ch 12 & 13

Benefits of Borrowers

* lowers the cost of capital - increases the supply of funds available for borrowing - overcomes the problem of limited liquidity

Potential destabilization of economies due to...

- "hot money" pursuing short term gains - lack of long-term patient money

Foreign Exchange Risk and the Cost of Capital

- Adverse movements in foreign exchange rates can substantially increase the cost of foreign currency loans - Unpredictable movements in exchange rates inject risk into foreign currency borrowing - Initially less expensive loans can become more expensive

Deregulation:

- Allows capital to flow freely between different markets - 1997 the World Trade Organization brokered a deal that removed many of the restrictions on cross-border trade in financial services. This deal facilitated further growth in the size of the global capital market. - Was initiated by the "free market" ideology

Considerations for the Firm

- Borrower can hedge by entering into a forward contract to purchase required amount of the currency being borrowed when the loan comes due - Firm must weigh the benefits of lower interest rates against the risks of an increase in the real cost of capital due to adverse exchange rate movements - Forward exchange market

Consumer Surplus: This portion of value that is captured by the consumer is often due to the

- Competition in the marketplace - Firm's inability to segment the market and charge a price at the individual customer level

Value Creation

- Creating more value increases the firm's profitability - Amount of value a firm creates is measured by the difference between its costs of production & value that consumers perceive in its products - The more value consumers place on a firm's products, the higher the price the firm can charge

4 main strategies when competing internationally

- Global Standardization Strategy - Localization Strategy - Transnational Strategy - International Strategy

What are the 2 factors (of growth) that allowed the international capital market to bloom in the 1980s, 1990s, and 2000s?

- Information Technology - Deregulation

Value Chain: Support Activities

- Information systems - Company infrastructure/ Logistics - Human Resources

2 Drivers of Experience Curve

- Learning Effects - Economies of Scale

Value Creation: Two basic strategies to create value and attain competitive advantage according to Porter

- Low-Cost Strategy - Differentiation Strategy

Eurobonds are... issued by

- MNE's - large domestic corporations - governments - international institutions

Characteristics of Learning Effects

- More significant with complex tasks that are repeated - Declines and then ceases after two to three years due to economies of scale

3 Risks of Global Capital Market

- Nations are more vulnerable to speculative capital flows - Potential destabilization of economies - Lack of quality information on foreign investments

To maximize the value of the firm, managers must pursue strategies that increase the firm's

- Profitability (return on invested capital) - Profit growth (percentage increase on invested capital)

Value Chain: Primary activities

- R&D - Production -Marketing & sales - Customer service

Deregulation

- Response to Eurocurrency market - Increasing acceptance of the "free market" ideology - WTO 1997 financial services agreement - Dismantling of national capital controls - Less restrictions on inward/outward capital flows

Benefits of Listing Stock on Foreign Equity Markets

- Tap into larger pool of funds for investment - Lowering cost of capital - Prelude to issuing stock in local market - Facilitate future acquisitions of foreign firms

Segments of the Global Capital Market

- The Eurocurrency Market - The International Bond Market - International Equity Market

Eurodollars

- are dollars banked outside of the US - account for two-thirds of all eurocurrencies

The relatively low correlation between the movements of stock markets in different countries is due to...

- countries pursue different macroeconomic policies - countries face different economic conditions - different stock markets are still somewhat segregated from each other due to capital controls

Nations are more vulnerable to speculative capital flows due to...

- deregulation - reduced controls on cross-border capital flows

Global Expansion, Profitability, and Profit Growth

- expand the market for their domestic products - realize location economies by dispersing certain value creation activities to those locations where they can be performed most efficiently and effectively - realize greater cost economies from experience effects by serving an expanded global market from a central location - earn a greater return by leveraging valuable skills (core competence) developed in foreign operations and transferring them to the firm's other operations

What did the growth of Information Technology accomplish?

- facilitated instantaneous communication - diminished the cost of sharing information

Eurobonds are not offered in ___ and to___

- in capital market - to residents of the country, in whose currency they are expressed

As competition intensifies...

- international and localization strategies tend to become less viable - the firm must shift toward either a global standardization or transnational strategy

Trend toward internationalizing global equity markets is resulting in:

- internationalization of corporate ownership - companies broadening stock ownership by listing stock on equity markets of other nations

2 Effects of location Economies

- lower the cost of value creation and help the firm achieve a low-cost position and/or - enable the firm to differentiate its products offerings from those of competitors

International Portfolio Risk Reduction: Solnik's study suggests that the...

- rate of integration is not occurring as rapidly as perceived - a fully diversified portfolio with stocks from many countries is less than half as risky as a fully diversified portfolio that contains only US stocks

Leveraging Subsidiary Skills requires firms to...

- recognize that valuable skills can come from any part of the firm (NIH syndrome) - establish incentives to encourage local employees to acquire new skills - have a process that identifies valuable new skills - facilitate the transfer of new skills within the firm

International Portfolio Risk Reduction: Volatile exchange rate movements limit...

- risk-reducing effects of international portfolio diversification - growth of the international capital market

Economies of Scale derive from

- spreading fixed costs over a large volume - serving global markets from a single location - increased size of the firm increases bargaining power with suppliers

The International Bond Market

... Foreign Bonds

Eurocurrency market is a source for...

....low-cost source of funds for international business

Strategy

Actions that managers take to attain the goals of the firm

Foreign Bonds

Bonds sold outside borrower's country & denominated in the currency of the country where issued OR A bond issued by a foreign borrower in the currency of the country in which it is sold

Function of a Generic Capital Market

Brings together those who want to invest money with those who want to borrow money

Learning Effects

Cost savings that come from "learning by doing"

Main purpose of Foreign Bonds

Desire to lower cost of capital

Information Technology

Development of international telecommunications technology and advances in data processing

Localization Strategy

Extensively customize product offering to match tastes and preferences in different national markets

Limitations of Location Economies

Need to consider the impact of: - transportation costs - trade barriers - political risks - economic risks - foreign exchange risks

Consumer Surplus

Occurs when the price charged by a firm on a good or service is less than value placed on it by a customer

International Portfolio Risk Reduction

Perception is that the stock markets are integrating & reducing the benefits of international diversification

Benefits of Investors

Provides portfolio diversification

Global Standardization Strategy

Pursuing a low-cost strategy on a global scale by reaping cost reductions from economies of scale, learning effects, and location economies

Economies of Scale

Reductions in unit cost achieved by producing a large volume of a product

Pressures for Local Responsiveness

Requires a firm to differentiate its product and marketing strategy from country to country due to differences in: - consumer taste and preferences - infrastructure and traditional business practices - distribution channels - host government demands

Pressures for Cost Reduction

Requires a firm to lower the costs of value creation by mass producing a standardized product at an optimal location to realize location and experience curve economies

Core Competence

Skills within the firm that competitors cannot easily match or imitate that exist within the value creation activities of the firm

International Strategy

Taking products first produced for the domestic market and selling them internationally with only minimal local customization

Location Economies

The economies that arise from performing a value creation activity in the optimal location for that activity in the world

Experience Curve

The systematic reduction in production costs that have been observed to occur over the life of the product related to the cumulative output over time.

Leveraging Subsidiary Skills

Transferring valuable skills from subsidiaries and applying them to other operations within the firm's global network

Transnational Strategy

When a firm is trying to simultaneously: - achieve low costs through location economies, economies of scale, and learning effects - differentiate their product offerings across geographic markets to meet local differences - foster a multidirectional flow of skills between different subsidiaries within the firm's global network of operations

Expanding internationally can

achieve both

The Eurocurrency Market (or eurocurrencies)

any currency banked outside its country of origin

Nations have their own

domestic equity markets (many open to foreign investors)

Low-Cost Strategy

driving down the production costs of the product

Evolution of Strategy: Problem with the international and the localization strategies is that competitors will...

emerge and the firm must reduce their relatively high cost structure

Differentiation Strategy

increasing the attractiveness of the product

Eurobonds

international bond that is expressed in a currency not native to the country where it is issued.

Preeminent goal of a firm is usually to...

maximize the value of the firm for it's owners in a socially responsible manner

Systematic Risk

movements in a stock portfolio's value that are due to macroeconomic forces that affect all firms rather than factors specific to an individual firm

No global equity market exists similar to...

the international currency and bond markets