Lecture International business (9e): Chapter 12 - Charles W.L. Hill

In this chapter, you will learn to explain the concept of strategy. Recognize how firms can profit by expanding globally. Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice. Identify the different strategies for competing globally and their pros and cons. Explain the pros and cons of using strategic alliances to support global strategies.

9e

By Charles W.L Hill

The Global Capital

Market

Why Do We Have  Capital Markets?

 Capital markets bring together investors and

borrowers

investors - corporations with surplus cash,

individuals, and non-bank financial institutions

borrowers - individuals, companies, and

governments

markets makers - the financial service companies

that connect investors and borrowers, either directly

(investment banks) or indirectly (commercial banks)

 capital market loans can be equity or debt

in Capital Markets?

The Main Players in a Generic Capital Market

 Today’s capital markets are highly

interconnected and facilitate the free flow of

money around the world

 Borrowers benefit from the additional supply of

funds global capital markets provide

 lowers the cost of capital

 Investors benefit from the wider range of

investment opportunities

 diversify portfolios and lower risk

How Have Global Capital  Markets Changed Since 1990?

 Global capital markets have grown rapidly

 the stock of cross-border bank loans was just $3,600 billion in 1990, but $32,430 in 2010

 the international bond market has grown from $3,515 billion in 1997 to $26,613 in 2010

 international equity offerings were just $18 billion in

1990, but grew to $750 billion in 2009

 The growth in the markets is a result of

1 Advances in information technology

2 Deregulation by governments

Global Capital Markets?

 Question: Could deregulation of capital markets

and fewer controls on cross-border capital flows make nations more vulnerable to the effects of

speculative capital flows?

 can have a destabilizing effect on economies

 2008-2009 global financial crisis

 Speculative capital flows may be the result of

inaccurate information about investment

opportunities

 if global capital markets continue to grow, better

quality information is likely to be available from

financial intermediaries

 A eurocurrency is any currency banked outside

its country of origin

 about two-thirds of all eurocurrencies are Eurodollars

 It is an important source of low-cost funds for

international companies

 The market began in the 1950s

 Eastern bloc countries feared that the U.S might

seize their dollars so, they deposited them in Europe

 additional dollar deposits came from Western

European central banks and companies that exported

to the U.S

Market Grown?

 In 1957, the market surged again after changes

in British laws

 London became the leading center of the market and still hold this position

 In the 1960s, the market grew once again

 Changes in regulations discouraged U.S banks from lending to non-U.S residents

 would-be borrowers of dollars outside the U.S turned

to the euromarket as a source of dollars

Market Grown?

 The next big increase came after the

1973-74 and 1979-80 oil price increases

huge amounts of dollars

avoided potential confiscation of their dollars

by the U.S by depositing them in banks in

London

Market Attractive?

 The eurocurrency market is attractive because it

is not regulated by the government

 banks can offer higher interest rates on eurocurrency deposits and charge lower interest rates to

eurocurrency borrowers

 The spread between the eurocurrency deposit

and lending rates is less than the spread

between the domestic deposit and lending rates

 gives eurocurrency banks a competitive edge over

domestic banks

Market Attractive?

Interest Rate Spreads in Domestic and Eurocurrency Markets

Market Unattractive?

 The eurocurrency market has two significant

drawbacks:

1 Because the eurocurrency market is

unregulated, there is a higher risk that bank

failure could cause depositors to lose funds

 can avoid this risk by accepting a lower return on a

home-country deposit

1 Companies borrowing eurocurrencies can be

exposed to foreign exchange risk

 can minimize this risk through forward market

hedges

What Is The  Global Bond Market?

 Bonds are an important means of financing for

many companies

 the most common bond is a fixed rate which gives

investors fixed cash payoffs

 The global bond market grew rapidly during the

1980s and 1990s and continues to grow today

 There are two types of international bonds

1 Foreign bonds

2 Eurobonds

Market Attractive?

 The eurobond market is attractive because

1 It lacks regulatory interference

 since companies do not have to adhere to strict

regulations, the cost of issuing bonds is lower

1 It has less stringent disclosure requirements

than domestic bond markets

 it can be cheaper and less time consuming to offer

eurobonds than dollar-denominated bonds

1 It is more favorable from a tax perspective

 eurobonds can be sold directly to foreign investors

What Is The  Global Equity Market?

 The global equity market allows firms to

1 Attract capital from international investors

 many investors buy foreign equities to

diversify their portfolios

1 List their stock on multiple exchanges

 this type of trend may result in an

internationalization of corporate ownership

1 Raise funds by issuing debt or equity

around the world

 The growth in global capital markets has created opportunities for firms to borrow or invest

internationally

 can often borrow at a lower cost, but must balance

the foreign exchange risk against the costs savings

 Growth in capital markets offers opportunities for firms, institutions, and individuals to diversify

their investments and reduce risk

 Capital markets are likely to continue to integrate providing more opportunities for business