Global corporate finance - Kim
.pdf
xx PREFACE AND ACKNOWLEDGMENTS
point of global financial managers. Tables, figures, and numerical examples clarify discussions of financial concepts and techniques. All end-of-chapter questions and problems are tied or keyed to major topics presented in the chapter. Solutions to most end-of-chapter problems can be found at the end of the text. Additionally, we have made an extra effort to clearly define every key term, which we highlight in bold type. This book also provides a quick reference glossary with 400 key terms.
COMPLETE REVISION Since the first edition of this book, we have applied the same principle in consequent revisions; that is, planning anew rather than simply adding on to what we had already written. This approach has undoubtedly helped us avoid two problems: we have not overlooked important changes in international finance, and we have not unnecessarily increased the length of the book. This sixth edition contains many new cases, new sections, and new practical examples, but it is shorter in length than the previous edition.
A SUMMARY OF THE UNDERLYING PHILOSOPHY Instructors who want students to possess practical, job-oriented skills in international finance will find that Global Corporate Finance speaks to their needs. Corporate recruiters often criticize business schools for turning out graduates who cannot contribute immediately. At the core of this criticism is the belief that, while students are educated in various theories, little emphasis is placed on developing practical skills. For that reason, we have been especially careful to ensure that such criticism will not apply to those who adopt a book that aims at developing students’ skills in international finance. In fact, we expect that many students will keep this book as a useful reference work after they have completed their courses.
Learning Features
A CASE-STUDY APPROACH Students find different ways to master a subject, but we believe that the case-study approach is the most effective. Although this book is not a casebook, it centers on a series of real-life, current, and decision-oriented cases. We provide actual cases from the real world to begin and end each chapter. In other words, all 40 cases are bona fide real cases.
GLOBAL FINANCE IN ACTION In this edition, students will find 50 discussions under the heading of “Global Finance in Action.” We further catch the readers’ attention by setting these topics apart on the page. These boxes include real-life examples, contemporary issues, and important research findings, as well as new financial instruments and techniques. Among the topics covered in these boxes are the impact of the September 11, 2001 attacks on the world economy, the high cost of protectionism, and the US accounting scandal of 2002 and its impact on corporate governance.
INTERNET RESOURCES We have added a list of appropriate website addresses and a set of Internet questions for every chapter: these are located at the end of the book to help students find specific online sources of information about current company, market, and business events. In addition, we have designed the questions to help students use real-time resources in preparing executive briefings and in solving global finance problems.
REAL-WORLD EXAMPLES Global Corporate Finance focuses primarily on corporate finance practice. Throughout, numerous real-world examples present actual applications of financial theories
PREFACE AND ACKNOWLEDGMENTS |
xxi |
|
|
and techniques. These discussions center on how managerial decision-makers work within a global business with specific areas of responsibility for corporate finance. Specifically, this book is solidly grounded in the theory of modern corporate finance and yet has strong ties to the real world of international finance. We discuss and illustrate just about every theory and concept with actual data and/or practical examples.
READABILITY This book is readable and easy to understand because it discusses the basic tools and techniques of global finance without a complex treatment of theoretical concepts. Students become frustrated when they have to study mathematical formulas without corresponding numerical examples. Practically all of the formulas used in this book are accompanied by practical, but straightforward, numerical examples. We emphasize readability because we believe that it will motivate readers to pursue further knowledge in international finance.
Pedagogical Features
For ease of learning, each chapter of Global Corporate Finance follows a common format:
•At the beginning of each chapter, a mini-case is provided to achieve two objectives: (1) to build student interest with regard to the upcoming chapter and (2) to introduce a real-world example that will be explained further by theories and research findings presented in the chapter.
•The introductory mini-case is followed by a chapter overview, which describes the chapter themes and the content of the major sections.
•Real-world illustrations, numerical examples, figures, tables, and special boxes are integrated throughout the text to clarify discussions of financial concepts and techniques.
•Key terms and concepts are presented in bold type when they are first introduced. We have also concentrated on clearly defining key terms.
•A short summary provides students with a handy overview of key concepts for review.
•Those references used in each chapter are listed to allow readers to find sources that provide additional information about specific topics discussed in the chapter.
•A generous number of questions and problems support text discussions; they reemphasize definitions, concepts, and the application of theory.
•An analytic mini-case concludes each chapter. The closing case problems serve a different purpose from the opening ones. They present situations for which students must analyze possible actions on the basis of what they have learned in the chapter. In other words, the opening cases enhance interest and recall essential facts; the closing case problems enhance the development of critical reasoning skills. Moreover, Internet exercises have been added at the end of each case problem, to explain how the Internet may be used to access international financial data and obtain information on the case concepts.
To the Student
While you may use this book in whatever way you find most comfortable, the following tips may give your learning experience added value. In each chapter:
xxiiPREFACE AND ACKNOWLEDGMENTS
•Read the opening case, to view the upcoming material through a real-world example.
•Read the chapter text.
•Read the chapter summary.
•Study the key terms and concepts that are highlighted in bold type. The website consolidates all of the key terms and concepts, with end-of-chapter definitions.
•Rework any numerical examples provided in the chapter.
•Read our lecture notes for the chapter.
•Prepare notes using your professor’s lectures, lecture notes, and the textbook. Make those notes your own.
Changes to the Sixth Edition
We have carefully revised the sixth edition to reflect changes in global finance. In response to reader suggestions, we have eliminated four chapters, added two new chapters, added 16 new cases, developed 20 Internet resources, and discussed many new practical examples in special boxes under the heading “Global Finance in Action.” We have also revised 40 Internet exercises for students who take international finance courses. We have expanded our coverage on shareholder value and corporate governance. We have discussed the introduction of the euro and its impact in several chapters. We have also discussed several new topics in many chapters – the impact of the September 11, 2001, attacks on the world economy, the growing economic power of China, and the 2002 corporate scandal in the United States and its impact on corporate governance. To enhance the international focus of the sixth edition, we have dropped those topics that took specifically American viewpoints while increasing our coverage of emerging markets. Finally, we have replaced the currencies of 12 eurozone countries with other currencies throughout the text, the Instructor’s Manual, and the Study Guide. These and other changes are designed to place the focus of the book on managerial finance for multinational companies.
Chapter 1, “Introduction,” has been extensively rewritten to eliminate a few existing topics and to discuss three new topics: the corporate governance of a major pension fund as an opening case; the impact of the September 11, 2001, attacks on the world economy; and the orientation of globalization. Chapter 2, “Motives for World Trade and Foreign Investment,” examines the impact of economic freedom on consumption, the cost of protectionism, and the fruits of free trade under the World Trade Organization. Chapter 3, “The Balance of Payments,” considers the implications of the huge US trade deficit and the trade friction between the USA and China. Chapter 4, “The International Monetary System,” discusses the euro as an opening case, compresses the history of the international monetary system, and expands the coverage of the euro.
In chapter 5, “The Foreign-Exchange Market and Parity Conditions,” we have replaced both the opening case and the ending cases with new ones, shortened our discussion on the overview of the foreign-exchange market, and, in a box, examined the effectiveness of official exchange intervention. Chapter 6, “Currency Futures and Options,” discusses the risk of financial derivatives more explicitly and analyzes the reasons for the decline in the importance of currency futures. We have substantially revised chapter 7, “Financial Swaps,” to reflect new information in the opening case, to describe the US accounting scandal of 2002, and to explain the motives for the use of financial swaps. Chapter 8, “Exchange Rate Forecasting,” tracks the fluctuation of the US dollar in a box and discusses the reasons for central bank intervention in currency markets.
PREFACE AND ACKNOWLEDGMENTS |
xxiii |
|
|
The fifth edition of this book had only one chapter about foreign-exchange risk management, but the sixth edition discusses this important topic in two separate chapters: chapter 9, “Managing Transaction Exposure and Economic Exposure,” and chapter 10, “Translation Exposure Management.” This means that we have covered foreign-exchange risk management in its entirety.
Chapter 11, “International Financial Markets,” has been completely rewritten to shorten our coverage of a few existing topics and to discuss four new topics: the attractiveness of Asian shares, international interest rate linkages and corporate governance reform as a matter of global concern, new trends in stock markets, and the rotation from debt to equity by developing countries. Chapter 12, “International Banking Issues and Country Risk Analysis,” has undergone extensive revision to discuss Argentina’s currency crisis, the World Bank, and the World’s largest financial companies. Chapter 13, “Financing Foreign Trade,” evaluates countertrade in a new section and explains how to collect overdue accounts in a new topic. Chapter 14, “Financing Foreign Investment,” examines motives for strategic alliances in a new topic. Chapter 15, “International Working Capital Management,” has been shortened. Chapter 16, “International Portfolio Investment,” has a new opening case and discusses most topics with updated information. Chapter 17, “Corporate Strategy and Foreign Direct Investment,” looks at the reasons for the recent growth in new mergers and discusses the impact of reduced foreign direct investment in the USA. Chapter 18, “International Capital Budgeting Decisions,” has been substantially revised to include political risk analysis in a major new section. In chapter 19, “The Cost of Capital for Foreign Projects,” a few topics have been dropped but we discuss cultural values and capital structure in a new section. Chapter 20, “Corporate Performance of Foreign Operations,” is a new chapter that discusses those factors affecting the corporate performance of foreign operations.
Suk H. Kim and Seung H. Kim
Acknowledgments
Many colleagues have provided constructive advice critical to the successful development of the sixth edition. We would like to express our thanks to Dean Bahman Mirshab (University of Detroit Mercy) and Dean Ellen F. Harshman (St. Louis University) for their support and encouragement. Our special thanks go to a number of magnanimous reviewers, who provided detailed written suggestions for this edition in a response to the publisher’s request for their review. We are also grateful to Dan Baack (St. Louis University) and Stacey Banks (Cleary University) for developing a Study Guide to complement this book. Several students deserve special acknowledgment for their contributions: Eun-Young Choi, Yalda Ghorashyzadeh, and Kala Raman. We also wish to thank the staff of Blackwell Publishing who made many valuable contributions to this edition: Seth Ditchik, Joanna Pyke, Rhonda Pearce, Laura Stearns, and Geoffrey D. Palmer. Finally, and importantly, we thank the following reviewers for their recommendations and insights:
Sadhana Alangar, Cleary University
Mazin Aljanabi, Al Akhawayn University Ifrane, Morocco
Stephen F. Borde, University of Central Florida
Bruce Brorby, University of Detroit Mercy
xxiv PREFACE AND ACKNOWLEDGMENTS
Alva Wright Butcher, University of Puget Sound Hai Yang Chen, Youngstown State University John S. Cotner, Loyola College, Baltimore
Reid W. Click, George Washington University Jay Choi, Temple University
Karen Craft Denning, West Virginia University Rhonda DeLong, Eastern Michigan University Anthony Diemo, Detroit College of Business John H. Dunning, Rutgers University
Everton Dockery, Staffordshire University
Brian Fitzpatrick, Rockhurst University Stanley Flax, St. Thomas University Ramesh Garg, Eastern Michigan University Claire Gilmore, Saint Joseph’s University
Gary A. Giamartino, University of Detroit Mercy Gunita Grover, University of Delaware
Nell S. Gullett, University of Tennessee at Martin Mahfuzul Haque, Indiana State University Chi-Cheng Hsia, Portland State University Chang Soo Huh, GS Holdings
Youn-Suk Kim, Kean University of New Jersey Robert K. Kleiman, Oakland University Richard Kowalczyk, University of Detroit Mercy
Charles O. Kroncke, University of Wisconsin–Milwaukee John W. Lang, Cambridge University
Donald Lessard, Massachusetts Institute of Technology Weiping Liu, University of Wisconsin–Green Bay
Jay R. Marchand, Westminster College
William T. Moore, University of South Carolina Atsuyuki Naka, University of New Orleans George Ogum, La Sierra University
Spencer Pack, Connecticut College Chong S. Pyun, University of Memphis Harri Ramcharran, Universtiy of Akron Hongkeun Rim, Shippensburg University Alan Robinson, Simmons College
Neil Seitz, St. Louis University Kilman Shin, Ferris State University
Tai S. Shin, Virginia Commonwealth University Robert Singer, St. Louis University
Martha Soleau, University of Detroit Mercy Sankar Sundarrajan, Tarleton State University
Peter Tsirigotis, The Securities and Exchange Commission Robert Uptegraff, Central Michigan University
David VanerLinden, Kent State University
Joseph K. Winsen, University of Newcastle
PREFACE AND ACKNOWLEDGMENTS |
xxv |
|
|
Regan Whitworth, American University of Armenia
Fred Yeager, St. Louis University
Yeomin Yoon, Seton Hall University
Don Welty, Westminster College
John Zietlow, Lee University
The authors and publishers gratefully acknowledge the following for permission to reproduce copyright material:
“World Value of the Dollar” table: courtesy The Wall Street Journal, July 12, 2004, p. C13. Reprinted by permission.
Figure 2.2: The Mercosur Trade Group, courtesy The Wall Street Journal, June 16, 2003, p. A13. Reprinted by permission.
Figure 2.3: Progress on Tariffs, from International Business: Environments and Operations, 10th edn, by J. D. Daniels, L. H. Radebaugh, and D. P. Sullivan. Copyright © 2004. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ, chapter 6.
Figure 3.3: US Trade Balances with Mexico and China, courtesy The Wall Street Journal, Aug. 4, 2003 p. A4. Reprinted by permission.
Figure 4.1: Argentine Pesos Per US Dollar, courtesy The Wall Street Journal, July 2, 2003, p. A6. Reprinted by permission.
Figure 4.6: US Dollar’s Doldrums Fuel Euro’s Rise, courtesy The Wall Street Journal, Jan. 2, 2004, p. R13. Reprinted by permission.
Table 5.1: Key Currency Cross Rates, courtesy The Wall Street Journal, July 12, 2004, p. C13. Reprinted by permission.
Table 11.1: Money Rates, courtesy The Wall Street Journal, June 22, 2004, p. C16. Reprinted by permission.
Figure 11.1: Asian Markets Boom, courtesy The Wall Street Journal, July 17, 2003, p. C12. Reprinted by permission.
Figure 13.2: US Arms Exports and Offset Obligations, courtesy The Wall Street Journal, April 20, 2000, p. A18 (from the US Department of Commerce). Reprinted by permission.
Figure 15.1: A Hot Spot, courtesy The Wall Street Journal, June 29, 2000, p, A21. Reprinted by permission.
Figure 16.1: All for One, and One for All, courtesy The Wall Street Journal, Sept. 8, 2003, p. A10. Reprinted by permission.
Figure 16.8: Americans Look Abroad, courtesy The Wall Street Journal, July 2, 2001, p. C20. Reprinted by permission.
Figure 16.9: The Money Pours In, courtesy The Wall Street Journal, July 7, 2004, p. C1. Reprinted by permission.
Figure 16.10: DaimlerChrysler’s Dilemma, from J. Ball, “DaimlerChrysler Frets over Loss of US Shareholders,” The Wall Street Journal, Mar. 24, 1999, p. B4. Reprinted by permission.
Figure 16.11: “The Struggling Chrysler Group,” courtesy The Detroit News, Feb. 29, 2001, p. A4. Reprinted by permission.
xxvi PREFACE AND ACKNOWLEDGMENTS
Figure 17.5: Closely Held, courtesy The Wall Street Journal, Apr. 26, 1999, p. R15. Reprinted by permission.
Figure 17.6: A Pickup in Merger Activity, courtesy The Wall Street Journal, Jan. 2, 2004, p. R15. Reprinted by permission.
Figure 18.2: Expropriation Acts, by Year, from C. R. Kennedy, “Multinational Corporations and Expropriation Risk,” Multinational Business Review, Spring 1993, p. 45. Reprinted by permission of Suk Kim.
Case Problem 10: Dell Mercosur, from International Business Environments and Operations, 10th edn, by J. D. Daniels, L. H. Radebaugh, and D. P. Sullivan. Copyright © 2004. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ, pp. 623–6.
The publishers apologize for any errors or omissions in the above list and would be grateful to be notified of any corrections that should be incorporated in the next edition or reprint of this book.
About the Authors
Suk H. Kim
Suk H. Kim, a professor of international finance, is the program coordinator of finance and international business at the University of Detroit Mercy. Professor Kim has authored or coauthored 14 finance textbooks and 60-plus refereed journal publications. According to an article by Allen Morrison and Andrew Inkpen ( Journal of International Business Studies, First Quarter, 1991), Professor Kim was among the top 25 international business researchers in the 1980s. He was a Fulbright Scholar in international finance at Yonsei University in Seoul, Korea, in 1993. He is the editor of North Korean Review (www.northkoreanreview.com) and the founding editor of Multinational Business Review. Dr Kim received his MBA from Pepperdine University and his PhD in finance from St. Louis University. He has received awards for excellence in teaching and research.
Seung H. Kim
Seung H. Kim, Paul G. Lorenzini Endowed Professor in International Business, is Director of the Boeing Institute of International Business at St. Louis University. He has authored or coauthored seven books and 30 refereed journal publications. Professor Kim received an outstanding teacher award at the School of Business and Administration, St. Louis University. He has served as a consultant for multinational companies and international banks, and on the boards of the following organizations: the Missouri District Export Council, appointed by the US Commerce Secretary; the State of Missouri Governor’s Office; the World Trade Center of St. Louis; and the World Affairs Council of St. Louis. Dr Kim attended the Seoul National University Law School, and received his MBA and PhD from New York University.
PART I
The Global Financial
Environment
Part I of this text (chapters 1–4) presents an overview of the global financial environment. Chapter 1 develops the goal of the multinational company to be used in the financial decisionmaking process and examines the role of global finance in achieving this goal. Chapter 2 examines motives for world trade and foreign investment. Before considering foreign trade and foreign investment separately in the coming chapters, we will discuss key trade and investment theories in this chapter. Chapter 3 describes the balance of payments and its relationship to currency regimes. Chapter 4 looks at an overview of the international monetary system and how the choice of system affects exchange rates.