1-1

FINS3616
International Business Finance
Dr Bohui Zhang (Week 1-4)
9385 5834
Room: ASB 314
(access from west lobby)
Email: bohui.zhang@unsw.edu.au
Consultation: Wed 16:00 18:00
(or by appointment)
1-2
Textbook
Required textbook:
- Bekaert, Geert, and Hodrick, Robert, 2012,
International Financial Management:
International Edition, 2nd ed. Pearson
- This book is available from the UNSW
bookshop located near the Quadrangle.
Other reference:
- Butler, Kirt, 2008, Multinational Finance,
John Wiley Publishing, 4
th
Edition.
1-3
Assessment
Tutorials 10%
- Attendance 5%
- Participation 5%
Mid Session 30%
- Week 7 Saturday (Sep. 13
th
)
- Coverage: Week 1 to 6
Group project 25%
Final Examination 35%
- Formal exam period
- Coverage: Week 7-12
Total 100%
1-4
Mid-session Exam
It includes 45 multiple choice questions.
Closed book
One and a half hours
Details will be discussed in week 6.
1-5
Study Tools
Australian Securities Exchange
(http://www.asx.com.au/)
Reserve Bank of Australia
(http://www.rba.gov.au/)
World map
(http://maps.google.com/)
Bloomberg.com
(http://www.bloomberg.com/news/)
1-7
Australia's top 10 export markets in 2010
1. Introduction of international business finance
1-9
Three phases of business
Three broad phases in the evolution of a
firm
- Domestic phase : operations are confined
within the boundaries of one country
- International trade phase : the firm imports
materials or export its product or both
- Multinational phase : the firm establishes
operations overseas
Rio Tinto
Australian mills
Rio Tinto
Chinese mills
Export
Rio Tinto
Grasberg Joint
Venture,
Indonesia
Foreign operation
Local business
Y1905
Y1990
Y2001
1-11
The objective of international business
finance
This course is concerned with multinational
corporations (MNCs)
It takes the perspective of a financial manager
in a multinational corporation
It develops framework for evaluating the
opportunities, costs, and risks of operating in
the worlds markets for goods, services, and
financial assets
1-12
Structure of a multinational corporation
Board of Directors
Management
Share-
holders
Debt
Assets
Equity
1-13
The objective of international business
finance
Goals of an MNC
--Maximize shareholder wealth (US, UK, Australia)
--Maximize stakeholder wealth (Europe and Asia)
Conflict of interest between shareholders and
managers
Independent board of directors; concentrated
ownership; executive compensation; shareholder
activism and litigation; hostile takeovers
2. Opportunities of multinational
operations
1-15
Theoretical support for multinational
operations
Theory of comparative advantage: a country
should produce and export goods if it can
produce with relative efficiency and import
goods from other nations which can produce
more efficiently.
For example:
-- Australia: mining and agricultural industries
-- India: IT industry
-- Japan/Germany: manufacturing
-- Saudi Arabia: oil-based industries
1-17
How do MNCs enter foreign markets?
Four methods
--Licensing: gives local firms right to manufacture their
products in exchange for fees
--Franchising: provides specialized sales or service strategies
in exchange for fees. e.g. McDonald
--Joint venture: jointly invest and operate a business with a
foreign company.
--Foreign direct investment: starts a company from scratch
3. Challenges of multinational operations
1-19
Political risk
- The risk that a host government will change the
rules of the game under which business is
conducted.
- Due to unexpected political changes within a host
country or to the hosts relationship with other
governments.
Financial risk
- Foreign exchange risk: the risk of an unexpected
change in the value of the firm due to an unexpected
change in exchange rates
- Financial crises
Cultural risk is the risk of dealing with an unfamiliar
culture
Example:
-- Political risk
The dispute between US and Iranian governments in 1970s
--Financial risk
July 2008 1 A$= 0.97 US$
November 2008 1A$=0.61 US$
Now 1 A$=0.93 US$
--Culture risk
Does everyone around the world like Starbucks coffee?
Alcohol in Dubai?
4. MNCs international partners
1-22
International Banks
e.g. BGI, Citibank, ANZ, and Commonwealth
International Institutions
--The International Monetary Fund (IMF)
--The World Bank
--Regional development banks e.g. The Asian Development
Bank (ADB)
--The World Trade Organization (WTO)
--The Organization for Economic Cooperation and
Development (OECD)
--The Bank for International Settlements (BIS)
--The European Union (EU)
Governments
Individual and Institutional Investors
e.g. hedge funds, private equity firms, and sovereign wealth
funds
5. Globalization
1-24
Globalization
Definition: increasing connectivity and
integration of countries and corporations and
the people within them in terms of their
economic, political, and social activities
Implication:
- integration of the markets for goods and
services
- integration of international financial markets
1-25
Recent integration of global markets for goods &
services:
1960s only 20% of countries were open; By 2000, over
70% of countries were open
Free trade agreements: 1995 creation of the World
Trade Organization (WTO)
1999 creation of the euro and its adoption by an
expanding set of European countries
Outsourcing shifting of non-strategic functions to
specialist firms
WTO
members in
January
2012
1-27
International Trade as a Percentage of GDP
1-28
Recent integration of financial markets:
Financial market liberalization in both developed
and emerging markets in 1980s and 1990s
Increasingly interdependent national financial
markets, including cooperative linkages among
securities exchanges
Derivative contracts and securitization techniques
become more popular
WTO
members
6. How to record a countrys cross-border business?
Can we do it like a firms income statement?
1-31
Balance of payments
The balance of payment (BOP)
- records all economic transactions between the
residents of the home country and residents of all
other countries
E.g. According to Australian Bureau of Statistics, the
Australian BOP is a systematic record of economic
transaction between residents of Australia and residents
of the rest of the world.
- measures all financial and economic transactions
over a specified period of time.
1-32
Balance-of-Payments Statistics
Types of accounts and balances:
Current account measures purchases of goods/services,
interest and dividend receipts and payments, and transfer
payments between countries (e.g., gifts or aid)
Capital account measures cross-border transactions
associated with changes in ownership of assets and
liabilities
Regular capital account measures transactions on assets
except gold and currencies
Official settlement account measures transactions on
gold and currencies
Australias balance of payments
Current account 2009
Goods: exports 1,068
Goods: imports -1,575
Services: exports 502
Services: imports -370
Receipts from foreign investments 588
Payments on foreign assets in Australia -467
Net unilateral transfers -125
Current account balance -379
Australias balance of payments
Capital account 2009
Regular capital account
Australian assets aboard -89
Foreign assets in Australia -144
Financial derivatives 214
Official settlements account
Australian reserves assets -52
Foreign official assets 450
Capital account balance 379
1-35
Balance-of-Payments Statistics
Double-entry accounting system
Each transaction gives rise to a credit (inflows) and a
debit (outflows), both of equal value
An important Balance of Payments identity:
Current Account + Capital Account = 0