CH13: GLOBAL COST AND AVAILABILITY OF CAPITAL

Local market access

- Segmented (isolated) Danish market- in Novo case (the market doesn't communicate much with
other markets)
- Illiquid market- a small number of trades; not being able to buy or sell at the fair price
o Sometimes you need to heavily discount the value of your asset just to be able to sell it
- Appeal only to domestic investors

Global market access

- Access to global securities

- Liquid market- you can buy or sell securities at a fair price at any time
- Securities appeal to international investors

Capital market segmentation is caused by:

- Government constraints- governments are afraid of capital flights (significant capital outflows)
o They are afraid of speculators (short-term capital flying in and out of the country)
- Institutional practices (poor policies, economy, legal laws)
- Investor perceptions (corruption, bribery)
o How investors subjectively perceive the markets

Some capital market imperfections include:

- Asymmetric information (lack of information)- weak market efficiency, semi-strong market

efficiency
- Lack of transaction transparency
- High transaction costs
- Foreign exchange risk- in floating exchange rate regime
- Political risks
- Corporate governance issues (Agrokor)
o Good corporate governance constitutes a high level of transparency, and a high level of
business ethics in terms of the company's operations, financial statements, etc.
- Regulatory barriers (market entry or exit)

When the marginal cost of capital (MCC) equals the marginal rate of return (MRR) there is an equilibrium
and an optimal debt level

Corporate governance

- Board of directors- responsible for mission and vision

o Making strategic decisions
Novo Case

- Novo Industri is a Danish company that produces enzymes and sells them worldwide.
- The company’s sales have been declining due to increased competition and pressure to lower
prices.
- Novo’s management team is considering implementing a new pricing strategy that will reduce
prices to gain market share, but this will also reduce profit margins.
- The management team is also considering diversifying into other businesses, such as
pharmaceuticals, to increase revenue streams.
- Novo’s financial situation is strong, with a healthy cash flow and low debt levels.
- The company’s stock price has been declining, which has led to pressure from investors to
improve performance.
- Novo’s management team is considering a stock buyback program to boost the company’s share
price.
- The management team is also considering restructuring the company’s operations to reduce
costs and increase efficiency.
- Novo’s board of directors is considering replacing the current CEO, who has been criticized for
failing to address the company’s declining performance.
- The company is also facing pressure from activist investors who are calling for changes to the
company’s strategy and management team.
- Overall, the case study highlights the challenges faced by companies in highly competitive
industries and the need for management teams to adapt to changing market conditions in order
to maintain profitability and investor confidence.

The Novo Industri case study highlights several implications:

- Currency Risk: Novo Industri has significant exposure to currency risk due to the majority of its
sales being in US dollars, while its costs are in Danish kroner.
- Hedging Strategy: The company has not implemented a hedging strategy to manage its currency
risk, which has led to significant losses due to unfavorable exchange rate movements.
- Pricing Strategy: Novo Industri has been following a cost-plus pricing strategy, which has not
been effective in capturing the value of its products and services.
- Capital Structure: The company has a high level of debt and a low level of equity, which makes it
vulnerable to financial distress and limits its ability to invest in growth opportunities.

To address these implications, Novo Industri should consider the following actions:

- Implement a currency hedging strategy to manage its exposure to currency risk.

- Explore alternative pricing strategies that capture the value of its products and services.
- Review and optimize its capital structure to reduce its leverage and increase its financial
flexibility.
- Diversify its customer base to reduce its dependence on the US market and explore growth
opportunities in other regions.
- Improve its financial reporting and transparency to enhance its credibility with investors and
lenders.
1. What were the impacts on Novo as a result of operating in a segmented market?
- Novo Industries, being a leading producer of insulated wires, was operating in a segmented
market where there were several players with small market shares. The segmentation of the
market led to several impacts on Novo:
o Price competition: The market segmentation led to intense price competition among the
players, which affected Novo's profit margins.
o Limited bargaining power: Novo had limited bargaining power with its customers as they
could easily switch to other suppliers in the segmented market.
o Difficulty in innovation: The segmentation of the market made it difficult for Novo to
invest in innovation as they could not reap the benefits due to the intense price
competition.
o Limited market share: Novo was not able to capture a significant market share due to
the presence of several small players in the segmented market.
- Overall, the segmented market had a negative impact on Novo's profitability and growth
prospects, which led them to consider expanding into international markets.

2. What were the primary causes of the market segmentation?

- Cultural differences: The cultural differences between Denmark and other countries, such as
Germany, made it difficult for Novo Industri to export its products.
- Regulatory differences: The regulatory environment for Novo Industri's products was different in
different countries. For example, the regulations for insulin were stricter in Germany than in
Denmark.
- Price differences: Novo Industri faced pricing pressures in different markets, with its products
being more expensive in some countries than others.
- Competitor differences: Novo Industri faced competition from different companies in different
markets. For example, in Germany, it faced competition from larger companies with more
resources.
- Distribution differences: Novo Industri's distribution channels and networks were different in
different countries, making it difficult to market its products effectively.

3. Ultimately, what actions did Novo take to escape its segmented market?
- Diversification: Novo expanded into new markets and product lines, including medical devices
and diagnostics.
- Acquisition: Novo acquired several companies to strengthen its position in existing markets and
expand into new ones.
- Partnership: Novo formed partnerships with other companies to enter new markets and
leverage their expertise.
- Restructuring: Novo restructured its operations to improve efficiency and reduce costs, including
consolidating manufacturing facilities and reducing headcount.
CH14: FUNDING THE MULTINATIONAL FIRM

The difference between an IPO and an SEO

- An initial public offering (IPO) is the first time a company offers its shares to the public on a stock
exchange, while a seasoned equity offering (SEO) is when a company that has already gone
public issues new shares to the public. In contrast, a listing refers to a company's shares being
listed on a stock exchange, which can happen before or after an IPO or SEO. Essentially, an IPO
and SEO are ways for a company to raise capital by selling shares to the public, while a listing
allows the company's shares to be traded on a stock exchange.

Equity listing

- When the company offers existing shares to the market that were previously owned by some
venture capitalists, etc.
 Spotify- Instead of issuing new shares in an IPO, Spotify's existing shareholders
were able to sell their shares directly to public investors on the NYSE. This
allowed Spotify to avoid the underwriting fees associated with a traditional IPO
and gave its shareholders more control over the price at which their shares were
sold.

Equity issuance- IPO, SPO, euroequity, direct issuance

Equity listing- cross-listing, depository receipts

Depository receipts

- financial instruments that represent ownership of shares in a foreign company. They are issued
by banks in one country, based on shares held in custody in another country.
- Depository receipts are used to facilitate cross-border trading and investment, allowing investors
to buy and sell shares in foreign companies without the need for complex and costly
international transactions.
- There are two types of depository receipts:
o American Depository Receipts (ADRs), which are issued in the United States and
denominated in dollars
o Global Depository Receipts (GDRs), which are issued outside the United States and
denominated in a currency other than the local currency of the issuing country
 An example of a depository receipt: the American Depositary Receipt (ADR) of
Alibaba Group Holding Limited, which is listed on the New York Stock Exchange
(NYSE). ADRs allow US investors to invest in Alibaba shares without having to
buy the shares directly on the Hong Kong Stock Exchange, where the company is
listed. Each ADR represents a certain number of Alibaba shares, which are held
by a depository bank in the company's home country (China) and are traded on
the NYSE.
What is the role of depository receipts in raising equity?

- Depository receipts can help companies to raise equity by providing access to a larger pool of
investors in international markets. By issuing depository receipts, companies can attract
investors who may not have been able to invest in the company directly due to legal, logistical,
or regulatory barriers. This can increase the demand for the company's stock and potentially
lead to a higher stock price. Additionally, depository receipts can provide greater liquidity for
existing shareholders by increasing the trading volume of the company's stock.

What is the unique role of private placement in raising global capital?

The private placement is a method of raising capital by selling securities directly to institutional investors
or a small group of accredited investors. Its unique role in raising global capital includes:

- Flexibility: Private placement offers more flexibility than public offerings in terms of the types of
securities issued, the pricing of the securities, and the disclosure requirements.
- Customization: The issuer can customize the terms of the offering to meet the specific needs of
the investors and the company.
- Cost-effectiveness: Private placements are typically less expensive than public offerings because
they do not require extensive marketing and regulatory compliance.
- Efficiency: Private placements can be completed more quickly than public offerings, allowing the
issuer to raise capital more efficiently.
- Confidentiality: Private placements are confidential, which can be an advantage for companies
that want to keep their financial information private.
- Access to a wider range of investors: Private placements can be used to reach a wider range of
investors, including institutional investors, high-net-worth individuals, and family offices.

Globalizing the cost and availability of capital:

TERMS:
CH17: FDI & POLITICAL RISK

The OLI Paradigm helps to explain the strategic decision to undertake a foreign direct investment.

The OLI Paradigm- a theoretical framework by John H Dunning

- Examining what are the reasons behind the choice of multinational companies to enter foreign
markets

– O is for ownership advantages- firm-specific competitive advantages related to:

o Trademarks, licenses, copyrights, etc.

o Something that is firm-specific, not easily copied or transferable

– L is for location advantages- location-specific comp.adv.

o Cheap labor/ natural resources

o Something that is location-specific
o Taxes, regulations
o Centers of technological excellence
 E.g. loose environmental regulations in China to attract entries

– I is for internationalization advantages- comp.adv, related to firm-specific characteristics related to HC

o Firm-specific characteristics related to human capital

o Key strategy: minimizing transaction costs

The FDI sequence:

What are the modes of entry to the market? Their advantages and disadvantages?

1. Exporting - the sale of goods and services to another country

o Advantages: Low investment required, allows for testing of foreign markets, and can
generate revenue without the need for physical presence.
o Disadvantages: Limited control over marketing, high transport costs, and limited
opportunities for customization.
2. Licensing - an agreement in which one company grants another company permission to
manufacture its products or use its intellectual property.
o Advantages: Low investment required, low risk, and can generate revenue without the
need for physical presence.
o Disadvantages: Limited control over marketing, limited opportunities for customization,
and licensees may become competitors.
3. Franchising - a type of licensing in which a company grants another company the right to use its
brand name, products, and processes.
o Advantages: Low investment required, low risk, and can generate revenue without the
need for physical presence.
o Disadvantages: Limited control over marketing, limited opportunities for customization,
and franchisees may damage the brand name.
4. Joint venture - a partnership between two or more companies for a specific business purpose.
o Advantages: Shared investment, shared risk, and access to local expertise.
o Disadvantages: Complex negotiations, shared control, and cultural differences may
create conflict.
5. Wholly-owned subsidiary - a company that is completely owned and controlled by another
company.
o Advantages: Full control over marketing and operations, opportunities for customization,
and no risk of losing proprietary technology.
o Disadvantages: High investment required, high risk, and cultural differences may create
conflict.
6. Greenfield investment - building a new facility in a foreign country.
o Advantages: Full control over marketing and operations, opportunities for customization,
and no risk of losing proprietary technology.
o Disadvantages: High investment required, high risk, and long lead times.
7. M&A- mergers and acquisitions
o Advantages:
 Can provide a quick way to enter a new market or expand existing operations.
 Can provide access to established customer bases and distribution networks.
 Can provide access to new technologies, products, or services.
 Can create economies of scale and cost savings through consolidation of
operations.
o Disadvantages:
 Can be expensive, both in terms of transaction costs and potential overpayment
for the acquired company.
  Integration of operations and cultures can be difficult and time-consuming.
 Can result in loss of key personnel or disruption of existing operations.
 Can lead to a lack of focus on core business operations.

How to manage blocked funds?

- Multinational firms can react to the potential for blocked funds at three stages:
o Prior to investing, a firm can analyze the effect of blocked funds on the expected return
on investment, the desired local financial structure, and optimal links with subsidiaries.
o During operations, a firm can attempt to move funds through a variety of repositioning
techniques.
o Funds that cannot be moved must be reinvested in the local country to avoid
deterioration in their real value because of inflation or local currency depreciation.
CH16: INTERNATIONAL TRADE FINANCE

Letter of credit (LC)

- a bank’s conditional promise to pay issued by a bank at the request of an importer, in which the
bank promises to pay an exporter upon presentation of documents specified in the L/C.
- An L/C reduces the risk of noncompletion because the bank agrees to pay against documents
rather than actual merchandise.
- The essence of an L/C is the promise of the issuing bank to pay against specified documents,
which must accompany any draft drawn against the credit.
- The L/C is not a guarantee of the underlying commercial transaction, but rather a separate
transaction from any sales or other contracts on which it might be based.
- The primary advantage of an L/C is that it reduces risk- the exporter can sell against a bank’s
promise to pay rather than against the promise of a commercial firm.
- The major advantage of an L/C to an importer is that the importer need not pay out funds until
the documents have arrived at the bank that issued the L/C and after all conditions stated in the
credit have been fulfilled.
- The process of LC:
 The buyer and seller agree on the terms of the transaction, including the price,
delivery date, and quality of goods.
 The buyer arranges for a letter of credit from their bank in favor of the seller,
specifying the terms of the transaction.
 The buyer's bank sends the letter of credit to the seller's bank, which confirms
the letter of credit's authenticity
 The seller then ships the goods to the buyer.
 The seller presents the shipping documents to their bank, which examines the
documents to ensure they conform to the terms of the letter of credit.
 If the documents are in order, the seller's bank pays the seller, and the buyer's
bank reimburses the seller's bank.
 The seller's bank sends the shipping documents to the buyer's bank, which
forwards them to the buyer.
 The buyer uses the shipping documents to claim the goods from the shipping
company.
- Commercial letters of credit are also classified as follows:
o Irrevocable versus revocable
o Confirmed versus unconfirmed
- Confirmed letter of credit: A confirmed LC is a guarantee from both the issuing bank and the
confirming bank that the payment will be made. The confirming bank agrees to make the
payment to the seller even if the issuing bank fails to do so.
- Unconfirmed letter of credit: An unconfirmed LC is a guarantee only from the issuing bank that
the payment will be made. The seller takes on the risk that the issuing bank may fail to pay.
- Revocable letter of credit: A revocable LC can be changed or canceled by the issuing bank at any
time without the consent of the seller.
 - Irrevocable letter of credit: An irrevocable LC cannot be changed or cancelled without the
agreement of all parties involved. It offers greater security to the seller, as it cannot be revoked
by the issuing bank once it is issued.

Draft (Bill of exchange B/E)

- is the instrument normally used in international commerce to effect payment.

- An order written by an exporter (seller) instructing an importer (buyer) or its agent to pay a
specified amount of money at a specified time.
- The person or business initiating the draft is known as the maker, drawer, or originator
 Normally this is the exporter who sells and ships the merchandise.
- The party to whom the draft is addressed is the drawee.
- If properly drawn, drafts can become negotiable instruments. As such, they provide a convenient
instrument for financing the international movement of merchandise (freely bought and sold).

To become a negotiable instrument, a draft must conform to the following four requirements:

o It must be in writing and signed by the maker or drawer

o It must contain an unconditional promise or order to pay a definite sum of money
o It must be payable on demand or at a fixed or determinable future date
o It must be payable to order or to bearer
o A draft accepted by a bank becomes a banker’s acceptance- they can be traded

There are time drafts and sight drafts:

- A time draft is a type of bill of exchange that is payable at a specified time in the future. It is
used in international trade to extend the payment period for the buyer, who accepts the draft
and promises to pay the amount due at a later date.
- A sight draft, on the other hand, is payable immediately upon presentation to the buyer or the
buyer's bank. It is used when the seller wants to receive payment quickly and does not want to
extend credit to the buyer.

Bill of Lading (B/L)

- The third key document for financing international trade is the Bill of lading or B/L.
- Issued to the exporter by a common carrier transporting the merchandise.
- It serves three purposes:
o Receipt
o Contract
o Document of title
- Bills of lading are either straight or to order.

Forfaiting

- Forfaiting is a longer-term financing instrument used to eliminate the risk of nonpayment by

importers in instances where the importing firm and/or its government is perceived by the
exporter to be too risky for open account credit.
 - A typical forfaiting transaction involves five parties—importer, exporter, forfaiter, investor, and
the importer's bank
- The essence of forfaiting is the non-recourse sale by an exporter of bank-guaranteed promissory
notes, bills of exchange, or similar documents received from an importer in another country.

Short-term financing instruments:

- Bankers Acceptances
- Trade Acceptances
- Factoring
- Securitization
- Bank Credit Lines
- Commercial Paper
CH18: MULTINATIONAL CAPITAL BUDGETING

- Multinational capital budgeting, like traditional domestic capital budgeting, focuses on the cash
inflows and outflows associated with prospective long-term investment projects.

Cemex Case

Why is CB for a foreign project more complex than for a domestic project?

- Because we need to take into account both views: the parent view and the local (subsidiary)
view, while the parent view is more important.
- Also because currency risks are considered while forecasting future CFs; we analyzed dividend
payments, license fees, repayment of principle, and interest after taxes
- Parent company wants to know if the NPV is positive and if there is political risk in the emerging
economy that forbids repatriation of funds (blocked funds)
- Some subsidiaries may have a cannibalization effect, but the parent view sums all of these
factors and determines where it compensates and adjusts its strategic decisions accordingly
- In emerging economies the political risk needs to be taken into account and the exchange rate
risk as well (that supposes uncertainty)

Cross-border M&A

- The driving factors behind cross-border M&A include:

- Quicker than starting from scratch

- M&A may be cost-effective

- International market imperfections may allow target firms to be undervalued

- On the downside:

- Easy to pay too much

- Corporate cultures may clash

- Potential host government interference