International Financial Management
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UNIVERSITY OF ST ANDREWS School of Management MN5607: International Financial Management Semester One Module Group Essay On "Continuing development of international business is absolutely dependent on effective and efficient international financial markets" Attention of Donald G Macleod Submitted By: Anna Tutarashvili 080007007 Chetan Oberoi 080015161 Daria Evtyukhova 080004439 Elena Berezovskaya 080015071 Date of Submission: 28 November 2008 Introduction The commonly stated goal of a firm is to maximize its value and thereby multiple shareholders' wealth. Since managers have discovered that they could gain a competitive edge by going globally, more and more companies today are performing internationally in order to achieve the above mentioned goal. Developing business in foreign markets can be distinctly different from local markets and that creates a number of serious difficulties and barriers for companies to go internationally. However, today, there is a tendency towards reducing or removing barriers; thereby, firms are encouraged to pursue international business, which creates opportunities for improving their cash flows. As a result, many firms have evolved into multinational corporations (MNCs), which are defined as firms that engage in international business. At present, while thinking of business, even more of international business, the first image that comes up is a suspected by the society, limited by the government, a monster-size company called MNC, which strives to tap any possible coin from its resources. These high stake players along with smaller firms are now enjoying the consequences of globalization. As globalization intensifies, economies and, therefore, business become heavily interdependent, making international business operations an alluring source of profit. However, what we see today is another part of a golden coin. We are witnessing the severest ever world-wide global economic crisis and the question is who is in charge for this: either inefficient financial markets or poor management of MNCs or their mutual interdependence? Though it is quite sophisticated to give a precise answer to the question because the crisis is still there, the purpose of this essay is to demonstrate that international business and financial markets are mutually dependent and both are responsible for the current crisis.
It does not include foreign investment into the stock markets." (About.com) One of the best examples of FDI is the evolution of Nike Inc. In 1962 Phil Knight, a business student at Stanford's business school had a better idea on how a US firm could use Japanese technology to break the German dominance of the athletic shoe industry in the United States. Knight signed an agreement with a Japanese company Unitsuka Tiger Shoe Company to produce shoes in Japan and sold it in US under the name Blue Ribbon Sports (BRS). In 1972, Knight exported his shoes to various countries like Canada, Australia. He licensed factories in Taiwan and Korea to produce athletic shoes and then sold in Asian countries. In 1978, BRS became Nike Inc. and began to export shoes to various parts of Europe (Nike.com). As a result of exporting and FDI, Nike's international sales reached $1 billion by 1992 and were about $6 billion by 2008 (Findarticles.com). In our opinion, Nike achieved the above figures because of investing in different financial markets across the globe. Has it been a poor economy in say, Korea or Taiwan, it could not have managed to sell its products in Asian countries. Hence, it is very much true that the one of major factors in success of Nike was efficient and effective financial markets. Valuation of cash flows for an international business (Eun & Resnick, 2007) Exhibit 2: Foreign cash flow of a MNC (Madura & Fox, 2007) The risk pie for the MNC's is bigger than the domestic companies. Their valuation model depends on various factors like different economies and value of exchange rates. These factors affect the revenues and costs. The model of evaluating cash flows for an international business can be defined as - ECFh = ? (ECFf) X (FX-R) ECFh = Expected cash flow in home currency (ECFf) = Expected cash flow in foreign currency (FX-R)
The weakness in the US dollar was partially offset by the Canadian dollar (up 4%) and the Australian dollar (up 2%). The overall impact of exchange rate movements on the Group's Profit and Loss statement and free cash flow generation was adverse and is shown separately. In 2004, movements in exchange rates, primarily the US dollar reduced the Group's sales by 4%, underlying pre-tax profit by 7% and underlying earnings per share by 7%. There was a greater impact on underlying operating profit than turnover as the Group generated higher profits in the currencies that have weakened during the year compared to those that have strengthened. The adverse impact of currency movements on free cash flow was 16%. The reason for the greater impact on free cash flow relative to profits was due to the higher margin generation of US Dollar sales in the Americas beverages region. Conclusion In our work we have reviewed an understanding of what is meant by International Business, Financial Markets and current economic crises and how and why we can observe the interaction between these three. Through the examples provided in the last part of the essay we attempted to reveal that the development of international business is depended on effective and efficient financial markets as well as market efficiency is defined by strong and rational management of MNCs. One of the major reasons behind the current US financial crisis was poor management of MNCs, as the mortgage loans were given like pennies. Due to this negligence and when home prices started to go down and a year or so later, borrowers of subprime mortgages started to default on their loans, the financial system became unstable. Thus due to instability of the US economy we are facing problems in all international businesses across the globe. Thus we can conclude - international business and financial markets are a part of vicious circle. They are mutually dependent and working of one depends and affects both the working of other.
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