international business environments & operations

Copyright © 2015 Pearson Education, Inc. 10-1

International BusinessEnvironments & Operations

15e

Daniels ● Radebaugh ● Sullivan


Chapter 10Global Capital Markets


Learning Objectives Describe the finance function and how it fits in the

MNE’s organizational structure Show how capital structure varies internationally Describe the different ways to access debt internationally Show how companies can raise capital on stock markets

outside their home countries Highlight tax issues facing MNEs

IntroductionLearning Objective:

Describe the finance function and how it fits in theMNE’s organizational structure


The Finance Function The CFO, controller, and treasurer determine the

objectives of the global financial management by:

Making the financing decisions

Making investment decisions

Managing short-term capital needs


Capital Structure Leveraging Debt Financing

The degree to which a firm funds the growth of business by debt is known as leverage

It may not be the best option when:Excessive reliance on long-term debt raises financial

risk and requires a higher return for investorsForeign subsidiaries of the MNE have limited access

to capital markets and debt financing


Capital StructureLearning Objective:

Show how capital structure varies internationally


Selected Capital Structures, FY 2012


Factors Affecting the Choice of Capital Structure

Debt and Exchange Rates Asian financial crisis 1997 Global crisis 2007-2009 European economic crisis 2010-2011

Regulatory Risk Financial stability of banks


Global Capital Markets Learning Objective:

Show how companies can raise capital on stock markets outside their home countries


Global Capital Markets Eurocurrency

“Offshore Currency” – any currency banked outside its country of origin

Eurodollar is the most significant Eurocurrency market


Global Capital Markets Major Sources of Eurocurrencies

Foreign governments or individuals Multinational enterprises with excess cash European banks with excess foreign currency Countries with large foreign exchange reserves

China, Japan, EU, Saudi Arabia, Russia, Taiwan


Global Capital Markets Characteristics of the Eurocurrency Market

Eurocurrency market is a wholesale market Public borrowers are major playersGovernments, Central banks, Public sector

corporationsEuro-credit – short term credit of 1-5 yearsSyndication – banks pool resources spread the

financial risk


Global Capital MarketsInterest Rates in the Eurocurrency Market

LIBOR – London Inter-Bank Offered Rate

Began in 1986 by British Bankers’ AssociationAverage rate submitted by 18 different banks Published daily in London


Global Capital MarketsInternational Bonds

Foreign Bonds – a bond sold outside the borrower’s country but denominated in the currency of the country of issue

Eurobonds – usually underwritten by a syndicate of banks from different countries and sold in a currency other than that of the country of issue


Global Capital Markets International Bond market is attractive to

borrowers because it allows companies to diversify its funding sources aside from local, domestic banks

Firms can sometimes borrow in maturities that might not be available in the domestic market


Global Capital Markets Equity Securities

Private placement market Angel investors Venture capital firmsInstitutional investorsSovereign wealth funds (SWF’s) – state-owned

government fund


Global Capital MarketsEquity Securities

Equity-capital market (stock market) IPO – Initial Public Offering

Firms can list in their home country or abroad – International IPO


Market Capitalization 2012


Global Stock MarketTrends toward the importance of stock

markets in emerging economies, especially China. Hong Kong Stock Exchange Shanghai Stock Exchange Shenzhen Stock Exchange


Global Stock MarketTrend towards a rise in the Euro-equity market

Stock shares are sold outside the boundaries of the issuing firm’s home country

Trend toward Delisting Trend of listing stocks on more than one exchange has

reversed somewhatBetter prices are often found in the home marketListing in several markets is expensive


Global Stock MarketAmerican Depositary Receipt (ADR)

A negotiable certificate issued by a U.S. bank in the United States to represent the underlying shares of a foreign corporation’s stock held in trust at a custodian bank in the foreign country.

Traded like stock shares Most foreign companies list on the U.S. stock exchanges

through ADR’s


International Tax PracticesLearning Objective:

Highlight tax issues facing MNEs


International Tax PracticesIssues:Differences in types of taxesDifferences in Generally Accepted Accounting Principles (GAAP)Differences in Tax RatesTwo Approaches to Corporate Taxation:

Separate Entity Approach – used in the U.S.Integrated System Approach – avoids double taxation


Taxing Branches and SubsidiariesThe Foreign Branch

Extension of the parent companyThe Foreign Subsidiary

Legal entityThe Controlled Foreign Corporation (CFC)

US Tax law – Active vs. Passive income


Transfer Prices Differences in taxation rates between countries Arm’s length prices – the price between 2

companies that do not have an ownership interest in each other

Companies can establish arbitrary transfer prices between their affiliated companies, to reduce taxes paid


Transfer Prices


Offshore Financial Center OFC’s are cities or countries that provide large

amounts of funds in currencies other than their own, and are used as locations in which to raise and accumulate cash. Transactions are usually on both sides of the balance

sheet Transactions are usually initiated elsewhere Institutions involved are usually controlled by

nonresidentsCopyright © 2015 Pearson Education, Inc. 10-28

Characteristics of OFC’s Large foreign currency (Eurocurrency) Large net supplier of funds (Switzerland) Intermediary or pass-through for international loan funds

(Bahamas, and Cayman Islands) Economic and political stability Efficient and experienced financial community Good communications and support services Regulatory climate favorable to the financial industry


OFC’s as Tax Havens OECD uses the following key factors in identifying tax havens:

No or only nominal taxes Lack of effective exchange of information (especially bank

secrecy) Lack of transparency No substantial activities

OECD is trying to reduce harmful tax practices through improved translation and disclosure



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