Exporting and Trading info

CASE: LSI Logic Corp. In the late 1970s, Wilfred Corrigan, the British-born chairman and president of Fairchild Camera & Instrument Corp., sold Fairchild to Schlumberger Ltd. Approximately one year later, in November 1980, he started LSI Logic Corp., a manufacturer of custom-made microchips based in Malpitas, California. Although Mr. Corrigan's idea of custom-made microchips sounded unconventional at the time, he was able to use his record at Fairchild to convince some U.S. venture capitalists in January 1981 to invest nearly $7 million in the new firm. The company had only four employees at this point, but since Corrigan had solved two key issues—the nature of the product and the initial infusion of cash—there was a solid foundation for growth. Corrigan now had to decide how LSI Logic should service its customers worldwide, and how and where it would raise capital to keep expanding. Global Strategy Mr. Corrigan learned from his experience at Fairchild that a producer of ...

 Local debt markets, which vary dramatically from country to country owing to local business customs and practices, are important sources of funds for MNEs. A Eurocurrency is any currency that is banked outside of its country of origin. The dollar comprises the bulk of the Eurocurrency market and is referred to as the Eurodollar. Eurodollars are expanded through the fractional reserve concept, whereby a bank reserves only a fraction of each Eurodollar deposited and loans the remainder of the deposit, thus "creating" more Eurodollars. A Eurobond is a bond issue sold in a currency other than that of the country of issue. Ajoreign bond is one sold outside of the country of the borrower but denominated in the currency of the country of issue. Offshore financial centers such as London, Switzerland, the Caribbean, Singapore, Hong Kong, Bahrain, and now New York City, deal in international transactions that are not regulated in the same way as domestic markets. Most indu...

Regional Development Banks During the seventies and eighties, there was a dramatic increase in the num- ber of development banks, and they have become an important source of financing for the developing countries, especially the riskiest developing countries. Although many of the development banks are national in scope,       there are also a number of regional development banks. In Europe, the most      important regional development bank is the European Investment Bank,     which offers funds for private and public industrial and infrastructure projects in Europe and to over 70 nations associated with the European Community. Latin America has five active regional development banks: (1) the Andean Development Corp., (2) the Caribbean Development Bank, (3) the Inter-American Development Bank, (4) the Central American Bank for Economic Integration, and (5) the Banco Latinoamericano de Exportaciones. There are a number of other similar d...

The "World Bank" is the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD has two affiliates, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). The Bank, the IFC, and the MIGA are sometimes referred to as the "World Bank Group."45 International Bank for Reconstruction and Development  The IBRD was organized in 1945 along with the IMF to aid in rebuilding the world economy. It is owned by the governments of 151 countries, and its capital is subscribed by those governments; it provides funds to borrowers by borrowing funds in the world capital markets and from the proceeds of loan repayments as well as retained earnings. At its founding, the bank's major objective was to serve as an international financing facility to function in reconstruction and development. With the Marshall Plan providing the impetus for European reconstruction, the...

NONBANKING FINANCIAL SERVICES FIRMS So far we have discussed debt and equity markets available to MNEs as well as the international banks that provide financial services. But there are a number of other financial-services firms in addition to banks that provide financial services for MNEs. Sometimes the distinction between banks and financial-services firms that deal in the securities markets (both debt and equity) is unclear because of differences in different countries' regulations. For example, the United Kingdom does not require a separation of commercial and investment banking, whereas both Japan and the United States do. As Table 9.6 shows, there is only one British firm among the twenty-five largest securities and financial-services firms. This is so primarily because U.K. banks can engage in both commercial and investment banking. Firms often behave very differently abroad than they do at home. Thus Japanese and American commercial banks are heavily involved in securiti...

Although the Japanese banks are the biggest in terms of assets and the most valuable in terms of stock-market capitalization, they are definitely not the most profitable. As noted in Table 9.5, most of the most-profitable banks in the world are U.S. and European. In 1989, however, the earnings of a number of large international banks fell as a consequence of a new round of massive losses on Latin American loans. The banks were affected by loans to developing countries because many of them are holding loans on which no principal and interest are being paid. New banking regulations in the United States require banks to identify the amount of their nonaccrual loans at the end of each quarter. A nonaccrual loan is one for which principal or interest is 90 days past due or for which payment of interest or principal is determined to be doubtful. The non-accrual concept relates to domestic as well as foreign loans, and many banks have had as many problems with domestic loans as with fore...

Market Access and Changing Market Conditions We will examine three important aspects of market access: the lack of access foreign banks have to certain markets, such as Japan and Korea; the opening of Europe by the end of 1992; and the changes taking place in the U.S. market. A report by the U.S. Treasury identified several countries that have significant barriers to entry of their financial markets by foreign financial-services firms. In Japan, for instance, the regulation of interest rates gives Japanese banks an edge over foreign banks and allows them to operate on narrower profit margins abroad. In addition, operating restrictions, the close ties between Japanese banks and Japanese corporations, and lack of clarity over banking regulations make it difficult for foreign firms to operate.33 South Korea is another country that has restricted the entry of foreign banks. Foreign banks are hindered by "discriminatory restrictions on their ability to establish head offices and b...

Important Dimensions of International Banking International banks must face a wide variety of issues, and a large number of key developments have taken place in recent years; we will focus here on the following areas that have an impact on MNEs and their operations worldwide: the expansion of services, market access and changing market conditions, and profitability. Expansion Of Services  The market for financial services has virtually skyrocketed for banks in recent years. The major functions that are especially suited for the international banks are: 1. export and import financing; 2. foreign-exchange trading; 3. debt and equity financing in domestic and Euromarkets; 4. international cash management, especially electronic funds transfer across national borders; 5. financial engineering for corporate clients; and 6. the supply of information and advice to clients. Although there are at least these six areas in which banks can offer services for corporate clients...

Structure of International Banking MNEs find that their banks offer a variety of services worldwide through a variety of different operational modes. The major way that banks become  involved in cross-border operations is through correspondent relationships, banks in different countries facilitate inter-national financial transactions for each other's clients. For example, a bank  in Country A may ask its correspondent in Country B to remit funds from an  importer in Country B to an exporter in Country A. A bank may have several correspondent banks m the different countries where it wants to do business, or it may operate through a key bank. Banks may also increase their influence abroad through establishing branches. A branch is a legal form of operation that is an extension of the parent bank. It is not a separate corporation where the parent owns stock, like a subsidiary. A branch is used to gain access to local capital or Eurocurrencies, and it is often establ...

INTERNATIONAL BANKS An essential aspect of the growth of international business has been the increase in international banking services. Firms would have been unable to expand as they have without the timely flow of money and other resources provided by the international banks. Not only do banks facilitate the flow of existing corporate resources, they also provide debt financing from local and international markets. A Canadian bank, for example, could loan funds to a Canadian corporation that is attempting to acquire a U.S. business, or it could provide that financing through the Eurodollar market. Because of the entrance of commercial banks into investment-banking activities and vice-versa, it is difficult to separate commercial banks from other financial-services firms. However, these latter firms, such as Goldman Sachs and Nomura Securities, will be discussed after the section on banking. Leading World Commercial Banks U.S. MNEs are among the world's largest, but U.S. ba...

Other Exchanges In most developing countries, the financial system is bank-oriented and strongly controlled by the government. However, equity markets can make a significant contribution to corporate development and can be a source of funding for MNEs that want to locate in those countries and get access to local capital. Equity markets are an important tool for economic development, they can help mobilize investment funds, and they can lower the cost of capital for firms. However, there are also a number of problems in the development of equity markets in developing countries. The major costs are the inevitability of market cycles, causing difficulties in raising capital; interest-rate fluctuations; intermediation costs (the costs of establishing, maintaining, regulating, and using the markets); the need for additional regulation; the loss of some control by the government over the financial system; possibilities of speculation and dishonest activities; and inefficient allocation o...

The Euroequity Market Another significant event in the past decade is the creation of the Euroequity market. The Euroequity market is the market for shares sold outside of the national boundaries of the issuing company. Prior to 1980 few companies thought of offering stock outside of the national boundaries of the headquarters. Since then, hundreds of companies from all over the world have issued stock simultaneously in two or more countries. Table 9.2 shows global stock markets in a slightly different light than Table 9.1. In Table 9.2, stock markets are ranked by equity turnover of foreign stocks. Thus the London Stock Exchange is ranked first in equity turnover of foreign stocks, even though it is ranked only third in terms of total turnover as well as the market value listed in Table 9.1. In the list of 300 stocks traded most actively in the Euroequity market, Japanese and U.S. stocks dominate the list with 68 and 44 entries, even though they are not among the top 50 as menti...

Deregulation The major event in international equity markets in recent years was the "big bang," the deregulation of the British stock market which occurred in London on October 27, 1986. Prior to that time, the City of London (the financial district in London) operated on two different sides. The first side was the domestic front, home to the U.K. financial firms that controlled the U.K.'s financial system. Custom and regulation basically kept the domestic side from keeping up with financial services developed elsewhere. The other side was the Eurocurrency market, which was dominated by foreign institutions. The British government's abolition of exchange controls in 1979 blurred the differences between the domestic and international sides of the City of London. However, the big bang resulted in a dismantling of the trading system, a liberalization of Stock-Exchange membership requirements, and an opening of the market to foreign competition.14 These changes have ...

In addition to the debt instruments in the local debt markets as well as the Eurodollar and Eurobond markets, the equity-capital market is another source of financing. The three largest international stock exchanges in the world in terms of market capitalization are the Tokyo, New York, and London stock exchanges. Market capitalization is the total number of shares of stock listed on the stock exchange times the market price per share. Prior to 1987 the New York market was by far the largest in the world. In 1984 Wall Street controlled 55 percent of the world's equity market, three times as much as Tokyo and eight times as much as London.12 From 1984 to 1986, however, the gap narrowed quickly. By 1986 the market capitalization of U.S. equities was down to 43 percent of the world total, whereas the Japanese had increased from 20.1 percent to 29.1 percent. The soaring yen and rapid increase in Japanese equity prices caused Tokyo to surpass New York in the spring of 1987 to become th...

OFFSHORE FINANCIAL CENTERS So far we have alluded to the major financial centers of the world. The countries with large markets, such as the major OECD countries, have large domestic financial markets. This does not mean that they have large financial markets that deal in foreign currencies, however; neither does it mean that they have large offshore centers. Center Characteristics Offshore financial centers are cities or countries that provide large amounts of funds in a currency other than their own. These centers provide an alternate, and usually cheaper, source of funding for MNEs so that they don't have to rely strictly on their own national markets. Generally these markets in these centers are regulated in a different, and usually more flexible, way than are the domestic markets. The centers have one or more of the following characteristics as well: 1. There is a large foreign-currency (Eurocurrency) market for deposits and loans (e.g., London). 2. The market of ...

INTERNATIONAL BONDS Many countries have very active bond markets available to domestic and foreign investors. One good example is the United States: In mid-1980s, given the high real interest rates, relative political and economic stability, and governmental desire to finance its high budget deficits with borrowing, the U.S. market was attractive to foreign investors. The repeal of the withholding tax on interest in the United States in 1984 also eliminated a major roadblock for foreign investors taking U.S.-issued bonds. Foreign Bonds and Eurobonds The international bond market can be divided into foreign bonds and Eurobonds. Foreign bonds are sold outside of the borrower's country but are denominated in the currency of the country of issue. For example, a French corporation floating a bond issue in Swiss francs in Switzerland jwould be floating a foreign bond. A Eurobond is usually underwritten, or placed in the market for the borrower, by a syndicate of banks from differe...

Eurocurrency Market Characteristics  The Eurocurrency market has several interesting characteristics: 1. It is a wholesale rather than retail market, which means that transactions tend to be very large. Public borrowers such as governments, central banks, and public-sector corporations tend to borrow most of the funds. Also, nearly four fifths of the Eurodollar market is interbank, which means that the transactions take place between banks. 2. The market is essentially unregulated. 3. Deposits are primarily short term. Most of the deposits are interbank, and they tend to be very short term. This leads to concern about risk, since most Eurocurrency loans are for longer periods of time. _ 4. The Eurocurrency market exists for savings and time deposits rather than demand deposits. That is, institutions that create Eurodollar deposits do not draw down those deposits into a particular national currency in order to buy goods and services. 5. The Eurocurrency market is primar...

EUROCURRENCIES The Eurocurrency market is an important source of debt available to the MNE. A Eurocurrency is any currency that is banked outside of its country of origin. Eurodollars, which constitute a fairly consistent 65-80 percent of the market, are dollars banked outside of the United States. Dollars held by foreigners on deposit in the United States are not Eurodollars, but dollars held at branches of U.S. or other banks outside of the United States are Eurodollars. Similar markets exist for Euro-Japanese yen (Euro-Yen), Euro-German marks (Euro-Deutsche marks), and other currencies, such as British pounds, Swiss francs, and French francs. The Eurocurrency market is worldwide. Large transactions take place in Asia (Hong Kong and Singapore), the Caribbean (the Bahamas and the Cayman Islands), and Canada, as well as in London and other European centers. However, London is the key center for the Eurocurrency market, given that nearly 20 percent of all Eurocurrency transactions i...

LOCAL DEBT MARKETS As corporations expand across foreign frontiers, they must adjust to local debt markets, both short term and long term. Since each country has different business customs, firms need to abandon strict operating procedures developed in other countries. When Caterpillar Tractor went to Brazil for the first time, it was accustomed to operating through one bank for all of its transactions. Very quickly, however, it became clear that the tight credit market in Brazil required different operating procedures. So Caterpillar opened accounts in several banks, allowing it to tap several different credit sources. Caterpillar liked this so much that it exported its Brazilian policy back to the United States, which allowed it to gain access to funds from many different banks. In the United States it is customary for U.S. companies needing cash to sell commercial paper, a form of IOU backed up by standby lines of bank, credit, which are the lines of credit that the companies ca...

Introduction to Financial Markets for International Operations This hypothetical case is meant to demonstrate the interdependence of capital markets and industrial growth worldwide. It may seem farfetched to assume that events in Hong Kong could influence a steelworker's job in Ohio, but stranger things have happened. Economic problems in Brazil and Mexico certainly have had a strong influence on the activities of the large multinational banks. The small firm involved only tangentially in international business may be concerned only about the functions of the foreign-exchange section of its commercial bank. The larger MNE investing and operating abroad cares about access to capital in local markets as well as the large global capital markets. These capital markets and the institutions set up to make them run are primarily in the private sector. However, banks in some countries are owned by the government, and some lending institutions, such as the World Bank, are either govern...