Fundamentals of multinational finance

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M anagement ARTHUR I STONEHILL Oregon State University and University o f Hawaii at Manoa DAVID EL EITEMAN University o f California, L os Angeles PEARSON Boston San Francisco N ew York L ondon Toronto Sydney Tokyo Singapore M adrid M exico C ity M unich Paris Cape Town H o n g Kong M ontreal Editor in Chief: Denise Clinton Executive Editor: Donna Battista Assistant Editor: Kerri M cQueen Managing Editor: Nancy Fenton Senior Production Supervisor: M eredith Gertz Cover Designers: Gillian Hall and B eth Paquin Design Manager: Joyce Wells Text Designer: Gillian Hall Supplements Editor: H eather McNally Senior Media Producer: Bethany Tidd Senior Marketing Manager: Andrew Watts Permissions Editor: D ana Weightman Senior Prepress Supervisor: Caroline Fell Senior Manufacturing Buyer: Carol Melville Production Coordination, Composition, and Illustrations: Gillian Hall, The A ardvark Group Publishing Services Copyeditor: Kathleen Cantwell, C4 Technologies Proofreader: Holly M cLean-Aldis Cover image: © Image Source Pink Library of Congress Cataloging-in-Publication Data Moffett, Michael H Fundamentals of m ultinational finance / Michael H Moffett, A rthur I Stonehill, David K, E item an. 3rd ed p cm Includes index ISBN 978-0-321-54164-2 International business enterprises—Finance International finance Foreign exchange I Stonehill, A rthur I II Eiteman, David K III Title HG4027.5.M64 2008 332',042~dc22 2008000739 ISBN-13:978-0-321-54164-2 ISBN-10:0-321-54164-2 Copyright © 2009 Pearson Education, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form ox by any means, electronic, mechanical, photocopying, record­ ing, or otherwise, without the prior written permission of the publisher Printed in the United States of America For information on obtaining per­ mission for use of m aterial in this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Departm ent, 501 Boylston Street, Suite 900, Boston, M A 02116, fax your request to 617-671-3447, or e-mail at http://www.pearsoned.com/legal/permissions.htm lO-DOW -12 11 10 09 08 Preface F undamentals o f Multinational Finance, third edition, views the m ultinational enterprise (MNE) as an organization that poses unique demands on the business leaders of tomorrow Those leaders—possibly some readers of this text—will be confronted with a m ultitude of challenges that will test not only their ability to com­ prehend global markets, but also m ore importantly, their ability to lead organizations through the constantly shifting currents and tides of global change Com petent leader­ ship may indeed be the scarcest global commodity This book is about multinational management, and more specifically, the financial m anagement (dimensions of leading a multinational enterprise The MNE itself acts as a catalyst and facilitator of international trade, and as an important producer and dis­ tributor in the host countries where it operates The M N E’s potential success, however, rests in the hands of the truly competent global leader The success of any MNE depends on its leadership’s ability to lead and manage the global organization , In writing this book, our vision is to aid the development of tom orrow’s MNE leaders It is their ability to recognize and benefit from business opportunities such as imperfections in national markets, unequal costs and efficiencies of production factors, wellsprings of intellectual property, and sources of global funding to facilitate growth that adds value The financial managers of MNEs face numerous foreign exchange and political risks These risks can be daunting, but if properly understood they also present oppor­ tunities for creating value These risks and opportunities are most effectively under­ stood in the context of the global business itself, and the ability of m anagement to integrate the strategic and financial challenges th at the business faces vi Preface Audience Fundamentals o f Multinational Finance, third edition, is appropriate for university level courses in international financial management, international business finance, international finance, and similar subjects It can be used at the undergraduate or grad­ uate level as well as in executive education courses A prerequisite course or experience in corporate finance or financial management would be ideal However, we review the basic finance concepts before we extend them to the multinational case We also review the basic concepts of international econom­ ics and international business We recognize the fact that many potential adopters of this book live outside the United States and Canada Therefore, we use a significant num ber of non-U.S exam­ ples, mini-cases, and Global Finance in Practice boxes, as seen in the business and news press (anecdotes and illustrations) Organization Fundamentals o f Multinational Finance, third edition, is organized into seven parts They are unified by the common thread of the globalization process by which a firm moves from a domestic to a multinational business orientation • Part i describes the road to globalization • Part introduces the global financial environment ® Pari explains foreign exchange theory • Part analyzes foreign exchange rate exposure đ Part analyzes financing the global firm ã Part analyzes international investment decisions • Part examines managing multinational operations New in the Third Edition • Chapter , Globalization and the Multinational Enterprise, is new but mainly incor­ porates topics that were previously discussed in the chapter on Foreign Direct Investment • Chapter 2, Financial Goals and Corporate Governance, is largely new and expands on the discussion of corporate governance presented previously in Chapter l.T h e chapter now includes private ownership of business and differing perspectives on the value of good global corporate governance • Chapter 5, The Foreign Exchange Market, includes the (2007) results of the “Triennial Central Bank Survey of Foreign Exchange and Derivatives M arket Activity.” • Chapter 13, Sourcing Equity Globally, includes the various capital m arket stock exchange mergers, additional material on equity funds, and family-owned compa­ nies Preface v¡¡ • Chapter 17, Foreign Direct Investment Theory and Strategy, has a new section on emerging m arket MNEs ® There are now 22 mini-cases, many of which are new; and in response to user feed­ back, fifteen of the most popular mini-cases are retained • There are m ore Global Finance in Practice, boxes • Internet exercises, end-of-chapter questions, and end-of-chapter problems are updated There are more than 200 problems throughout ' In this book, we use foreign exchange quotations that sometimes may differ from the latest computer code quotation symbols (three-digit symbols) This is a result of constant change in the marketplace, coupled with our text being revised every three years, and our preference to use traditional symbols—$, ¥, £, €—rather than three-digit codes, which in our opinion are more sterile We also recognize that we may appear out of date when we reference specific rates of exchange But that is what this book is par­ tially about—the difficulties and challenges of managing businesses in a rapidly chang­ ing financial environment We also are cognizant that many professors have prepared additional teaching materials based on our existing foreign exchange quotations Therefore, we try to continue a mix of selected existing quotations (from previous edi­ tions) with the introduction of the latest rates and movements in the marketplace In any case, we use the quotations to illustrate a particular problem, not as a basis for upto-the-minute solutions Pedagogical Tools To make Fundamentak o f Multinational Finance, third edition, as comprehensible as possible, we use a large num ber of proven pedagogical tools Again, our efforts have been informed by the detailed reviews and suggestions of a panel of professors who are recognized individually for excellence in the field of international finance, particu­ larly at the undergraduate level Among these pedagogical tools are the following: • A student friendly writing style combined with a structured presentation of m ate­ rial begins with chapter learning objectives and ends with a summarization of how those learning objectives were realized • Numerous illustrations and exhibits provide a visual parallel to the concepts and content presented The book uses a multicolor presentation, which provides a visual attractiveness that contributes significantly to reader attention and reten­ tion • A running case about a hypothetical U.S.-based firm, Trident Corporation, pro­ vides a cohesive framework for the multifaceted globalization process, and is rein­ forced in several end-of-chapter problems • Spreadsheet analyses prepared by Francis Clauss illustrate the quantitative dimen­ sions of the analysis These spreadsheet analyses not only provide the computa­ tional support to improve reader understanding, but also provide the detailed formula behind their construction • A mini-case at the end of each chapter illustrates the chapter content and extends it to the multinational financial business environment viii Preface • Global Finance in Practice boxes illuminate the theory with accounts of actual business practices These applications extend the concepts without adding to the length of the text itself • The power and resources of the Internet are leveraged throughout the text in a variety of applications Every chapter has end-of-chapter exercises that require the use of the Internet, while a variety of Internet references are dispersed throughout the chapters in text and exhibits • Additional end-of-chapter questions and problems assess students’ understanding of the course material All end-of-chapter problems are solved using spreadsheet solutions Selected end-of-chapter problem answers, indicated with an asterisk (*), are now included at the back of the book A Rich Array of Support Materials A robust package of materials for instructors and students accompanies the text to facilitate learning and to support teaching and testing All instructor resources are available for download from the online catalog page for this book (www.prenhall.com/finance or www.prenhall.com/irc) • Instructor’s Manual The Instructor’s Manual, prepared by the authors, contains answers to all end-of-chapter questions, problems, and mini-cases All quantitative end-of-chapter problems are solved using spreadsheets, which are available for download and on the Instructor’s Resource CD-ROM • Test Bank The Test Bank, prepared by Curtis Bacon of Southern Oregon University, contains m ore than 1,200 multiple choice and short essay questions The multiple choice questions are labeled by topic and by category—recognition, conceptual, and analytical The test bank is available for download on the online catalog page and on the Instructor’s Resource CD-ROM • Computerized Test Bank The Test Bank is also available in Pearson Education’s TestGen software for Windows® and Macintosh® TestGen’s graphical interface enables instructors to view, edit, and add questions; transfer questions to tests; and print different forms of tests Search-and-sort features enable the instructor to locate questions quickly and arrange them in a preferred order The Quizmaster application allows the instructor to administer TestGen tests over the school’s computer network M ore information on TestGen software is available at www.prenhall.com/testgen • Mini-Case PowerPoint® Presentations A significant addition to the instructor’s resources in this edition, each of the 22 m ini-cases has a stand-alone PowerPoint presentation, which is available on the Instructor’s Resource CDROM and on the online catalog page for this book (www.prenhall.com/finance or www.prenhall.com/irc) • PowerPoint Presentation Slides The extensive set of PowerPoint slides available on the Instructor’s Resource CD-ROM and on the online catalog page for this book provides lecture outlines and selected graphics from each chapter • Instructor’s Resource CD-ROM This CD-ROM contains the Test Bank, Computerized Test Bank files, the Instructor’s M anual files, and PowerPoint files Preface • ix Study Guide W ritten by Timo Korkeamaki of Gonzaga University, the Study Guide enhances understanding and retention of concepts by providing detailed study outlines It helps students prepare for tests with a series of self-test questions, including true/false, multiple choice, and short essay—all with answers • Web Site A dedicated Web site (www.prenhall.com/moffett) contains the Web exercises from the book with wired links, self-study quizzes, electronic flashcards of glossary terms, and selected solutions and spreadsheets for end-of-chapter problems international Editions Fundamentals o f Multinational Finance and Multinational Business Finance have been used throughout the world to teach students of international finance O ur books are published in several foreign languages including Chinese, French, Spanish, Indonesian, Portuguese, and Ukrainian Acknowledgments The authors are very thankful for the many detailed reviews and suggestions from numerous colleagues The third edition reviews included 15 detailed chapter-bychapter reviews The final version of this edition reflects most of the suggestions pro­ vided We appreciate the following reviewers: Torben Andersen, N orthwestern University; K ristine Beck, U niversity of Wisconsin; G eorge Change, Bradley University; O rkunt Dalgic, SUNY New Paltz; Robert Duvic, U T Austin; Ling He, University of Central Arkansas; Pankaj Jain, University of Memphis; David Ng, Cornell University; Rolando Pelaez, University of Houston; Niranjan Tripathy, University of N orth Texas; Consheng Wu, University of Bridgeport; Jimmy Yang, Oregon State Previous editions of Fundamentals o f Multinational Finance greatly benefited from other reviewers including the following: M orten Balling, W Brian Barrett, Cetin Ciner, Joseph F Greco, K en H unsader, Charmen Loh, Beverly B Marshall, Daniel L McCounaughy, Simona Mola, Ali M Parhizgari, Olgun Fuat Shahin, Jimmy Senteza, James G Tompkins, Phil Uhlm ann, and M iland M Shrikhande We would also like to thank two people at Prentice Hall who have worked dili­ gently on this edition: D onna Battista, Executive E ditor for Finance, and Kerri McQueen, Assistant Editor Finally, we dedicate this book to our parents, Bennie R uth and the late Hoy Moffett, the late Harold and Norm a Stonehill, and the late Wilford and Sylvia Eitem an, who m otivated us to become academicians and authors We thank our wives, Megan, Kari, and Keng-Fong, for their patience while we prepared Fundamentals o f Multinational Finance, third edition Glendale, Arizona Honolulu, Hawaii Pacific Palisades, California M.H.M A.I.S D.K.E X Preface About the Authors Michael H Moffett Michael H Moffett is Associate Professor of Finance at Thunderbird,The Am erican G raduate School of International Management Formerly, he was Associate Professor of Finance at Oregon State University (1985-1993) H e has also held teaching or research appointm ents at the University of Michigan, A nn A rbor (1991-1993); the Brookings Institution, Washington, D.C.; the University of Hawaii at Manoa; the Aarhus School of Business (Denmark); the Helsinki School of Economics and Business A dm inistration (Finland); the International C entre for Public Enterprises (Yugoslavia); and the University of Colorado, Boulder Professor Moffett received a B.A (Economics) from the University of Texas at Austin (1977); an M.S (Resource Economics) from Colorado State University (1979); an M.A (Economics) from the University of Colorado, Boulder (1983); and a Ph.D (Economics) from the University of Colorado, Boulder (1985) He has authored, co-authored, or contributed to six books and fifteen other pub­ lications His articles have appeared in Journal o f Financial and Quantitative Analysis, Journal o f A pplied Corporate Finance, Journal o f International Money and Finance, Journal o f International Financial Management and Accounting, Contemporary Policy Issues, Brookings Discussion Papers in International Economics, and others H e has contributed to a num ber of collected works, including the Handbook o f Modern Finance, the International Accounting and Finance Handbook, and the Encyclopedia o f International Business H e has co-authored two books on multinational business with Michael Czinkota and Ilkka Ronkainen: International Business (sixth edition) and Global Business (fourth edition) Arthur I S tonehili A rthur I Stonehill is a Professor of Finance and International Business, Emeritus, at Oregon State University, where he taught for 24 years (1966-1990) From 1991 to 1997 he held a split appointm ent at the University of Hawaii at M anoa and Copenhagen Business School From 1997 to 2001 he continued as a visiting professor at the University of Hawaii at Manoa He has also held teaching or research appointments at the University of California, Berkeley; Cranfield School of Management (U.K.); and the N orth European Management Institute (Norway) Formerly, he was president of the Academy of International Business, and was a west­ ern director of the Financial Managem ent Association \ Professor Stonehill received a B.A (History) from Yale University (1953), an M.B.A from Harvard Business School (1957), and a Ph.D in Business Administration from the University of California, Berkeley (1965) H e was awarded honorary doctor­ ates from the Aarhus School of Business (Denmark, 1989), the Copenhaigen Business School (Denmark, 1992), and Lund University (Sweden, 1998) H e has authored or co-authored nine books and twenty-five other publications His articles have appeared in Financial Management, Journal o f International Business Studies, California M anagement Review, Journal o f Financial and Quantitative Analysis, Journal o f International Financial Management and Accounting, International Business Review, European Management Journal, The Investment Analyst (U.K.), National0konom isk Tidskrift (D enm ark), Sosial0konom en (Norway), Journal o f Financial Education, and others Preface xi David K E ite m a n David K Eitem an is Professor Emeritus of Finance at the John E Anderson Graduate School of M anagement at UCLA He has also held teaching or research appointments at the Hong Kong University of Science & Technology, Showa Academy of Music (Japan), the National University of Singapore, Dalian University (China), the Helsinki School of Economics and Business Administration (Finland), University of Hawaii at Manoa, University of Bradford (U.K.), Cranfield School of M anagement (U.K.), and ID E A (Argentina) Formerly, he was president of the International Trade and Finance Association, the Society for Economics and M anagement in China, and the Western Finance Association Professor E item an received a B.B.A (Business A dm inistration) from the University of Michigan, Ann A rbor (1952), M.A (Economics) from the University of California, Berkeley (1956), and a Ph.D (Finance) from Northwestern University (1959) He has authored or co-authored four books and twenty-nine other publications His articles have appeared in The Journal o f Finance, The International Trade Journal, Financial Analysts Journal, Journal o f World Business, Management International, Business Horizons, M SU Business Topics, Public Utilities Fortnightly, and others ... Moffett Michael H Moffett is Associate Professor of Finance at Thunderbird,The Am erican G raduate School of International Management Formerly, he was Associate Professor of Finance at Oregon... international Editions Fundamentals o f Multinational Finance and Multinational Business Finance have been used throughout the world to teach students of international finance O ur books are... Proofreader: Holly M cLean-Aldis Cover image: © Image Source Pink Library of Congress Cataloging-in-Publication Data Moffett, Michael H Fundamentals of m ultinational finance / Michael H Moffett,