Rechtswissenschaften

- money deposited in banks outside its country of origin (eg US Dollar in CH)

- The Eurocurrency market is attractive to firms bc these funds are not subject to the government regulations of their home country banking system.

Example: when Mexico’s Cemexsells dollar-denominated bonds in the United States, it is issuing foreign bonds.

obtaining funds from within firm’s network of subsidiaries and affiliates.

Usually it has little effect on the parent’s balance sheet because the funds are simply transferred from one area of the firm to another.

Advantages:

- saves bank transactions

- Eliminates possible costly effects

-  Avoids the ownership

-  Can reduce income tax burden bc interest payments are often tax deducible (abziehbar)

- International financial managers devise strategies for transferring funds within the firm’s worldwide operations to optimize global operations.

- Cash flow needs to arise from everyday business activities, such as paying for labor and materials or resources, servicing interest payments on debt, paying taxes, or paying dividends to shareholders.

Through a trade credit, a subsidiary defers payment for goods received from the parent firm.

Dividend remittances are commonly used to transfer funds from foreign subsidiaries to the parent, but vary depending on tax levels, currency risks, and other factors.

Royalty payments are compensation paid to owners of intellectual property. Assuming the subsidiary has licensed technology, trademarks, or other assets from the parent or other subsidiaries, royalties can be an efficient way to transfer funds.

In a fronting loan,the parent deposits a large sum in a foreign bank, which then transfers the funds to the subsidiary in the form of a loan. (Government Restriktionen umgehen)

If the loan is made through a bank in a tax haven country, the parent can minimize taxes that might otherwise be due if the loan was made directly.

Transfer pricing (also known as intracorporatepricing) refers to prices that subsidiaries and affiliates charge one another as they transfer goods and services within the same MNE.

Firms can use transfer pricing to shift profits out of high-tax countries into low-tax countries (improving internal CF); minimize foreign exchange risks, for example, by moving funds out of countries where a currency devaluation is forecast; and optimize the management of internal cash flows.

= MNEs pool surplus funds into a central depository for needy subsidiaries

= Multilateral netting: strategic reduction of cash transfers within the MNE family through the elimination of offsetting cash flows. MNEs with numerous subsidiaries usually establish a netting center that headquarters supervises.

-->when Switzerland pays Taiwan an amount for a product and Tawain which is also a subsidiary also buys something from CH, instead of sending money back and forth they just pay the difference = Netting. a bank can do that or a tool inhouse (safes bank fees)

The purpose of capital budgeting is to help managers decide which international projects provide the best financial return.

- anhand des NPVs wissen Firmen welche Projekte zu priorisieren sind (the highter NPV the better)

NPV is the difference between the present value of a projects incremental cash flow and its initial investment requirement.

1 project cash flows are usually in a currency other than the reporting currency of the parent firm

2  Tax rules in the project location and the parents country usually differ

3 Governments may restrict the transfer of funds from the project to the parent firm

4 The project may be exposed to country risk, such as government intervention or adverse economic conditions.

Transaction exposure is currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

Translation exposure is currency risk that results when a firm translates financial statements denominated in a foreign currency into the functional currency of the parent firm. (Consolidation)

Economic exposure is currency risk that results from exchange rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments.

Spot rate: exchange rate based on the current rate of exchange.

•Forward rate: exchange rate applicable at some future date but specified at the time of a transaction.

•Direct quote: the number of units of the domestic currency needed to acquire one unit of the foreign currency. For example, ‘it costs $1.42 to acquire one euro.’

•Indirect quote: the number of units of the foreign currency obtained for one unit of the domestic currency. For example, ‘for $1, I can receive 0.74 euros.

Hedgersseek to minimize the risk of exchange rate fluctuations, often by buying forwards or similar financial instruments. They include MNEswho conduct international trade. (not necessarily interested in profiting from currency trading, is a protection. SELLS THE RISK)

•Speculatorsare currency traders who seek profits by investing in currencies with the expectation that they will rise in value.

(value will change in the future and then sell them later at the different value, the speculator speculates that he knows how the currency will change. BUYS THE RISK)

•Arbitragersare currency traders who buy and sell the same currency in two or more foreign-exchange markets to profit from differences in the currency’s exchange rate for the sake of generating profits.

forecast exchange rates

Customers arouond the world prefer to deal in their own currency. The most common method for managing exposuree is heding.

If the hedge is perfect, the firm is protected against the risk of adverse changes in the price of a currency.

Transparency improves the ability of investors to accurately evaluate company performance.

eg US GAAP, IFRS

Aim of harmonizing accounting practices:

1. Reduce the cost of preparing financial statements

2. Increase the efficiency of consolidating financial informtion from various countries

3. Enhance the reliability of financial reporting by increasing comparabillity and transparency of accounting practices

4. Facilitate international investment in securities and ventures by helping investors and mangers make better decisions

current rate method translates foreign currency at the current exchange rate. This form is typically used when translating records of foreign subsidiaries that aree considered separate entities rather than part of the parent firms operations.

market rates = spot rates

temporal method translates at the exchange rates in effect when the assets were acquired. inventory, property plan and equiment are translated at historical rates. eg if the yen is the main currency the Japanese subsidiaary of a US multinational firm uses the company must use the current rate method. If the functional currency is the parents currency, the MNE must use the temporal method.

Tax havens are countries hospitable to business and inward investment because of their low corporate income taxes.

MNEs take advantage of tax havens either by establishing operations in them or by funneling business transactions through them.

1. Decide on the Capital structure: (Choosing a capital structure (determine the ideal long-term mix of financing for the firms int. operations)

2. Raise Funds for the Firm (financing might come from selling stock, borrowing money)

3. Manage Working Capital & Workflows

4. Perform Capital Budgeting (Assess the financial attractiveness of major investment projects such as foreign expansion)

5. Manage Currency Risks (Oversee transaction in various foreign currencies (exchange rate fluctuations))

6. Manage the diversity of International Accounting & Tax practices (diverse account practices)

--> Companies with extensive international operations benefit from increeases opportunities to tap lower cost capital, minimize taxes and increase the efficiency of threi financial operations.

1. transaction exposure, 2. translation exposure, 3. economic exposure

Transaction exposure = outstanding accounts receivable or payable are denominated in foreign currencies

translation exposure = foreign currency into the functional currency of the parent firm --> consolidating

economic exposure = known as operating exposure

Transaction exposure affects ongoing contractual transactions. By contrast economic exposure affects long-term profitability through changes in revenues and expenses. Fluctuation problems explain why many countries in EU use a single currency. With a single medium of exchange, currency risk is eliminated in trade among the countries using the euro.

A typical tax treaty between country A and country B states that, if the firm pays income tax in A, it does not pay the tax in B. an automatic decrease in domestic tax liability when the firm can prove it has already paid income tax abroad. Or the firm may be liable to pay tax in each country, but the amount is adjusteed so the total is no more than the max. tax in either country.

1. low-income

2. limited industrialization

3. stagnant economies

4. high birth rates promote poverty

5. bad education system, illitercy (education is correlated with economic development)

6. a lot of natural resources

7. Government is severely indebted

8. Government policies discourage entrepreneurship, trade and investment (Bureaucracy and red tape)

9. agriculture and commodities sector create little basis for creating wealth

1. rapid industrialization, modernization, economic growth

2. attractive markets & low-cost manufacturing bases

3. former developing countries

4. serious rivals for advanced economies bc of Technology (includes educational systems, worker sill levels and banking infrastructure), government support (incentives), low cost capital

5. main emerging markets: Asia, Eastern EU, Latin America and a few in Africa, Middle East

6. rapidly improving living standards

7. growing middle class

8. attractive destinations for FDI, global sourcing

Emerging markets that changed from centrally planned economies to liberalized markets (China, Russia)

They were socialists (wohlstand aller über individuellem Wohlstand) now transformed into capitalism (Privateigentum)

leading firms from emerging markets that are fast becoming key contenders (Herausforderer) in world markets

1. post-industrial countries

2. well-developed commercial infrastructure (trade)

3. service based

4. based on capitalism

5. few restriction on international trade & investment

6. host the world largest MNEs

1. growing middle class and their rising demand for elecotronics & services (eg health care)

2. targets for machinery, equipment, technology sales

3. invest huge sums to develop manufacturing facilities

4. home to low-wage, high quality labor

5. noncore business to specialized suppliers (trend called outsourcing), and therefore concentrate on core competencies

= global sourcing, offshoring

the procurement of selected value-chain activities, including production of intermediate goods or finished products, from independent suppliers

... is difficult bc:

- limited data

- unreliable information

--> in early stages to estimate market potential: per capita income PPP (BIP pro Kopf) or size of middle class (bc makes up the largest proportion of households in advanced economies)

1. Political instability = corruption, weak legal framework which discourages inward investment & development of a reliable business environment --> reduces mngt ability to forecast business conditions

2. Weak intellectual Property Protection

3. Bureaucracy, Red Tape and Lack of Transparency

4. Poor Physical Infrastructure: MNEs often must build their own systems and find creative solutions to support value-chain activities

5. Partner availability and qualification

6. Likely Resistance from Family Conglomerates (FC): Government protection and support, giving them incentives of set up market-entry barriers to competitors (bc FC provide huge tax revenues and facilitate national economic development)

1. Customize offerigns to unique emerging markets needs: develop deep understanding, set prices appropriate

2. Partner with FCs: Reduce risks, time, gain networks

3. Target government in Emerging Markets: Government is important for 3 reasons:

    - enormous quantities of products

    - the public secftor influences the procurement activities of various private corporations

    - state enterprises buy from foreign companies (railway, airlines)

--> government is attracted that firms create local jobs, employ local resources and therefore reduce import dependence

- support economic development: P&G sells shampoo for 2 cents, which is more profitable bc huge population, or cell phone market brought up new related industries

- Microfinance to facilitate Entrepreneurship: assist entrepreneurs to start business in poor countries