Introduction
The opening case describes how Deutsche Telekom overcame the financing constraints imposed by a relatively illiquid German capital market and raised $13.3 billion by simultaneously listing its shares for sale on stock exchanges in Frankfurt, London, New York, and Tokyo. Deutsche Telekom tapped the international capital market to finance its capital spending needs because the German capital market alone was too small to supply the requisite funds at a reasonable cost. This illustrates a primary benefit of the global capital market--the increased liquidity relative to a purely domestic capital market enables a borrower to lower its cost of capital (that is, to borrow funds at a lower cost).
Although Deutsche Telekom's initial public offering represents one of the more notable examples of the use of the global capital market to finance capital spending needs, it is not unique. In recent years, many companies have sought to raise capital by selling shares and bonds to foreign investors or by borrowing money from foreign banks. In 1994, Daimler-Benz, Germany's largest industrial company, raised $300 million by issuing new shares not in Germany, but in Singapore.1 In 1997, Yukos, a large Russian oil company, raised $1 billion in loans from Western banks.2 Also in 1997, three other national telecommunications companies, Telecom Italia, Ente Nazionale Idrocarburi, and France Telecom, made international equity offerings of $11 billion, $7.8 billion, and $7.1 billion, respectively. According to data from the Bank for International Settlements, by late 1997 the stock of cross-border loans stood at $5,285 billion, there were $3,515 billion in outstanding international bonds, and international equity offerings were on target to exceed $100 billion.3 All figures were records and represented steep increases from a decade earlier.
We begin this chapter by looking at the benefits associated with the globalization of capital markets. This is followed by a more detailed look at the growth of the international capital market and the risks associated with such growth. Next, there is a detailed review of three important segments of the global capital market: the Eurocurrency market, the international bond market, and the international equity market. As usual, we close the chapter by pointing out some of the implications for the practice of international business.
Benefits of the Global Capital Market
Although this section is about the global capital market, we open it by discussing the functions of a generic capital market. Then we will look at the limitations of domestic capital markets and discuss the benefits of using global capital markets.
The Functions of a Generic Capital Market
Why do we have capital markets? What is their function? A capital market brings together those who want to invest money and those who want to borrow money (see Figure 11.1). Those who want to invest money include corporations with surplus cash, individuals, and nonbank financial institutions (e.g., pension funds, insurance companies). Those who want to borrow money include individuals, companies, and governments. Between these two groups are the market makers. Market makers are the financial service companies that connect investors and borrowers, either directly or indirectly. They include commercial banks (e.g., Citibank, U.S. Bank) and investment banks (e.g., Merrill Lynch, Goldman Sachs).
Commercial banks perform an indirect connection function. They take cash deposits from corporations and individuals and pay them a rate of interest in return. They then lend that money to borrowers at a higher rate of interest, making a profit from the difference in interest rates (commonly referred to as the interest rate spread). Investment banks perform a direct connection function. They bring investors and
