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Hi there ...

82,3 Million Germans. Hi there . 1,28 Billion Chinese People. Hi there . Where I‘m from. Vita. Born in Lindlar (near Cologne), Germany 1970 Diploma in Business Administration University of Cologne  1976 Doctor of Economics 1976/86 Institut der deutschen Wirtschaft

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Hi there ...

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  1. 82,3 Million Germans Hi there ... 1,28 Billion Chinese People

  2. Hi there ... Where I‘m from

  3. Vita Born in Lindlar (near Cologne), Germany 1970 Diploma in Business Administration University of Cologne  1976 Doctor of Economics 1976/86 Institut der deutschen Wirtschaft 1985 Consultant Kienbaum International Since 1989 Professor at Cologne University of Applied Sciences

  4. The job: International Finance and Investment

  5. Agenda • Management  • Corporate Finance and Investment(Sole Proprietorships, Partnerships, Corporations --> Separation of Ownership & Control)  • International Finance and Investment                     • Lessons Learned

  6. How to ...? • Corporate (managerial) Perspective        • Keep it short and simple        • Asking questions and giving answers

  7. Management: What does it mean? • Getting things done with people Or • Reaching goals with effective and efficient use of resources

  8. Which Management-Functions must be performed? • Planning • Organizing • Staffing • Leading/Actuating • Controlling

  9. The Leadership Engine. How to get Energy out of everyone? • A sense of urgent need ... • A mission that is inspiring ... • Goals that stretch people's abilities • A spirit of teamwork • A realistic expectation that the team members can meet the goals.

  10. Which Roles should be taken? • Entrepreneur • Disturbance Handler • Resource Allocator • Leader • Monitor • Negotiator  Relations  Information  Decision

  11. What is a Decision? Decision Making is Problem Solving by Finding a Way out of a Mess. May be more rational, may be more intuitive.

  12. Six Steps af a Rational Decision • Classifying the Problem • Defining the problem. What are we dealing with? • Specifying the answers to the Problem. What are the boundary conditions? • Deciding what is "right", rather than what is acceptabel, in order to meet the boundary conditions • Building into the decision the action to carry it • Testing the validity and effectiveness of the decision against the actual course of events.

  13. Intuitive Decision Making Intuition means Problem Solving by Recognition. If You have already Experience with  a Problem or a Job deliberate consciousness is not necessary to find the way out. You find it more or less automatically.

  14. Gary Klein & Intuition generates Situation Cues using your to effect the that let you recognize Mental Simulation Mental Models which you assess by Patterns Action Scripts that activate

  15.  Managerial Decision Making Managing Uncertainty: The higher the Position or the more relevant the Problem, the more Uncertainty You have to take! Believe it or not!

  16.  Behavioural Finance • Financial management is more than applying rules and procedures.  It explores the behaviour of markets, firms and individuals... Behavioural finance is the study of psychological traits that investors and managers display that prevent them acting in a purely rational manner." (see Pike & Neale, 2006, p. 672) • Building Intuition"It is our experience that students who have a strong conceptual understanding of finance theory better understand how things really work and are better problem solvers and decision makers than students who focus primarily on computational skills." (see Kidwell & Parrino, 2009 - Preface)

  17. Fundamentals: Balance Sheet Investment („capital allocation“ / „capital budgeting“) Finance („optimal mix“) Investment What have you done with your purchasing power? Where does the purchasing power come from? De-Investment

  18. Financial Management The Finance Function: “to plan, raise and use funds in an efficient manner to achieve corporate financial objectives.” (see Pike & Neale, 2006, pp 5) depending on the position of the source - internal financing (e.g. profit or restructuring the assets)- external financing (e.g. credit) depending on the legal status of the source- equity financing (e.g. silent partnership or capital increased)- debt financing (e.g. suppliers or clients) depending on the location of the fund supplier - domestic markets - foreign markets

  19. Financial Management Decisions • Capital Budgeting: Long Term Assets • Financing Decisions: Capital Structure/Financial Structure: Long Term Equity/Long Term Debt • Working Capital Management Decisions: Current Assets/Current Liabilities (Ross et al. 2008, pp 2, see Parrino & Kidwell, 2009, pp 4)

  20. Financing Decisions / Capital Structure Criteria / Restructuring Leverage: % Equity financed resp. % Debt financed (Debt to Equity: D/E) Equity/Fixed Assets ec.

  21. Financial Ratios (1/2) • e.g. Return on Capital Employd (ROCE), Capital Gearing (CG = LTL/Shareholders’ Funds), Return on Equity • Working Capital: Current Assets less Current Liabilities.Horizontal Key Ratios vs. Vertical Key Ratios • Optimal Capital Structure? Financial Distress?

  22. Financial Ratios (2/2) - Restructuring - Corporate Restructuring means changing the Ownership Structure of a Firm to improve the Value of the Firm, e.g. through Share Repurchase, Leveraged Buy Outs, Substitution of Debt for Equity Business Restructuring means changing the Mission of the Company, e.g. through MBOs, Sell-Offs, Mergers Asset restructuring means changing the ownership of assets, e.g. sale and lease back (see Pike & Neale, 2006, pp 576).

  23. Basic Forms of Investment: A Plunge into the Unknown (1/3) Investment Decision 1: How much should the Firm invest? • Short-term Choices (“Working Capital Management”) • Long-term Choices (fixed)Assets/Capital Budgeting Decisions • Real Assets (tangible vs. intangible) vs. Financial Assets

  24. Basic Forms of Investment: A Plunge into the Unknown (2/3) Investment Decision 2: In which Projects should the Firm invest? • Internal vs. external Investments (= Acquisitions) + • Investment in Working Capital (inventories), Replacement Investment, New Investment in Fixed Assets (Capital Budgeting Decisions) • Domestic Investments vs. Cross Border Investments

  25. Basic Forms of Investment: A Plunge into the Unknown (3/3) Investment Rule Invest in a Project if the Cost you incur today is less than or equal to the Present Value of the future Payments from the Project. See: O’Sullivan & Sheffrin, 2006, p 609

  26. Valuation Criteria / Investment Appraisal / Capital Rationing • Static Capital Budgeting, e.g. Comparison of Profits or Costs, Cash Flow Analysis • Dynamic Capital Budgeting,e.g. Present Value or Annuity Method • Risk Assessment Methods,e.g. Expected Net Present Value (ENPV), Sensitivity Analyses, Best/Worst Case Analyses • Hard vs. Soft Rationing(see Pike & Neale, 2006, p. 134)

  27. International Finance and Investment: Outlook • Characteristics of Intern. Finance and Investment • Differences (domestic vs. intern.) • Globalization • Motives: Why become a MNC? • Intern. Monetary System (Currency, Balance of Payments, Exchange Rate) • Intern. Flow of Money and Capital/Entry Modes • Int. financial Environment • Derivatives & Hedging • Multinational Capital Budgeting • CB Risk Management • DFIs • MNCs & Transfer Pricing • Scams and Swindles

  28. International Financial Management and Investments Specific characteristics of International Financial Management: • Foreign Exchange (Currencies) and Political Risks • Accounting Rules • Stakeholders • Legal, Regulatory and Institutional Framework • Language • Taxation • Market Imperfections • Expanded Opportunity Set • Intellectual Property Rights (see: Connally, 2007 pp1) • Main goal of Financial Management? Managing for Value resp. Shareholder wealth maximation! (see: Eun & Resnick 4th ed. 2007, p. 5)

  29. What is different about International Financial Management? (1/4) see Eitemann et al., 2007, p.3

  30. What is different about International Financial Management? (2/4) see Eitemann et al., 2007, p.3

  31. What is different about International Financial Management? (3/4) Parrino & Kidwell, 2009, p 699

  32. What is different about International Financial Management? (4/4) Parrino & Kidwell, 2009, p 699

  33. International Corporate Finance: „The basic principles of corporate finance still apply to international corporations: like domestic companies, these firms seek to invest in projects that create more value for the shareholders than they cost and to arrange financing that raises cash and the lowest possible cost . In other words , the net present value principle holds for both foreign and domestic operations. Although it is usually more complicated to apply the NPV rule for foreign exchange.” Ross et al., 2007, p 726

  34. Basic Principles Remain the Same: “In today’s globalized environment. Financial managers must be prepared to handle international transactions and all the complexities that those transactions involve. Fortunately, the basic principles of finance remain the same whether a transaction is domestic or international. The time value of money for example, is not affected by whether a business transaction is domestic or international. Likewise, we use the same models for valuing capital assets, bonds, stocks, and entire firms.” Parrino & Kidwell, 2009, p 698

  35. Globalization: Trends and Problems (1/3) Trends: • Emergence of Globalized Financial Markets • Emergence of the Euro as a Global Currency • Trade Liberalization and Economic Integration • Privatization (see: Salvatore, 2004, pp v-vi)

  36. Globalization: Trends and Problems (2/3) Problems: • Trade Restrictions/Protectionism • Destabilizing effects of globalized capital markets (see Subprime Crisis) • Financial and economic Crisis of emerging Economies • Unemployment and slow Growth in Europe • Increased international Competition causing job insecurity • Restructuring of eastern Europe and former Russia • Poverty and Inequality e.g. in Africa and South America • Corruption (see: Salvatore, 2004, pp v-vi)

  37. Globalization: Trends and Problems (3/3) “International Business consists of business transactions between parties from more than one country” See: Griffin & Pustay, 2005, p 5 (see: Salvatore, 2004, pp v-vi)

  38. Theories and Motives for International Business. Gains from Trade and Capital Flows? (1/2) • Absolute Advantage means, that Country I is more efficient at Product A than II, but less efficient at Product B. The gains: Importing B, exporting A. • Comparative Advantage means that even if Country I is less efficient at A and B than II, it realizes a gain when it specializes and exports A where the disadvantage is smaller than with B, so the loss is smaller. • Opportunity Costs: “The theory that the cost of a commodity is the amount of a second commodity that must be given up to release just enough resources to produce one more unit of the first commodity.” (Salvatore, 2005, p458)

  39. Theories and Motives for International Business. Gains from Trade and Capital Flows? (2/2) Motives? • Economic Conditions: Supply Factors (e.g. favourable Performance, Production Costs, Logistics, Availability of Natural Sources, Access to Key Technology) vs. Demand Factors (e.g. Customer Access, Marketing Advantages, Exploitation of Competitive Advantages, Customer Mobility) see Griffin & Pustay2005, pp167. • Exchange Rate Expectations • International Diversification

  40. Assessing international opportunities • Investment opportunities • Financing opportunities, e.g. interest rates • Political opportunities, e.g. removal of the Berlin Wall, BRI • Regional Opportunities, e.g. in Asia Madura, 2003, pp 13

  41. Why Do Firms Become Multinational? • Market Seekers • Raw Material Seekers • Production efficiency Seekers • Knowledge Seekers • Political safety seekers (see: Eitemann et al., 2007, pp 532) • To leverage Core Competencies, • to acquire Resources and Supplies, • to seek new Markets, • to better compete with Rivals (“Building Global Skills”), • Environmental Change, Internet Age (see: Griffin & Pustay, 2006, pp 12)

  42. Attributes of the “Ideal” Currency If the ideal currency existed in today’s world, it would possess three attributes, often referred to as the impossible trinity: • Exchange rate stabilityThe value of the currency would be fixed in relationship to other major currencies, so traders and investors could be relatively certain of the foreign exchange value of each currency in the present and into the near future. • Full financial integrationComplete freedom of monetary flows would be allowed, so traders and investors could willingly and easily move funds from one country and currency to another in response to perceived economic opportunities or risks. • Monetary independenceDomestic monetary and interest rate policies would be set by each individual country to pursue desired national economic policies, especially as they might relate to limiting inflation, combating recessions and fostering prosperity and full employment. (see: Eitemann et al., 2007, p.46)

  43. The Impossible Trinity Full Capital Controls Monetary Independance Exchange Rate Stability Pure Float Full Financial Integration Monetary Union Economic and financial theory clearly states that a country cannot be on all three sides of the triangle at once. It must give up one of the three “attributes” if it is to achieve one of the states described by the corners of the triangle. (see: Eitemann et al., 2007, p.46)

  44. The International Monetary System • “The rules, customs, instruments, facilitations, and organizations for effecting international payments.” (see Salvatore, 2005, pp 419) • Classification: Fixed exchange rate system with a narrow band of fluctuation vs. a wide band of fluctuation, adjustable peg system, crawling peg system, managed floating vs. freely floating. Or: gold standard vs. fiduciary system (e.g. pure $) vs. a combination of both. • 1947 IMF, SDRs, “firm surveillance” • The After War Monetary System since 1973 is a Managed Floating Regime • 1976 Jamaica Accords. $ Reserves. • 1979 EMS, 1999 EMU (€) • ‘Hard Peg’ vs. Fully Floating: Which Exchange Rate System is best? Criteria: Adjustment, Liquidity, Confidence (see Pilbeam 2006, pp 289) or: Exchange rate stability, Full financial integration, monetary independence (see Eitemann et al., 2007, p.46).

  45. Balance of Payments and Exchange Rates (1/2) Balance of Payments: “A summary statement of all the international transactions of the residents of a nation with the rest of the world during a particular period of time, usually a year.” (Salvatore 2005, pp 447/8)Informs about the (Dis)Equilibrium of International Debit or Credit-Transactions, about Deficits or Surplusses.

  46. Balance of Payments and Exchange Rates (2/2) Exchange Rate: is “the domestic currency prise of the foreign currency.” (see: Salvatore, 2005, p 452) • Flexible vs. fixed Exchange Rates vs. Optimum Currency Area (bloc) • Adjustable Pegs, Crawling Pegs, Managed Floating • Currency Board Arrangements (CBAs) and Dollarization • Spot and Forward Exchange Rates: “The spot rate of exchange is the exchange rate for an immediate transaction. The forward rate is is the exchange rate for a forward transaction … at a specified future date.” (see: Brealy & Myers & Marcus, 2004, p 632) • Foreign Exchange Futures and Option

  47. Flow of Capital / Flow of Funds. International Business Methods.Types of Foreign Investments resp. Entry Modes (1/3) • Trade Flows (visible trade- goods - vs. invisible trade – services-) • Portfolio Investments (no active Management or Control of the Securities in the host Country) • Direct Investments (DFI) with active Controlling of the securities in the host country (see: Salvatore, 2005, pp 225; Griffin & Pustay, 2005, pp 8)

  48. Flow of Capital / Flow of Funds. International Business Methods.Types of Foreign Investments resp. Entry Modes (2/3) • Licensing • Franchising • Joint Venture • Acquisition of existing foreign firms/operations • Establishing new foreign subsidiarities (see: Madura, 7 th ed., 2003, S. 10 ff.) • Takeover • Cross Border M&As • Horizontal Integration vs. Vertical Integration vs. Conglomerate Integration • Financing a Bid: Cash, Share Exchange, Other (see: Pike & Neale, 2006, pp 541)

  49. Flow of Capital / Flow of Funds. International Business Methods.Types of Foreign Investments resp. Entry Modes (3/3) Entry Modes • Exporting • Licensing • Patents • Spot Transactions • Long Term Contracts • Exporting with foreign agent (see: Pike & Neale, 2006, pp 632)

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