Who am I? AESC 210 Global Systems Butler International Finance

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1 Who am I? BA Psychology Honors College MS Computer Science College of Engineering MBA Finance College of Business PhD Finance College of Business all from Michigan State University I am ALL IN on the color GREEN

2 Where have I been? Director, Education Abroad, Coll. of Business Faculty leader: EMBA programs in Brazil (3), China (3), Czech Republic (2), Hungary (2), Slovakia (2), S. Africa (2), S. Korea (3) Visiting Prof., Augsburg Universität, Germany Visiting Prof., University of Michigan, Ann Arbor

3 Global Systems The only trouble with going abroad is that you have to leave home to do it. Anon

4 Global Systems Global economics: International/corporate finance by Kirt C. Butler, Department of Finance Learning objectives The domain of finance Corporate governance Market entry decisions Investment decisions and NPV Ethical environmental behavior

5 Global Systems International Business Is both international & business

6 The domain of finance Capitalism and finance Capitalism is an economic system in which trade, industry, and the means of production are controlled by private owners with the goal of making profits in a market economy. (Wikipedia) Finance provides a framework for evaluating the opportunities, costs and risks of the firm s investments, including their financing and operation. (Butler, Multinational Finance, 6e)

7 The domain of finance The objective of the firm is commonly stated as maximize shareholder wealth Shareholder wealth maximization is not the same as profit maximization Profits are not the same as cash flows We can t ignore the riskiness of cash flows Value depends on current and future cash flows Of course, managers also look out for their own personal interests

8 The domain of finance Investment strategy - Should we develop a new product or service? - Should we enter a new country or a new technology? - How fast should the firm grow? Financial strategy - How do we raise money for our investments? Management strategy - Where should we source our inputs to production? - Should we invest in that new IT system? - How should we compensate managers, engineers, other employees?

9 What Finance do for you In business, finance can help you - persuade top management to fund a development project, refurbish a plant floor, introduce a marketing campaign, or invest in a new IT system - acquire funds to start your own business In your personal life, finance can help you - make a lease-vs-buy decision on that new Corvette - decide how-and-when to refinance your mortgage - help you plan for and respond to life s contingencies - help you wisely invest your savings & plan for retirement - avoid common financial mistakes

10 Corporate governance Balance Sheet Liabilities Assets Owners equity Income statement Revenues - Operating expenses - Depreciation - Interest expense -Taxes Net income Cash flows = Cash inflows cash outflows Depreciation isn t a cash flow, but it does decrease taxes

11 Corporate governance Corporate governance refers to the way in which stakeholders exert control over the firm Board of Directors Management Debt Shareholders Assets Equity

12 Corporate governance Managers have many other stakeholders in addition to shareholders - debtholders - employees - customers - suppliers - communities - the Earth and its many inhabitants Corporate governance systems in various countries place different emphases on these various stakeholders

13 Market entry decisions The gentle reader will never, never know what a consummate ass he can become, until he goes abroad. Mark Twain

14 Market entry decisions Familiarity with a foreign market is useful in the market entry decision Business risk Multinational business risk Domestic business risk Knowledge of the foreign market or country

15 Market entry decisions Listen up, my Cossack brethren. We ll ride into the valley like the wind, the thunder of our horses and the lightning of our steel striking fear in the hearts of our enemies!...and remember stay out of Mrs. Caldwell s garden. Gary Larsen, The Far Side globaledge.msu.edu

16 Market entry decisions Country risk is the risk that the business environment in a host country will change unexpectedly Political risk is the risk that a host government will unexpectedly change the rules of the game under which businesses operate Financial risk refers more generally to unexpected events in a country s financial, economic, or business life

17 Market entry decisions Source:

18 Market entry decisions Coface Group - country risk rankings, 2017 Africa Asia Europe Mid-East Americas A1 - Japan HK Germany - Canada Singapore Switzerland USA A2 - Australia Denmark Kuwait Chile S. Korea Finland UK Qatar A3 Namibia China France Israel Trinidad Netherlands Oman UAE A4 Morocco India Czech Rep. Bahrain Brazil Mexico Kenya Indonesia Spain S. Arabia Panama Peru B Congo - Hungary Italy Jordan Ecuador Tunisia Portugal Turkey El Salvador C Mongolia Greece Egypt Argentina Nigeria Vietnam Russia Lebanon D Libya Sudan Afghanistan Belarus Iraq Venezuela Zimbabwe Pakistan Bosnia Iran Cuba E Somalia N Korea Time passes & things change

19 Market entry decisions Intellectual property rights A patent is a government-approved right to make, use, or sell an invention for a period of time. - First-to-invent (USA) v first-to-file (e.g., Japan) A copyright prohibits the unauthorized reproduction of a creative work. A trademark is a distinctive name, word, symbol, or device used to distinguish a company s goods or services. A trade secret is an idea, process, formula, device, technique, or information that a company uses to its advantage.

20 Market entry decisions Ways to limit exposures to loss Find the right partner Develop and nurture your relationships Limit your exposure Limit the scope of technology transfer, only use assets near the end of their life cycle or with limited growth options, trade one technology for another Negotiate the investment & financial environment Taxes, labor issues, access to markets, obligations & restrictions, performance assurances & remedies, arbitration of disputes

21 Investment decisions and NPV Basic principle of investment decision making An investment is worth undertaking only if it is at least as desirable as financial market alternatives Net present value (NPV) 1. Identify the size & timing of all relevant cash flows 2. Identify the risk and hence the discount rate appropriate for the cash flow stream 3. Calculate the net present value by discounting the expected cash flows at the appropriate discount rate

22 Investment decisions and NPV It is the theory that determines what can be observed. Albert Einstein

23 Investment decisions and NPV Rule 1 Only cash is relevant Profits are only useful if they are in cash Rule 2 Identify (only) cash flows that change Incremental cash flow = (Alternative Base) Include anything and everything that changes - First, identify a base case as a starting point This often is do nothing, but we might be replacing an existing program - Then, assess alternatives relative to the base case Incremental cash flows associated with alternatives are estimated relative to the base case

24 Investment decisions and NPV Toolkit: Compounding Suppose we invest PV = $100 at r = 10% for t = 2 years $100 $110 $ Future value = $100 x 1.10 x 1.10 = $100 x (1.10) 2 = $121 or FV = PV (1+r) t

25 Investment decisions and NPV Toolkit: Discounting Suppose we are to receive FV = $100 in t = 2 years & the required return is r = 10% per year $100 $ Present value = $121/ (1.10) 2 = $100 or PV = FV / (1+i) t

26 Investment decisions and NPV The general form of net present value C 1 C 2 C 3 C 0 r NPV 0 = C 1 / (1+r) + C 2 / (1+r) 2 + = t E[C t ] / (1+r ) t The discount rate r should be the same as that on similar-risk projects in the market

27 Investment decisions and NPV To get anywhere, or even to live a long time, a man has to guess, and guess right, over and over again, without enough data for a logical answer. Robert Heinlein, Time Enough for Love

28 Investment decisions and NPV Praxair example Suppose Praxair, Inc. estimates the cash flows from the construction and operation of a cryogenic air separation system as follows: -$200,000 +$100,000 +$120, $80,000 2 Praxair requires a return of 15% on its investment.

29 Investment decisions and NPV Praxair example Spreadsheet valuation Required return = 15% Time Cash flow (150,000) 100, ,000 80,000 PV(CF) (150,000) 86,957 90,737 52,601 Project value 80,295 => accept

30 Investment decisions and NPV Inputs to this decision must be estimated and in many cases are negotiable Year 1 Revenues 900,000 - Variable costs (400,000) - Fixed costs (375,000) Taxable income 125,000 - Taxes (20%) (25,000) Net income 100,000 Revenue = price * quantity Variable costs include labor and materials, each of which is negotiable Fixed costs include administrative overhead Taxes often are negotiable, especially in international markets

31 Ethical environmental behavior Always do right. This will gratify some people and astonish the rest. Mark Twain

32 Ethical environmental behavior Capitalism Capitalism is an economic system in which trade, industry, and the means of production are controlled by private owners with the goal of making profits in a market economy. Central characteristics of capitalism include capital accumulation, competitive markets, and wage labor. Wikipedia

33 Ethical environmental behavior Public goods are not private goods (thank goodness) A public good is one which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good... Paul Samuelson Air, water, national defense, personal safety,

34 Ethical environmental behavior How can U.S. environmental protection laws and regulations both protect the U.S. environment and promote the competitiveness of U.S. industry? Are these objectives mutually exclusive? From the perspective of a developing nation, how do you weigh the competing demands of environmental protection and economic competitiveness? Can international agreements on environmental standards level the playing field across countries? Are such agreements enforceable? Are they even feasible?

35 Ethical environmental behavior I get up every morning determined to both change the world and have one hell of a good time. Sometimes this makes planning my day difficult. E.B. White