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.

International Business 9e By Charles W.L Hill McGraw­Hill/Irwin         Copyright © 2013 by The McGraw­Hill Companies, Inc. All rights reserved Chapter 12 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 12­3 Who Are The Main Players  in Capital Markets? The Main Players in a Generic Capital Market 12­4 What Makes The Global  Capital Market Attractive?   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 12­5 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 Advances in information technology Deregulation by governments 12­6 What Are The Risks Of The  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 12­7 What Is A Eurocurrency?  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 12­8 Why Has The Eurocurrency  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 12­9 Why Has The Eurocurrency  Market Grown?  The next big increase came after the 1973-74 and 1979-80 oil price increases  Arab members of OPEC accumulated huge amounts of dollars avoided potential confiscation of their dollars by the U.S by depositing them in banks in London 12­10 What Makes The Eurocurrency  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 12­11 What Makes The Eurocurrency  Market Attractive? Interest Rate Spreads in Domestic and Eurocurrency Markets 12­12 What Makes The Eurocurrency  Market Unattractive?  The eurocurrency market has two significant drawbacks: 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 Companies borrowing eurocurrencies can be exposed to foreign exchange risk  can minimize this risk through forward market hedges 12­13 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 Foreign bonds Eurobonds 12­14 What Makes The Eurobond  Market Attractive?  The eurobond market is attractive because It lacks regulatory interference  since companies not have to adhere to strict regulations, the cost of issuing bonds is lower 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 It is more favorable from a tax perspective  eurobonds can be sold directly to foreign investors 12­15 What Is The  Global Equity Market?  The global equity market allows firms to Attract capital from international investors  many investors buy foreign equities to diversify their portfolios List their stock on multiple exchanges  this type of trend may result in an internationalization of corporate ownership Raise funds by issuing debt or equity around the world 12­16 What Do Global Capital  Markets Mean For Managers?   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 12­17 .. .Chapter 12 The Global Capital Market Why Do We Have  Capital Markets?  Capital markets bring together investors and borrowers  investors - corporations with surplus... corporations with surplus cash, individuals, and non-bank financial institutions  borrowers - individuals, companies, and governments  markets makers - the financial service companies that connect... 12 7 What Is A Eurocurrency?  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