Global Business Module 11

two methods a company can use for currency translation

-currency translation: the act of translating currencies on a financial statement to another currency METHODS 1. current rate method: a method of foreign currency translation that translates items on financial statements at the current exchange rate -in this case, the current value may be different on the day it is translated than on the date when the assets were originally purchased. Nonetheless, affects the valuation of the firm. -this method is the most widely used 2. temporal method: this method of foreign currency translation uses exchange rates based on the rate in place when the assets and liabilities were originally acquired or incurred -this method avoids the paper gain or loss problem of the current rate method -because assets are purchased at different times throughout the year, the MNC's balance sheet may not balance if the temporal method is used

Financial Accounting Standards Board (FASB)

-in charge of producing GAAP -an independent group that oversees the development and revision of GAAP -supported by the US government, various accounting organizations, and private businesses -it Is charged with establishing and improving the standards by which businesses and not-for-profit organizations produce the financial information that they distribute to decision makers -typically, accounting problems arise overtime within various areas of financial reporting -new types of financial events can be created, for example, that are not covered by GAAP -the major authority for the ongoing evolution of GAAP -weaknesses in earlier rules start to become evident -if such concerns grow to be serious, FASB will step in and study the issues and alternatives and possibly pass new rules or make amendments to previous ones -in 2009, FASB combined all the authoritative accounting literature into a single source for GAAP, Accounting Standards Codification --changes, additions, and deletions to GAAP are not made without proper consideration

derivatives

-tools used to limit losses (hedge) or to multiply gains and losses (speculate) 1. special types of financial instruments, the prices of which are ultimately derived from the price of performance of some underlying assets 2. decreases return volatility or to speculate -return volatility: a measure of the variation in returns on an investment -speculate: increase the volatility of returns

Google/Alphabet case

1. Alphabet is the parent company of Google 2. attempt to lower risk from antitrust violations 3. at the same time, it provided the corporation an opportunity to expand into different subsidiaries 4. it also allowed them to transfer profit to take advantage of the lowest tax jurisdiction and increase profits 5. welp, it caught up to them. France sued for tax they thought was created from the subsidiary in France

Government supported organizations that help businesses with import and export activities to and from their country

1. Japan External Trade Organization (JETRO) was established to help promote exporting of Japanese products to other countries and then after a trade surplus, encourage imports -then began focusing on assisting foreign companies to export their products into Japan -free services: market entry info, business partner matching, expert business consulting, and access to a global network of executives and advisors -offers subsidies to potential companies, makes offices available, and exhibition space 2. Overseas Private Investment Corporation (OPIC) was established to help US businesses invest overseas, particularly in developing countries -provides debt financing, political risk insurance, and support for private equity funds 3. The Export-Import Bank of the U.S (Exchange-IM Bank) -helps exporters who have found a buyer, but the buyer is unable to get financing for the purchase in his or her own country -can provide credit support (loans, guarantees, and insurance for small businesses) that covers up to 85% of the transaction's export value 4. the Private Export Funding Corp (PEFCO) -private sector organization -formed to "assist in the financing of US exports by supplementing the financing available from commercial banks and other lenders -provides medium-to long-term loans if they are secured against nonpayment under an appropriate guarantee or insurance policy issued by Ex-IM Bank or certain small business export loans under a guarantee issued by the SBA

forward contract

1. a contract in which the firm agrees to pay a set rate at the beginning of a contract for delivery at a future date -in the forward contract, the firm agrees to pay a specific rate at the beginning of the contract for delivery at a future date -thus, the firm will pay the agreed-on rate regardless of what the current exchange rate is on the date of the final settlement -specifically, a firm can lock in a guaranteed foreign exchange rate 2. swaps, options, and futures are the additional derivative currency instruments used in the forward contract

currency swap contracts

1. a simultaneous buy and sell of a currency for two different dates 2. locks in the price ex. if Danielle was in England and needed to purchase books from me. She would go ahead and receive the books and then I will create an invoice for the payment (maybe?)

Global Strategy and Risk

1. according to Control Risks Group, A London-based international business, consultancy, MNCs are now active in 100+ countries that are rated "medium" to "extreme" in terms of risk 2. to mitigate this risk, companies must understand the specific nature of the relationship between corporate globalization and geopolitics, identify the various types of risk that globalization exposes them to, and adopt strategies to enhance their resilience -starts with the recognition that the role of MNCs in the evolving global geopolitical landscape continue to change -in the 1990s, the belief of free market enterprise and liberalizing the economic agenda led to many consolidations and therefore, "global players" --conglomerates -corporations were almost unconstrained by political and social consideration -greater international presence of business and increased geopolitical complexity led to exposure of conflict and violence -recently, "global player" a company that has become a political actor as well -and to remain a global player today, a firm must be able to survive not only economic downturns but also geopolitical shocks -this requires understanding that risk has become an reality of the globalization process

transfer pricing compliance

1. all the price manipulations need to remain compliant with local regulations 2. generally, compliance with local tax regulations means setting prices such that they satisfy the "arm's length principle" -prices need to be consistent with 3rd party market results 3. how to know? -"what would an Independent company, operating in a competitive market charge for performing comparable services or selling similar products

societal or cultural risk

1. associates with operating in a different sociocultural environment -advisable to analyze specific ideologies; -the relative importance of ethnic, religious, and nationalistic movements; -and the country's ability to cope with changes -elements such as the standard of living, patriotism, religious factors, or the presence of charismatic leaders can play a huge role in the evaluation of these risks

types of funding for large organizations

1. cash: companies use internally generated cash flows from retained earning -with internal financing, companies use profits as a source of financing rather than distributing the profits to the owners or shareholders 2. loans: bank loans are a form of debt, often with a relatively low cost of capital -assets: a useful or valuable thing; something you own such as building, inventory, or case --in the case of bankruptcy, these debts are among the first repaid upon liquidation of assets 3. bonds: debt securities investors can purchase which will mature over time -the rate of return and time to maturation can vary -they're also lower costs of capital as they are paid before equity in the case of a bankruptcy, and interest paid can be tax deductible 4. equity (shares): particularly for larger and publicly traded organizations -by issuing equity, organizations can essentially sell small fractions of organizational ownership as an asset for investors -riskier, more costly, and less reliable sources of income compared to debt

currency futures contract

1. contracts that require the exchange of a specific amount of currency at a specific future date and at a specific exchange rate -a futures contract is a standardized form that is traded on the exchange market (shows baseline of income)

Currency risks terms

1. currency: any form of money in general circulation in a country 2. foreign exchange rate: the rate at which the market converts one currency into another 3. foreign exchange market: the market in which people use one currency to buy another currency -determines the ever changing rates -the foreign exchange market is how companies, investors, and governments convert one currency into another 4. currency values fluctuate from day to day which poses a risk for firms that operate internationally

Types of funding for smaller organizations

1. debt and equity 2. venture capitalists (VCs): VCs accumulate capital from a number of speculative investors and seek strong business opportunities still in the start up phase -can be quite lucrative, as the amount of capital invested can be high (high enough to justify international operations) -However, investors typically take a significant equity interest in the firm as well -VCs would be represented by a board that would access the viability of the business as an investment and determine the returns 3. Angel investors: they are more often individuals with capital to spare who have taken an interest in a particular business or product. -they may act as advisers or objective investors, they may simply love the product, or they may have investment incentives 4. FFF: "family, friends, and fools"; through personal connections -usually only for capital; does not include help beyond monetary input 5. crowdsourcing: a high amount of people to invest a small amount of capital -reimbursement in the form of credits, t-shirts, early access. to the product, and other incentives are often used to motivate small investments

Sources of Funding: overseas markets

1. debt refinancing: raising capital by borrowing the money and agreeing to repay the entire amount plus agreed on interest at a specific date in the future 2. firms can borrow money from banks or by selling bonds 3. advantage: through debt financing is that companies management does not give up any ownership of the firm, and interest paid can be tax deductible 4. MNCs can issue bonds in overseas markets as well as in their home countries -the Chinese government began letting foreign companies issue yuan-denominated bonds through Hong Kong in 2010 5. firms can also obtain funding via intra-firm loans or trade credits -trade credit: lets the customer defer payments on the good or service for a specified period of time, typically 30-90 days -by borrowing capital from a parent, both the subsidiary and the parent eliminate paying transactions. Costs to an outside entity such as a bank, which would charge fees to make the transaction

Sources of Funding: export financing

1. exporters need funding to make or acquire the products they will export 2. finance production by using contracts as collateral -finance against collateral is secured financing and it is the most common method of raising new money -banks will advance funds against payment obligations, shipment documents, or storage documents 3. loan from a commercial bank 4. loan from an intermediary, such as an export management company that provides short-term financing 5. loan from a supplier, for which the buyer can make a down payment and ask to make further payments incrementally 6. loan from corporate parent 7. governmental or other organizational financing 8. some companies have mechanisms for providing credit to their business customers -ex. UPS warehouse

2 subcategories of political risk

1. global risk: affects all of a company's multinational operations 2. country specific: affects investments in a specific foreign country -MACRO RISK: applies to all foreign investments in a country ->by reviewing the government's past use of soft policy instruments (like blacklisting, indirect control of prices, or strikes in particular industries) and hard policy tools (like expropriation, confiscation, nationalization, compulsory local shareholding, or other forms of asset seizure a company can be better prepared for future government action (1) asset seizure: an act of confiscating or taking control of private assets such as funds or property by a government -MICRO RISK: a type of political risk that applies to a specific foreign company or a group of companies in a country --> weak balance sheet, questionable accounting practices, or a regular breach of contracts should give rise to concerns

Global risk types

1. globalization risk can be of a political, legal, sociocultural, or financial-economic nature

corporate tax rates around the world

1. in 1980, corporate tax rates around the world averaged 38.84% and 46.63% when weighted by gross domestic product (GDP) 2. Since then, countries have recognized the impact that corporate taxes have on business investment decisions so that by 2018, the average was 23.03% and 26.47% when weighted by GDP for 208 separately tax jurisdiction 3. today, most countries have average corporation tax rates below 30%

Introduction to corporate taxes

1. introduced in 1909 with the ratification of the 16th amendment 2. at first, corporate taxes were a flat rate that applied to the income of all businesses 3. in 1936, Congress approved tax brackets or different rates for income in different ranges 4. with the Tax Cuts and Jobs Act in 2018, US has a flat 21% rate for all businesses, though most companies often pay lower effective rates 5. corporate tax rates have been falling globally for the past two decades, which puts increasing pressure on countries to lower corporate tax rates in order to attract and retain MNCs

fronting loan

1. is a loan made between a parent company and its subsidiary through a financial intermediary such as a bank 2. the parent company will be able to gain some tax benefits and bypass local laws that restrict the amount of funds that can be transferred abroad 3. How -the parent deposits the total amount of the loan in the bank -the bank then lends the money to the subsidiary -for the bank, the loan is risk free since the parent company has already provided the money -the bank charges the subsidiary a slightly higher interest rate on the loan than it pays to the parent, thus making a profit

incentives

1. local import and export regulations can also impact where companies decided to locate specific functions of the supply chain, such distribution centers or warehouses 2. many cities, states, or countries offer MNCs tax breaks to attract initial investment -these areas know MNCs bring economic development to an area that goes beyond a simple influx of jobs

MNCs choose to raise money in foreign markets for a number of reasons

1. make product recognizable in the foreign emerging markets 2. some MNCs raise in both the home country and overseas stock exchanges -lower cost of capital as shares become available to global investors who might not otherwise be able to purchase shares due to international investment barriers 3. emerging markets are also opening stock exchanges -public shares in China; A-domestic investors, B-foreign investors, and H-incorporated companies traded in Hong Kong -the Chinese government owns a large number of shares -the government intervenes in is capital markets -Chinese authorities (the China Securities Regulatory Commission, the People's Bank of China, and the State Admin of Foreign Exchange) closely regulate the Shanhai and Shenzhen stock exchanges

Sources of Funding: Global Equity

1. multinational firms engage in both transnational financing and transnational investments -transnational financing: seeing capital from foreign sources -transnational investments: investing capital in foreign markets 2. sources of financing available to firms: -foreign stock exchanges, foreign bond markets, foreign banks, VC firms, and funding from the parent company, as well as governments financing and domestic banks 3. sometimes complicated by foreign currency and exchange rates -foreign currency: any form of money in circulation in a different country -exchange rates: the price of one currency expressed in terms of units of another currency

Indirect taxes

1. one way that governments respond to budget shortfalls is by imposing or increasing indirect taxes such as the value-added tax (VAT) and goods and services tax (GST) -value-added tax (VAT): a consumption tax added to products incrementally for all stages of production but collected by the end retailer (similar to sales tax) -goods and services tax (GST): same as VAT 2. more countries are coming to rely on VAT as a significant, stable source of tax revenue, so these taxes are unlikely to diminish -China and India are considering introducing national VAT systems for the first time, while EU countries might be looking at ways to raise more revenue through VAT 3. International companies can assess and manage the risks and opportunities of new VAT systems -through using emerging technologies to increasingly automate the indirect tax process, deciding whether to insource or outsource new compliance obligations, and using modeling techniques to assess the impact of local VAT changes

political risk

1. possible political changes or instability in a country that could hurt a company's financial return on a foreign investment -relates to politically induced actions and policies initiated by a foreign government -ex. Terrorist attacks in US on Sept 11, 2001, ongoing conflict in Iraq and Pakistan, the instability of the Korean peninsula, and the recent global financial crisis have made geopolitical uncertainty a key component of formulating a global strategy

equity financing

1. raising capital by selling shares of stock 2. stock market: refers to the organized trading of securities through exchange -an individual or entity can purchase partial ownership in a corporation by buying shares of stock in the company 3. Global equity market: refers to all stock exchange worldwide where firms can buy and sell stock for financing and investment -New York Stock Exchange (NYSE), Euronext, the Tokyo Stock Exchange, the National Association of Securities Dealers Automated Quotations (NASDAQ) stock exchange, and the London Stock Exchange 4. the advantage of raising capital in equity markets is that the firm does not have to pay back the money at a specific time or at a specific interest rate 5. the disadvantage: each time a firm offers stock, the firm's management loses some control of the company because shareholders can now vote to approve or disallow management actions -and dividends paid may not be tax deductible unlike interest paid on loans

financial structure

1. refers to the ways in which a multinational firm's assets are financed; from short-term borrowing to long-term debt and equity

Legal risk

1. risk encountered in the legal arena in a particular country 2. an assessment of legal risk requires analyzing the foundations of a countries legal system and determining whether the laws are properly enforced -have to become familiar with the country's enforcement agencies and their scope of operation 3. as many companies have learned, numerous countries have written laws protecting MNC's rights, but these laws are rarely enforced -entering into a country like that can expose a company to a host of risks, including the loss of Intellectual property, technology, and trade marks

currency option contracts

1. the option or the right to exchange a specific amount of currency on a specific future date and at a specific agreed-on rate -to buy (call) or to sell (put) -since it is not an obligation, the party holding an option does not have to actually exchange the currencies if desired -called not exercising an option -the contract rate may be referred to as the strike price -to induce investors to issue an option, though, and thereby obligate themselves to make a disadvantageous trade, option holders must pay a premium to the option issuer

transfer pricing

1. the practice of shifting assets to a subsidiary in a country with a better tax bracket -the transfer price is the price that one subsidiary (or subunit of the company) charges another subsidiary for a product or service supplied to that subsidiary 2. since the pricing takes place between entities owned by the same parent firm, there is an opportunity for pricing an item or service at significantly above or below cost in order to gain advantages for the firm overall -ex. let's say you want to take money out of a country but there's a limitation to the amount, so you charge a cost plus markup to one subsidiary to extract more money 3. may bring morale problems for the subsidiaries whose profits are impacted negatively from such manipulation 4. as well as, the pricing makes it harder to determine the actual profit that the favored subsidiary would bring to the company without favored treatment 5. nonetheless, even within these guidelines multinational firms can adjust prices to shift income from a higher tax country to a lower tax one 6. governments, of course, are instituting or revising legislation to ensure maximum taxes are collected in their own countries

Accounting in international business

1. the purpose of accounting is to communicate the organization's financial position to company managers, investors, banks, and the government 2. accounting standards provide a system of rules and principles that prescribe the format and content of financial statements through consistent reporting, a firm's managers and investors can assess the health of the firm -covers topics such as how to account for inventories, depreciation, research and development costs, income taxes, investments, intangible assets, and employee benefits -investors and banks use these financial statements to determine whether to invest in or loan capital to the firm -governments use the statements to ensure that the companies are paying their fair share of taxes

currency risk

1. the risk of a change in the exchange rate that will have an adverse effect -companies face this risk because they typically price their products and services in the local currency of each country in which they operate to make it easy for local customers to understand the pricing and make the purchase -when they consolidate their subsidiaries' financial statements, they must translate all the currencies into the currency used by the parent company in its home country

advantage of a fronting loan

1. the tax advantages of fronting loans come into play if the loan is made by a subsidiary located in a tax haven -tax haven: a country that has very low corporate taxes -ex. Bermuda and the Cayman islands --Cayman Islands: no income tax and provides liberal protection for companies that shelter their money there 2. the bank pays interest to the tax haven subsidiary 3. the subsidiary doesn't pay taxes on that interest because of the tax haven laws 4. at the same time, the interest paid by the subsidiary is tax deductible

Financial or economic risk

1. the volatility of a country's macroeconomic performance and the country's ability to meet its financial obligations directly affect performance and the risk to long-term investments 2. a nation's currency competitiveness and fluctuation are important indicators of a country's stability both financially and politically and its willingness to embrace changes and innovations 3. financial risk assessment should consider such factors as how well the economy is being managed, the level of the country's economic development, working conditions, infrastructure, technological innovation, and the availability of natural and human resources

Tax avoidance policies

1. with the new US tax laws, a lot of companies are returning large amounts of case from overseas 2. many countries around the world have been adopting aggressive policies to tax avoidance strategies 3. the EU passed the Anti-Tax Avoidance Directive which took effect on January 1, 2019 -umbrella for five measures to combat tax avoidance -all EU members will limit the amount of interest that can be deducted limiting the benefits of a fronting loan -all EU members can tax the profits of a company that attempts to move its income to a low-tax member 4. The Organization for Economic Co-Operation and Development -recognizes the need for greater international cooperation and coordination in order to reduce tax avoidance -established the Base Erosion and Profit Sharing (BEPS) project at the 2015 G20 summit --to foster cooperation between 125 jurisdictions on multilateral measures such as stopping unwarranted transfers of profits between countries, helping countries collect VAT and eliminating tax treaty shopping

hedging

Using financial instruments to reduce adverse price movements -mitigates risk -costs such as premium pricing, bank fees, and interest payments

International Financial Reporting Standards (IFRS)

a collection of accounting principles used through much of the world outside the US

Generally Accepted Accounting Principles (GAAP)

a collection of generally accepted accounting principles used in the United States -authoritative guidance and standardization for financial accounting -many countries other than the US have made alternatives to GAAP -GAAP allows for the standardization of accounting principles -GAAP enables organizations and other parties to communicate successfully

short position

a strategy used in investing of a trader who sells someone else's asset with the expectation of buying it back later when it decreases in value

debt

amount owed to some

International Accounting Standards Board (IASB)

an independent group that oversees the development and revision of IFRS -originally formed in 1973, develops accounting standards known as international financial reporting standards (IFRS) -adherence to the IASB is voluntary, but many countries have mandated use of IFRS -the IASB is composed of 15 representatives from professional accounting firms from many countries -for a standard to be approved, 75% of the board members must agree -often getting agreement is difficult due to differences in social, economic, legal, and culture differences -as a result most IASB statements provide two acceptable alternatives -important for comparing the financial health of companies in different countries as well as only one report will have to be done 1. US and UK rely on individual investors so accounting rules are designed to help investors 2. Switzerland, Germany, and Japan rely on banks so accounting rules are designed to protect bank's investments and not reveal a lot of information 3. finally, accounting rules in China follow neither IFRS nor GAAP, which makes it hard for investors to gauge the true value of a company -so some report in Chinese standards and IASB standards 4. In other countries, the government steps in to make loans or invest in companies whose activities are in the "national interest"

long position

buys an asset with the expectation that it will increase in value

spot rates

currency transaction processed on the spot and settled immediately, using current exchange rate -"immediately" usually means within 2 business days, but it implies an "on the spot" exchange of the currencies -the spot exchange rate is the exchange rate transacted at a particular moment by the buyer and sell of a currency -helps you determine which one to go with

module 11

decisions to maximize financial outcomes

internal forward rate

if two subsidiaries of the same MNC do a currency exchange, then they can use an internal forward rate 1. internal forward rate: a company-generated forecast of future spot exchange rates -advantage: the subsidiary will not be blamed nor credited for the exchange rate change

political assessment

involves an evaluation of the stability of a country's current government and of its relationships with other countries -a high level of risk affects ownership of physical assets and intellectual property and the security of personnel, increasing the potential for trouble

equity

value of the shares of a company