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HEWLETT-PACKARD IN EUROPE: A CASH-MANAGEMENT STRATEGY of its treasury functions there. The Geneva headquarters is a reinvoicing center that buys from supply factories and resells to sales companies. Its European subsidiaries purchase up to 50 percent of their inventories in dollars but bill in local currencies. HP currently sells more than 10,000 products worldwide, making different pricing and hedging strategies necessary. In addition, since many of its sales are intercompany, it must plan around IRS regulations on intercompany transactions. Pricing Strategy  There are two key pricing issues facing HP: One of them is intercompany and the other is external. In 1990 HP management made the decision that HP would not support the Advanced Determination Ruling (ADR) procedure for any of its intercompany transactions. On the benefit side, management stated: "We have been strongly supportive of the ADR process as an attractive alternative to the current process of worldwide sporadic ...

LOOKING TO THE FUTURE Two things are going to have a significant influence on the cash-management and hedging strategies of MNEs in the future. Rot is the information and technology explosion, and second is the growth anal sophistication of hedging instruments (financial derivatives such as options and forwards). The information explosion will continue to allow firms to get information more quickly and cheaply than in the past. In addition, the ad-j vent of electronic data interchange (EDI) will allow firms to transfer information and money instantaneously around the world. Firms will significantly reduce the paper flow and increase the speed of delivery of information and funds, thus enabling them to manage cash much more effectively. Not onhr will that reduce the cost of producing information, but it will also allow firms to reduce interest and other borrowing costs as they utilize intercompany resources much more effectively. Second, the growing number and sophistication of financ...

FINANCIAL ASPECTS OF THE INVESTMENT DECISION An MNE considering foreign investment has many financing options available. The parent company must consider the mix of debt and equity that it will use and which capital market around the world will be tapped to supply the funds. There are at least two basic reasons why the debt-equity ratio for a foreign subsidiary may differ from that of the parent. First, the attitude toward the debt-equity ratio in the host country may differ from that in the parent country. Firms in Japan and Germany, for example, tend to be more highly leveraged than their U.S. counterparts, which means that they rely much more on debt than on equity capital. Second, different tax rates, dividend remission policies, and exchange controls may cause a firm to rely more on debt in some situations and on equity on others. The debt-equity ratio of the MNE will be a weighted average of the debt-equity ratios of all entities in the corporate structure. Japanese, German, ...

KEY ISSUES IN FOREIGN-EXCHANGE RISK MANAGEMENT To protect assets adequately against risks from exchange-rate fluctuations, it is important for management to (1) define and measure exposure, (2) organize and implement a reporting system that monitors exposure and exchange-rate movements, (3) adopt a policy on assigning responsibility for hedging exposure, and (4) formulate a strategy for hedging exposure. Measurement Most MNEs will be subject to all three types of exposure described above. In order to develop a viable hedging strategy, the firm must be able to forecast the degree of exposure in each major currency in which it operates. Because the three types of exposure are very different from each other, the actual exposure by currency must be kept separate. The translation exposure in Brazilian cruzeiros, for example, should be kept separate from the transaction exposure. The reason is that the transaction exposure will result in an actual cash flow, whereas the translation expo...

INFLATION AND FOREIGN-EXCHANGE RISK MANAGEMENT The discussions of global cash management have focused on the flow of money for specific operating objectives. In addition, an important objective of the financial strategy of an MNE is to protect against the risks of investing abroad. The strategies that a firm adopts to protect against risk may involve the internal movement of funds as well as the use of one or more of the foreign-exchange instruments described in Chapter 7, such as options and forward contracts. In examining the risk encountered in international business, it is important that firms consider the nature of the risk, the circumstances under which it can occur, the implications for the firm, and the best defense against it. Risks related to currency, commercial, and political factors are the major ones. Currency risks include both inflation and exchange-rate changes. Commercial risks involve the problems of extending and receiving credit and the difficulties of collectio...

GLOBAL CASH MANAGEMENT The problems of managing cash globally are complex. International cash management is complicated by governmental restrictions on the flow of funds, differing rates of inflation, and changes in exchange rates. General Principles We can discuss some general principles of international cash management without reference to the risks of inflation and exchange-rate changes. Effective cash management is one of the chief concerns of the MNE, and three questions must be raised to ensure effective cash management: 1. What are the local and corporate system needs for cash? 2. How can the cash be withdrawn from the subsidiary and centralized? 3. Once the cash has been centralized, what should be done with it? foreign-source income. A problem is that there may be a withholding tax on the interest payment, which might be viewed as a local cost of doing business. If that withholding tax is less than the tax on dividends, then local management might be happy with lower t...

INTERNAL SOURCES OF FUNDS If a firm wants to expand operations or needs additional working capital, it can look to outside sources or to sources within the firm. In the case of the MNE, the complexity of internal sources is magnified because of the number of related affiliates and the diversity of environments in which they operate. "Funds" can have many different definitions, and the term usually means cash. However, the term funds is used in a much broader sense in business and generally refers to working capital, that is, the difference between current assets and current liabilities. Figure 20.1 illustrates a situation involving a parent firm with two foreign subsidiaries. The parent, as well as the two subsidiaries, may be increasing funds through normal operations. These funds must be used on a firmwide basis. One possible way is through loans: The parent can loan funds directly to the French subsidiary or guarantee an outside loan to the Brazilian subsidiary. Additi...

ORGANIZATION OF THE FINANCE FUNCTION To optimize the flow of funds worldwide, the MNE must determine the proper parent-subsidiary relationship with respect to the finance function. There are three distinct patterns of parent-subsidiary relationships: (1) complete decentralization at the subsidiary level, (2) complete centralization at the parent level, and (3) varying degrees of centralization.4 It is important to understand that the treasury function is fairly broad, and not all decisions are dealt with the same way. Some functions, such as foreign-exchange risk management, may be centralized; others, such as short-term financing decisions, may be decentralized. Thus the centralization/decentralization concept can refer to the general orientation of the treasury function or its separate components.  In a decentralized situation the subsidiary is independent of the parent.  parent receives reports but generally issues only minor guidelines, espe- daily when foreign sales c...

OLIVETTI'S FOREIGN-EXCHANGE RISK-MANAGEMENT The Company  When De Benedetti was offered the CEO spot at Olivetti in 1978, the company was losing $8 million a month, had a debt position in excess of liquid assets by more than $600 million, and also had a management team that was very discouraged. "We had only a few products and a local culture," recalls Elserino Piol, executive vice president for corporate strategies. "We were sort of a country-boy company." As soon as De Benedetti came on board, he instituted massive layoffs, increased the research and development budget significantly, introduced new products, and replaced most of Olivetti's top management. By 1986 sales were $4.9 billion, and earnings were $380 million. Of Olivetti's sales, approximately 49 percent are in Italy, 32 percent in other European countries, and 18 percent in non-European countries. Olivetti struck strategic alliances with a number of MNEs, including Matsushita Electrical ...

THE MULTINATIONAL FINANCE FUNCTION X»J arlo De Benedetti took over as CEO of Olivetti in 1978, and turned the company, known primarily as a typewriter company, into the leading European-based office-automation company and one of the largest manufacturers of IBM-compatible computers. De Benedetti's aggressive strategy thrust Olivetti into the international marketplace and forced management to reexamine its exposure to foreign-exchange risk and determine whether or not the policies and procedures designed to protect against risk were adequate in light of its new international strategy.