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If TT3

While U.S. companies have historically relied more on internal financing, Japanese companies rely more heavily on external bank borrowing. Large multinational companies from smaller countries like Sweden and the Netherlands issue debt in foreign currencies to access a more diversified global investor base and lower their cost of capital. Even with free flowing global capital, multinational companies would still exist due to firm-specific advantages like unique products, technologies, and knowledge that provide benefits when operating in foreign markets.

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309 views

If TT3

While U.S. companies have historically relied more on internal financing, Japanese companies rely more heavily on external bank borrowing. Large multinational companies from smaller countries like Sweden and the Netherlands issue debt in foreign currencies to access a more diversified global investor base and lower their cost of capital. Even with free flowing global capital, multinational companies would still exist due to firm-specific advantages like unique products, technologies, and knowledge that provide benefits when operating in foreign markets.

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Ong CH
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BBMF3123 INTERNATIONAL FINANCE

TUTORIAL 3
1. What are some basic differences between the financing patterns of U.S. and Japanese
firms? What might account for some of these differences?
The basic differences between the financing patterns of U.S. and Japanese firms are in the
source of financing internal versus external-- and the composition of external finance bank
borrowing versus debt securities.
Historically, U.S. companies have received 60% to 70% of their funds from internal sources.
By contrast, Japanese companies have relied heavily on external funds to finance their
strategy of making huge industrial investments and pursuing market share at the expense of
profit margins. Industry's sources of external finance also differ widely between Japan and
the United States. Japanese firms rely heavily on bank borrowing, while U.S. firms raise
much more money directly from financial markets by the sale of securities.
2. What is securitisation? How has securitisation affected MNC financing policies?
Securitization is the process of matching up borrowers and savers by way of the financial
markets. By contrast, financial intermediation involves the use of financial institutions such
as banks and thrifts to bring together borrowers and savers. These institutions make a large
number of loans and fund them by issuing liabilities (e.g., deposits) in their own name.
Securitization largely reflects a reduction in the cost of using financial markets at the same
time that the cost of bank borrowing has risen. Multinational companies and other large firms
have participated in the securitization process. Instead of raising money in the form of
nonmarketable loans provided by financial intermediaries, they are now issuing negotiable
securities to the public capital markets.
3. Globalisation
a) What is meant by the globalisation of financial markets?
Ans: Businesses are open to global options
1. (Reasons for emergence)- Advances in communications and technology combined
with deregulation have reduced transaction costs and created a global financial
market.
2. Competition among key financial centres and institutions has skyrocketed and further
reduced the cost of issuing new securities.

3. Regulatory arbitrage draws users of capital markets to the financial centres with the
lowest regulatory standards and thus the lowest costs.
b) How has globalisation affected government regulation of national capital markets?
Ans:
Because the globalization of financial markets and institutions has been brought about by
technology and innovation, it cannot be reversed in any material way by regulation or
legislation. National systems of supervision and regulation that were created many years ago
were not designed for a marketplace of worldwide dimensions in which firms with differing
charters and national origins compete head to head with each other around the clock and
around the world. Governments that try to restrict domestic financial institutions will find that
foreign firms have a competitive advantage. Similarly, restrictions on domestic financial
markets drives business overseas. The net result has been to increase pressure for loosening
controls on domestic financial institutions and markets to enable them to be more competitive
and to speed the process of financial deregulation.
4. Why are large MNCs located in small countries such as Sweden, Holland, and
Switzerland interested in developing a global investor base?
Answer: Large MNCS located in these small countries often need to raise substantial
amounts of capital to continue growing. Quite often, the domestic market cannot provide this
amount of capital on reasonable terms because local investors already have a large exposure
to the local MNC. To add additional MNC paper will make their portfolios even less
diversified, leading local investors to demand an added risk premium. By going overseas,
MNCs from small countries such as Sweden and the Netherlands can find investors who view
stocks and bonds from Dutch and Swedish MNCs as a source of diversification. In other
words, although stocks of Dutch and Swedish MNCs comprise a large fraction of local
portfolios, they comprise a small fraction of global wealth. The net result is a lower cost of
capital for these MNCs from small countries (and hence a higher market value). In addition,
developing a global investor base gives these MNCs access to capital in the event their local
markets are subject to some event (most likely political) that restricts the ability of MNCs to
raise capital there regardless of price
5. Why firms may issue stock in foreign markets?
For diversification of portfolio – less sensitive to possible adverse market condition of home
country, Reduce risk
Cost lower from foreign (Higher share price), Increase share price
Increase Sales, capture new market, boost revenue sales
Branding, Reputation
Reduce political risk and uncertainty from diversification (Can explain based on your
understanding)
6. List some reasons a U.S.based corporation might issue debt denominated in a foreign
currency. (in other currencies)
A dollar-denominated debt is one measured in dollars. For instance, when the US borrows
money it sells bonds with values listed in dollars. The US then pays bondholders interest
(and eventually the principal) in dollars.

1. it wants to hedge a foreign currency exposure


2. it can borrow money at a lower effective interest rate. This is especially true for
those bond issues that are combined with swaps
7. Discuss the difference between a Eurocurrency loan and a Eurobond?
Eurobond Eurocurrency Loans
Cost of Borrowing  Issued in both fixed  Interest rates are
and floating rate variable
forms.  When rates decline,
 Fixed rate bonds are borrower costs
useful for exposure decline; when rates
management because increase, borrower
long-term currency costs increase
inflows can be offset
with known long-
term outflows in the
same currency.
Maturity  Longer Maturities  Shorter Maturities
 (5 to 30 years)  (6 Months)
Size of Issue  Size of Issue for  Size of Issue for
Eurobond is larger Eurocurrency loan is
smaller
Flexibility  Funds are drawn  The drawdown can
down in one sum on be staggered to fit
a fixed date and the borrower’s needs
repaid on a fixed with a fee of about
schedule unless the 0.5% per annum paid
borrower pays a on the unused
prepayment penalty. portion and can be
 Switching the prepaid without
denomination penalty.
involves a costly  A Eurocurrency loan
refunding and with a multicurrency
reissuing process. clause enables the
borrower to switch
currencies on any
rollover date.
Financing Speed  financing takes more  funds can be raised
time, but the in as little as two to
difference is three weeks
becoming less
significant.
8. If capital markets were perfect, i.e., capital could move freely across national borders,
would MNCs still exist? Why? Or, why not?

Even if capital moved freely across national borders, MNCs would


still exist, because MNCs bring a host of firm-specific knowledge
(iPhone, Mercedes, KFC) and advantages along with capital to the
countries in which they operate. Such advantages may include
unique products, processes, technologies, patents, specific rights,
or specific knowledge and skills. These advantages can be used
profitably in foreign markets. Moreover, MNCs are better able to
apply the knowledge and skills gained in their prior operations in
other countries to each new country that they enter. Thus, from
the point of view of a country attracting foreign capital, the capital
that is brought in by an MNC brings with it firm-specific advantages
that yield better returns than the capital that is simply borrowed
from a foreign country.

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