Global corporate finance - Kim

512 CORPORATE PERFORMANCE OF FOREIGN OPERATIONS

6Assume a value-added tax of 10 percent. What would be the selling price and taxes at each stage if the following were the values added?

7Eurowide Corporation has two foreign affiliates: A is in a low-tax country (30 percent tax rate) and B is in a high-tax country (50 percent tax rate). Affiliate A produces partially finished products and sells them to affiliate B, where the production process is completed. The pro forma income statements of these two affiliates are shown in the following table. Assume that the company increases its transfer price from $3,000 to $3,600. Determine the tax effect of this high transfer price on the company’s consolidated net income.

Pro forma income statements for two affiliates

8Eurowide Corporation has two foreign affiliates: A is in a low-tax country (30 percent tax rate) and B is in a high-tax country (50 percent tax rate). Affiliate A produces partially finished products and sells them to affiliate B, where the production process is completed. Affiliate B must pay import duties at the rate of 10 percent – 10 percent of the value of the imported goods. These tariffs are tax deductible. The pro forma income statements of these two affiliates are shown in the following table. Assume that the company increases its transfer price from $3,000 to $3,600. Determine the tax-plus-tariff effect of this high transfer price on the company’s consolidated net income.

AT is a multinational company with headquarters in Los Angeles, California. The company has five manufacturing locations in the USA and three abroad, with offices in 13 countries. In 1995, approximately 40 percent of its sales came from foreign operations – primarily South America and Asia, where the company has recently faced stiff competition from its larger rivals, such as IBM, Digital Equipment, and Olivetti. The company has depended on distributors for most of its overseas sales.

Conflict of Interest in Financial Affairs

Thomas Nickerson is a Special Assistant to the Vice President of Finance, Linda Humphrey. He graduated from a major university in St. Louis, Missouri, with an MBA in Finance. After 2 years of experience with Ernst & Young, a major CPA firm in St. Louis, he joined the accounting staff and served in a variety of accounting and finance positions for 5 years. Two years ago, he was appointed Special Assistant to Ms Humphrey at an unusually high salary, mainly because of his outstanding financial and communication talents. Thomas Nickerson has a large family and a home with a $450,000 mortgage. His deep debt and huge financial needs hardly matter to him, because he has a promising future at the company.

Ms Humphrey approached Thomas with a special task on August 1, 1996. She informed him that she had met with other vice presidents and decided to purchase Computer Engineering to alleviate the capacity problem. She further stated that the acquisition would be highly advantageous for AT, but she needed to convince two members of the board of directors. Then she instructed him to prepare a report justifying the acquisition of the company. Under the terms, AT would offer Computer Engineering two million shares of its stock. The market price of the stock was $20 per share.

Normally, Thomas would have welcomed the assignment, but this one made him uneasy. Computer Engineering’s financial statements indicated poor performance as compared with comparable companies in the field. He knew that Ms Humphrey and other vice presidents had helped the current top executives of Computer Engineering set up their company. He suspected that vice presidents of AT owned sizable blocks of Computer Engineering stock, which was not publicly traded. To establish a fair market price for Computer Engineering, he compiled the statistics presented in table 20.4. High Tech is more similar to Computer Engineering than any other company whose stock is traded in the public market.

Ethics Versus Profits in Global Business

The Foreign Corrupt Practices Act of 1977 (FCPA) has encouraged US companies to introduce policies against corrupt foreign payments and to improve internal controls. The FCPA bans illegal payments to foreign officials, monitors accounting procedures, and levies heavy penalties for violations. The FCPA forced AT to think about its way of doing business overseas. The company had expanded its foreign operations very quickly. In the 1960s, less than 2 percent of its sales came from foreign operations, but by the late 1970s its foreign operations accounted for 30 percent of total sales.

Just like many other companies, AT had undertaken positive steps to prevent illegal payments to foreign officials and to improve internal control. In 1980, the company published its

516 CORPORATE PERFORMANCE OF FOREIGN OPERATIONS

Table 20.4 Key statistics for Computer Engineering and High

Tech

first corporate code, along with two separate area codes: one for the USA and another one for the foreign area. The code of business conduct for overseas employees reflected most provisions of the FCPA, so that the company would not have any trouble with the law.

Marketing Vice President Miller had been under heavy pressure from President Smith to increase the company’s foreign sales by 30 percent per year for the next 5 years. Mr Miller thought that when in Rome, some do as the Romans do. In other words, he did not hesitate to call the FCPA “bad business” and “unnecessary.” Miller felt that the FCPA should be repealed for several reasons. First, it forced US companies to increase audit costs substantially. Second, the Department of Justice and the SEC failed to establish clear guidelines. Third, it put US companies at a competitive disadvantage. Fourth, in many countries, foreign payments are not outlawed, but they are encouraged. Fifth, the FCPA was unnecessary because US law enforcement agencies already had many statutes to prevent illegal foreign payments by US companies.

Mr Miller reflected on the report he would present to the Executive Committee. The purpose of this report was to make certain that AT was complying with its corporate code of conduct. There was, however, one situation that required a tough decision. This particular situation was considered an acceptable practice in the countries where they occurred, but he did not know how he would handle specific questions if they should come up.

Kevin Hart was the exclusive distributor for Advanced Technology products in South American countries. He had a reputation for reliability and efficiency. However, the most recent audit suggested that he had corruptly influenced customs officials to obtain lower duty rates for AT’s products. In doing so, he had violated both the FCPA and the company’s code of conduct.

AT had asked Kevin to agree in writing to abide by the code, but he had refused to do so. He had argued that these “grease payments” were customary in these countries. He had insisted that he could not compete effectively without them. Kevin had represented AT for many years and generated approximately $10 million worth of business per year for the company. His exclusive dealership contract would be up for renewal in a few months. AT had suggested that it might refuse to renew its contract unless he agreed to abide by the code. Mr Miller knew that it would be difficult to resolve this problem while he was under heavy pressure to increase the company’s overseas sales by 30 percent per year.

Case Questions

1Use the data in table 20.4 to estimate the market value of Computer Engineering in the following three ways: (1) price–earnings ratio, (2) market value/book value, and (3) the dividend growth model.

2List and discuss the options available to Thomas Nickerson.

3Discuss the two major sections of the FCPA – antibribery and accounting.

4List and discuss the pros and cons concerning corporate codes of conduct.

5If you were Sam Miller, what would you do about the situation in these South American countries?

6The Internet Center for Corruption Research provides the transparency international perceptions index and a comprehensive assessment of countries’ integrity performance. Use the website of this organization, www.gwdg.de/~uwvw/icr.htm, to identify the five most corrupt countries and the five least corrupt countries.

Sources: Arthur Aronoff, “Complying with the Foreign Corrupt Practices Act,” Business America, Feb. 11, 1991, pp. 10–11; Suk H. Kim, “On Repealing the Foreign Corrupt Practices Act: Survey and Assessment,” Columbia Journal of World Business, Fall 1981, pp. 16–21; Catherine C. Langlois and Bodo B. Schlegelmilch, “Do Corporate Codes of Ethics Reflect National Character?” Journal of International Business Studies, Fourth Quarter 1990, pp. 519–40; Manuel Velasquez, “Unicomp, Inc.,” St Charles, IL: Center for Professional Education, Arthur Anderson & Co., 1990; and David Whiteside and Kenneth E. Goodpaster, “Dow Corning Corporation: Business Conduct and Global Values,” in Kenneth E. Goodpaster and Thomas R. Piper, eds., Managerial Decision Making and Ethical Values, Boston, MA: Publishing Division/Marketing Department, Harvard Business School, 1991.

Web Resources and

Internet Exercises

Chapter 1: Introduction

Internet resources

www.wto.org

The website of the World Trade Organization (WTO) provides news and statistics on international trade as well as links to international organizations.

www.corpgov.net

The website of Corporate Governance Net contains news, research findings, recommendations, and other information related to the relationship between a business and its stakeholders.

www.ecgi.org

The website of the European Corporate Governance Institute (ECGI) contains news and research on corporate governance in Europe, comparative studies on international issues and codes, and principles of corporate governance by country and/or region.

www.bea.doc.gov

The website of the Bureau of Economic Analysis (BEA) contains economic data and articles on US international trade and capital flows as well as international surveys.

www.worldbank.org

The website of the World Bank contains data on the economic prospects of 208 countries and links to other sources of international data.

www.wsj.com

The website of The Wall Street Journal, the leading business newspaper in the USA.

www.ft.com

The website of The Financial Times, the leading international business newspaper.

www.economist.com

The website of The Economist contains news items and financial data on international economic and political situations.

www.intracen.org

The website of the International Trade Center (ITC) contains trade information, news items, and references on trade in developing countries.

Internet exercises

1Visit the website of Corporate Governance, www.corpgov.net, to view recent developments on the relationship between a corporation’s management and its stakeholders. In the light of recent accounting scandals in corporate America, list three proposed solutions to fix corporate governance practices. Visit the website of the European Corporate Governance Institute, www.ecgi.org, to view codes and principles of corporate governance for European countries. Choose a country or region and list five principles and/or recommendations on corporate governance. Explain how these European practices are similar to or different from existing practices in the USA.

2Select one country of your choice from the “County-at-a-Glance” table of the World Bank (www.worldbank.org) to answer the following questions: What is the population? What is the currency? What is the GNI per capita? How has the GDP changed in the past 3 years? Is this country a net importer or exporter? How much is the trade in goods as a share of GDP? What is the amount of foreign direct investment?

Chapter 2: Motives for World Trade and Foreign Investment

Internet resources

www.nafta-sec-alena.org

This is the official site of the NAFTA Secretariat and contains documents (including the full text of NAFTA), notes on past rulings, rules, and other background information.

www.citizen.org/pctrade/nafta/naftapg.html

This website contains a critical review of NAFTA.

www.dismal.com

This website covers over 65 economic findings from over 15 countries and contains news items dealing with international finance and economics.

www.census.gov/ipc/www

This website contains the International Data Base (IDB), a computerized data bank with statistical tables of demographics and socioeconomic data for 227 countries.

www.oecd.org

The website of the Organization for Economic Cooperation and Development (OECD), which provides access to news, data, and analysis on international finance and economics.

520 WEB RESOURCES AND INTERNET EXERCISES

www.inc.com

Inc. Online’s website for International business professionals, a useful resource for beginners in international business.

www.cnnfn.com

CNN’s financial section, containing extensive coverage of global business and financial information news.

Internet exercises

1Government subsidies in lumber production have created an unfair economic advantage in the trade of lumber between Canada and the United States. Access the websites of the BEA, www.bea.doc.gov, the OECD, www.oecd.org, and the NAFTA text, www.nafta-sec-alena.org, to answer the following questions: How do these subsidies affect the lumber trade between Canada and the USA? How big an industry is this? Which country had the comparative advantage before government intervention? Which one held the comparative advantage after the government intervention? Is the lumber trade part of the NAFTA agreement? There are numerous news articles on this subject. What is the position of US consumers on lumber duties? Refer to the following website for your answer: www.newswire.ca/releases/ January2003/08/c827.html.

2The intent of the NAFTA is to eliminate all tariffs on goods and services produced in one member country and exported to another. However, that does not mean that all cars made in one member country can cross the border to another member country tariff free. What are the “Rules of Origin” as outlined in chapter 4 of NAFTA? You may view the full text of NAFTA at www.nafta-sec-alena.org. Volkswagen, Hyundai, and Honda are some of the foreign-owned multinational automakers operating in NAFTA countries. How can these companies maintain tariff-free status when exporting within NAFTA countries? What happens when “nonoriginating” materials are used in the product exported, and how does this affect the “Regional Value Content” of the product?

Chapter 3: The Balance of Payments

Internet resources

www.bea.doc.gov

The website of the Bureau of Economic Analysis (BEA) contains economic data and articles on US international trade and capital flow.

www.stls.frb.org/fred/

The website of the Federal Reserve Bank of St Louis takes you directly to US trade and balance- of-payments data that you can download into a spreadsheet.

www.imf.org/external/about.htm

The website of the International Monetary Fund (IMF) discusses the IMF and its role and covers news topics, the balance of payments, and a variety of other information.

www.jin.jcic.or.jp/access/trade/balance.html

The website of Japan Information Network explains the balance-of-payments performance in terms of balance on goods, which is the difference between a nation’s exports and its imports.

www.bangladesh-bank.org/econdata/bop.html

This website puts forward the payment strategies used by Bangladesh Bank.

Internet exercises

1The website of the US Census Bureau, www.census.gov, provides statistics on foreign trade and other economic data. Utilize this site to identify the trade balance trends of the USA and Japan over the past 3 years. You may find the most recent balance-of-payments statistics for both countries by consulting the US Bureau of Economic Analysis at www.bea.doc.gov and Japan’s Ministry of Finance at www.mof.go.jp. Historical data are also available at these sites for trend analysis.

2Construct the balance-of-payments table for any two countries, such as Germany and Canada, for any particular year and interpret the numerical data. You can access this information by visiting the IMF website at www.imf.org/external/about.htm.

Chapter 4: The International Monetary System

Internet resources

www.imf.org/external.htm

The website of the International Monetary Fund (IMF) provides information on the IMF, SDRs, exchange rates, and miscellaneous information such as debt relief programs for poor countries and strategies for dealing with financial crisis.

www.ecb.int

The website of the European Central Bank (ECB) contains ECB publications, exchange rates, and other euro-related economic and financial data.

www.europa.eu.int

The website of the European Union (EU) contains news, information, and statistics on the EU and its member nations.

www.wallstreet.com/bankfrm.htm

This website provides links to the central banks of more than 100 countries.

www.ex.ac.uk/~Rdavis/arian/llyfr.html

This website provides a comprehensive history of money.

www.cnnfn.com/market/currencies

This CNN financial subsite provides a currency converter for converting one currency into another at current exchange rates.