ECON3060
INTERNATIONAL FINANCE - Topic 1
Important Players, FOREX Markets, International Flows
Multinational Corporation (MNC)
• Produces and sells goods or services in more than one nation. Consists of a parent company in the
firm’s originating country and the operating subsidiaries, branches and affiliates both at home and
abroad.
• Goals of an MNC: Maximise shareholder wealth.
• Agency Theory: Studies problems that arise from the separation of ownership and control, or the
conflict of goals between managers and shareholders.
• How MNCs Enter Foreign Markets:
• Importing/Exporting
• Licensing - gives local firms right to manufacture their products in exchange for a fee
(royalties)
• Franchising - the firm provides sales or service strategies, offer support, and may even
initially invest in the franchise in exchange for fees.
• Joint Venture - two or more firms form a new legal entity, jointly owned and operated by all of
the firms.
• Foreign Direct Investment (FDI) - when a company from one country buys at least 10% of a
company in another country.
• Greenfield: establishing new operations in a foreign country without having a local
partner and without acquiring a local company.
• Why MNCs Pursue International Business?
• Theory of Competitive Advantage: specialisation increases production efficiency.
• Imperfect Markets Theory: factors of production are somewhat immobile, providing
incentive to seek out foreign opportunities.
• Product Cycle Theory: as a firm matures, it recognises opportunities outside its domestic
market.
Other Important International Players
• International banks
• Managed funds
• International Institutions:
• International Monetary Fund (IMF) - member organisation whose goal is to ensure the
stability of the international monetary and financial system through surveillance and technical
assistance.
• The World Bank - member organisation whose goals are development, poverty alleviation and
advising.
• Multilateral Development Banks, World Trade Organization, OECD, European Union.
, ECON3060
Foreign Exchange Markets
• Exchange Rate: the relative price of two currencies
• Spot Market: where exchanges of national monies are settles immediately (within 2 business
days)
• Direct Quote: expressed as an amount of domestic currency per unit of foreign currency.
• Indirect Quote: expressed as an amount of foreign currency per unit of domestic currency.
• Pip: refers to the fourth (smallest) decimal point in a currency quote. A pip represents 0.0001.
• Bid Rate: rate at which a trader is willing to buy a currency.
• Ask Rate: rate at which a trader is willing to sell a currency.
• Bid-Ask Spread: difference between sell rate & buy rate.
• Appreciation: a strengthening of the value of a floating currency
• Depreciation: a weakening of the value of a floating currency
• Revaluation: a discrete rise in the value of a pegged-rate currency.
• Devaluation: a discrete fall in the value of a pegged-rate currency
Balance of Payments
• Summary of transactions between domestic and foreign residents for a specific country over a
specified amount of time.
• Components of the Balance of Payments Statement:
• Current Account: summary of flow of funds due to purchases/sales of goods or services
(international trade) or the provision of income on financial assets, or transfer payments.
• Capital Account: summary of flow of funds resulting from the sale of assets between one
specified country and all other countries over a specified period of time, including FDI and
portfolio investment.
• Examples of Balance Payment Transactions:
•
, ECON3060
Australia’s Global Trade
•
Australian Balance of Trade Over Time
•
, ECON3060
Factors Affecting Trade Flows
1. Cost of labour: Labour-abundant countries can make labour-intensive products quite cheaply,
thus having an advantage when competing globally
2. Inflation: A relative increase in a country’s inflation rate will decrease its current account, as
imports increase and exports decrease.
3. National Income: A relative increase in a country’s income level will decrease its current
account, as imports increase.
4. Government Restrictions: A government may reduce its country’s imports by imposing a tariff
on imported goods, or by enforcing a quota. Some trade restrictions may be imposed on certain
products for health and safety reasons.
5. Exchange Rates: If a country’s currency begins to rise in value, its current account balance will
decrease as imports increase and exports decrease.
Factors Affecting Foreign Direct Investment
• Changes in Restrictions: New opportunities have arisen from the removal of government barriers.
• Privatisation: Transfer from public to private ownership and control. FDI is stimulated by new
business opportunities associated with privatisation. Managers of privately owned businesses are
motivated to ensure profitability, further stimulating FDI.
• Potential Economic Growth: Countries with greater potential for economic growth are more likely
to attract FDI.
• Tax Rates: Countries that impose relatively low tax rates on corporate earnings are more likely to
attract FDI
• Exchange Rates: Firms typically prefer to pursue FDI in countries where the local currency is
expected to strengthen against their own.
Factors Affecting International Portfolio Investment
• Tax Rates on Interest or Dividends: Investors normally prefer to invest in a country where taxes
are relatively low.
• Interest Rates: Money tends to flow to countries with high interest rates, as long as the local
currencies are not expected to weaken.
• Exchange Rates: Investors are attracted to a currency that is expected to strengthen.
INTERNATIONAL FINANCE - Topic 1
Important Players, FOREX Markets, International Flows
Multinational Corporation (MNC)
• Produces and sells goods or services in more than one nation. Consists of a parent company in the
firm’s originating country and the operating subsidiaries, branches and affiliates both at home and
abroad.
• Goals of an MNC: Maximise shareholder wealth.
• Agency Theory: Studies problems that arise from the separation of ownership and control, or the
conflict of goals between managers and shareholders.
• How MNCs Enter Foreign Markets:
• Importing/Exporting
• Licensing - gives local firms right to manufacture their products in exchange for a fee
(royalties)
• Franchising - the firm provides sales or service strategies, offer support, and may even
initially invest in the franchise in exchange for fees.
• Joint Venture - two or more firms form a new legal entity, jointly owned and operated by all of
the firms.
• Foreign Direct Investment (FDI) - when a company from one country buys at least 10% of a
company in another country.
• Greenfield: establishing new operations in a foreign country without having a local
partner and without acquiring a local company.
• Why MNCs Pursue International Business?
• Theory of Competitive Advantage: specialisation increases production efficiency.
• Imperfect Markets Theory: factors of production are somewhat immobile, providing
incentive to seek out foreign opportunities.
• Product Cycle Theory: as a firm matures, it recognises opportunities outside its domestic
market.
Other Important International Players
• International banks
• Managed funds
• International Institutions:
• International Monetary Fund (IMF) - member organisation whose goal is to ensure the
stability of the international monetary and financial system through surveillance and technical
assistance.
• The World Bank - member organisation whose goals are development, poverty alleviation and
advising.
• Multilateral Development Banks, World Trade Organization, OECD, European Union.
, ECON3060
Foreign Exchange Markets
• Exchange Rate: the relative price of two currencies
• Spot Market: where exchanges of national monies are settles immediately (within 2 business
days)
• Direct Quote: expressed as an amount of domestic currency per unit of foreign currency.
• Indirect Quote: expressed as an amount of foreign currency per unit of domestic currency.
• Pip: refers to the fourth (smallest) decimal point in a currency quote. A pip represents 0.0001.
• Bid Rate: rate at which a trader is willing to buy a currency.
• Ask Rate: rate at which a trader is willing to sell a currency.
• Bid-Ask Spread: difference between sell rate & buy rate.
• Appreciation: a strengthening of the value of a floating currency
• Depreciation: a weakening of the value of a floating currency
• Revaluation: a discrete rise in the value of a pegged-rate currency.
• Devaluation: a discrete fall in the value of a pegged-rate currency
Balance of Payments
• Summary of transactions between domestic and foreign residents for a specific country over a
specified amount of time.
• Components of the Balance of Payments Statement:
• Current Account: summary of flow of funds due to purchases/sales of goods or services
(international trade) or the provision of income on financial assets, or transfer payments.
• Capital Account: summary of flow of funds resulting from the sale of assets between one
specified country and all other countries over a specified period of time, including FDI and
portfolio investment.
• Examples of Balance Payment Transactions:
•
, ECON3060
Australia’s Global Trade
•
Australian Balance of Trade Over Time
•
, ECON3060
Factors Affecting Trade Flows
1. Cost of labour: Labour-abundant countries can make labour-intensive products quite cheaply,
thus having an advantage when competing globally
2. Inflation: A relative increase in a country’s inflation rate will decrease its current account, as
imports increase and exports decrease.
3. National Income: A relative increase in a country’s income level will decrease its current
account, as imports increase.
4. Government Restrictions: A government may reduce its country’s imports by imposing a tariff
on imported goods, or by enforcing a quota. Some trade restrictions may be imposed on certain
products for health and safety reasons.
5. Exchange Rates: If a country’s currency begins to rise in value, its current account balance will
decrease as imports increase and exports decrease.
Factors Affecting Foreign Direct Investment
• Changes in Restrictions: New opportunities have arisen from the removal of government barriers.
• Privatisation: Transfer from public to private ownership and control. FDI is stimulated by new
business opportunities associated with privatisation. Managers of privately owned businesses are
motivated to ensure profitability, further stimulating FDI.
• Potential Economic Growth: Countries with greater potential for economic growth are more likely
to attract FDI.
• Tax Rates: Countries that impose relatively low tax rates on corporate earnings are more likely to
attract FDI
• Exchange Rates: Firms typically prefer to pursue FDI in countries where the local currency is
expected to strengthen against their own.
Factors Affecting International Portfolio Investment
• Tax Rates on Interest or Dividends: Investors normally prefer to invest in a country where taxes
are relatively low.
• Interest Rates: Money tends to flow to countries with high interest rates, as long as the local
currencies are not expected to weaken.
• Exchange Rates: Investors are attracted to a currency that is expected to strengthen.
