-term debt raises financial risk and requires a higher return for investors
Foreign subsidiaries of the MNE have limited access to capital markets and debt financing

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Leveraging Debt Financing

The degree to which a firm funds the growth of business by debt is known as leverage

It may not be the best option when:

Excessive reliance on long-term debt raises financial risk and requires a higher return for investors

Foreign subsidiaries of the MNE have limited access to capital markets and debt financing

Capital Structure

Learning Objective:

Show how capital structure varies internationally

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Learning Objective:

To show how capital structure varies internationally

Selected Capital Structures, FY 2012

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Factors Affecting the Choice of Capital Structure

Debt and Exchange Rates
Asian financial crisis 1997
Global crisis 2007-2009
European economic crisis 2010-2011

Regulatory Risk
Financial stability of banks

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Debt and Exchange Rates

Asian financial crisis 1997

Global crisis 2007-2009

European economic crisis 2010-2011

Regulatory Risk

Financial stability of banks

Global Capital Markets

Learning Objective:

Show how companies can raise capital on stock markets outside their home countries

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Learning Objective:

To show how companies can raise capital on stock markets outside their home countries

Global Capital Markets

Eurocurrency

“Offshore Currency” – any currency banked outside its country of origin

Eurodollar is the most significant Eurocurrency market

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Eurocurrency is “Offshore Currency” – any currency banked outside its country of origin The Eurodollar is the most significant Eurocurrency market

Global Capital Markets

Major Sources of Eurocurrencies

Foreign governments or individuals
Multinational enterprises with excess cash
European banks with excess foreign currency
Countries with large foreign exchange reserves
China, Japan, EU, Saudi Arabia, Russia, Taiwan

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The Major sources of Eurocurrencies are foreign governments or individuals, multinational enterprises with excess cash, European banks with excess foreign currency, countries with large foreign exchange reserves, such as China, Japan, EU, Saudi Arabia, Russia, Taiwan

Global Capital Markets

Characteristics of the Eurocurrency Market
Eurocurrency market is a wholesale market
Public borrowers are major players
Governments, Central banks, Public sector corporations
Euro-credit – short term credit of 1-5 years
Syndication – banks pool resources spread the financial risk

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Some characteristics of the Eurocurrency Market

The Eurocurrency market is a wholesale market where public borrowers are major players as well as governments, central banks, and public sector corporations.

Euro-credit is short term credit of 1-5 years

Syndication is where banks pool resources spread the financial risk

Global Capital Markets

Interest Rates in the Eurocurrency Market

LIBOR – London Inter-Bank Offered Rate

Began in 1986 by British Bankers’ Association

Average rate submitted by 18 different banks

Published daily in London

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Interest Rates in the Eurocurrency Market

LIBOR is the London Inter-Bank Offered Rate which began in 1986 by British Bankers’ Association.

It is an average rate submitted by 18 different banks and is published daily in London

Global Capital Markets

International Bonds
Foreign Bonds – a bond sold outside the borrower’s country but denominated in the currency of the country of issue
Eurobonds – usually underwritten by a syndicate of banks from different countries and sold in a currency other than that of the country of issue

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International Bond

A Foreign Bonds is a bond sold outside the borrower’s country but denominated in the currency of the country of issue. Eurobonds are usually underwritten by a syndicate of banks from different countries and sold in a currency other than that of the country of issue.

Global Capital Markets

International Bond market is attractive to borrowers because it allows companies to diversify its funding sources aside from local, domestic banks

Firms can sometimes borrow in maturities that might not be available in the domestic market

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The International Bond market is attractive to borrowers because it allows companies to diversify its funding sources aside from local, domestic banks. Firms can sometimes borrow in maturities that might not be available in the domestic market.

Global Capital Markets

Equity Securities
Private placement market
Angel investors
Venture capital firms
Institutional investors
Sovereign wealth funds (SWF’s) – state-owned government fund

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Equity Securities come in different forms. In the Private placement market there are:

Angel investors

Venture capital firms

Institutional investors

Sovereign wealth funds (SWF’s) – state-owned government fund

Global Capital Markets

Equity Securities

Equity-capital market (stock market)
IPO – Initial Public Offering

Firms can list in their home country or abroad – International IPO

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Market Capitalization 2012

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Global Stock Market

Trends toward the importance of stock markets in emerging economies, especially China.
Hong Kong Stock Exchange
Shanghai Stock Exchange
Shenzhen Stock Exchange

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The smear stock markets around the world have caused trends toward the importance of stock markets in emerging economies, especially China, such as:

The Hong Kong Stock Exchange

The Shanghai Stock Exchange

The Shenzhen Stock Exchange

Global Stock Market

Trend towards a rise in the Euro-equity market
Stock shares are sold outside the boundaries of the issuing firm’s home country
Trend toward Delisting
Trend of listing stocks on more than one exchange has reversed somewhat
Better prices are often found in the home market
Listing in several markets is expensive

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There are new trend towards a rise in the Euro-equity market, where stock shares are sold outside the boundaries of the issuing firm’s home country. Also the trend of listing stocks on more than one exchange has reversed somewhat because better prices are often found in the home market, and listing in several markets is expensive.

Global Stock Market

American Depositary Receipt (ADR)
A negotiable certificate issued by a U.S. bank in the United States to represent the underlying shares of a foreign corporation’s stock held in trust at a custodian bank in the foreign country.
Traded like stock shares
Most foreign companies list on the U.S. stock exchanges through ADR’s

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An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. bank in the United States to represent the underlying shares of a foreign corporation’s stock held in trust at a custodian bank in the foreign country. They are traded like stock shares, and most foreign companies list on the U.S. stock exchanges through ADR’s

International Tax Practices

Learning Objective:
Highlight tax issues facing MNEs

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Learning Objective:

To highlight tax issues facing MNEs

International Tax Practices

Issues:

Differences in types of taxes
Differences in Generally Accepted Accounting Principles (GAAP)
Differences in Tax Rates

Two Approaches to Corporate Taxation:

Separate Entity Approach – used in the U.S.

Integrated System Approach – avoids double taxation

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There are differences in types of taxes, differences in Generally Accepted Accounting Principles (GAAP), and differences in Tax Rates.

The are generally two Approaches to Corporate Taxation:

Separate Entity Approach – used in the U.S.

Integrated System Approach – avoids double taxation

Taxing Branches and Subsidiaries

The Foreign Branch

Extension of the parent company

The Foreign Subsidiary
Legal entity
The Controlled Foreign Corporation (CFC)
US Tax law – Active vs. Passive income

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The IRS recognizes the following for tax purposes:

The Foreign Branch, an extension of the parent company

The Foreign Subsidiary, a legal entity

The Controlled Foreign Corporation (CFC) where US Tax law determines Active vs. Passive income

Transfer Prices

Differences in taxation rates between countries
Arm’s length prices – the price between 2 companies that do not have an ownership interest in each other
Companies can establish arbitrary transfer prices between their affiliated companies, to reduce taxes paid

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Transfer pricing practices occur because of differences in taxation rates between countries.

Arm’s length prices are the price between 2 companies that do not have an ownership interest in each other.

Companies can establish arbitrary transfer prices between their affiliated companies, to reduce taxes paid.

Transfer Prices

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Offshore Financial Center

OFC’s 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.
Transactions are usually on both sides of the balance sheet
Transactions are usually initiated elsewhere
Institutions involved are usually controlled by nonresidents

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OFC’s 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.

Characteristics of OFC’s

Large foreign currency (Eurocurrency)
Large net supplier of funds (Switzerland)
Intermediary or pass-through for international loan funds (Bahamas, and Cayman Islands)
Economic and political stability
Efficient and experienced financial community
Good communications and support services
Regulatory climate favorable to the financial industry

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Some characteristics of Offshore Financial Centers are that they have a stock of foreign currency (Eurocurrency), and are large net suppliers of funds, like Switzerland, They are often an intermediary or pass-through for international loan funds, like the Bahamas, and Cayman Islands, and they also enjoy economic and political stability.

They are located in efficient and experienced financial communities and have good communications and support services. Their regulatory climate is favorable to the financial industry.

OFC’s as Tax Havens

OECD uses the following key factors in identifying tax havens:
No or only nominal taxes
Lack of effective exchange of information (especially bank secrecy)
Lack of transparency
No substantial activities
OECD is trying to reduce harmful tax practices through improved translation and disclosure

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The OECD uses the following key factors in identifying tax havens:

No or only nominal taxes

Lack of effective exchange of information (especially bank secrecy)

Lack of transparency

No substantial activities

Accordingly, the OECD is trying to reduce harmful tax practices through improved translation and disclosure.

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