Investing Overseas: Enhancing Shareholder Value

by: Dumapias, R., Edullantes, J.,

Figueroa, J.M., & Regino, M.

Multinational or global corporation is described as a firm that operates in an

integrated fashion in a number of countries. During the past 20 years, the international
commercial activity has developed in which it greatly increased the worldwide economic
and political interdependence. Multinational firms now make investments in fully
integrated operations from the extraction of the raw materials through the
manufacturing process and lastly the distribution of products to the worldwide
community.
There are seven primary reasons for going global namely: to seek production
efficiency; to avoid political, trade, and regulatory hurdles; to broaden markets; to seek
raw materials and new technology; to protect processes and products; to diversify; and
to retain customers.
In a global corporation, there are additional factors to be considered. The factors
are different currency denominations, political risk, economic and legal ramifications,
role of governments, and language and cultural differences. These factors complicate
financial management and increase the risks that global corporations deal with. With the
complications, there is an international monetary system that determines the exchange
rates within different currencies.
The foreign exchange markets consists of brokers and banks which are mostly
situated in New York, London and Tokyo, who conducts business transactions through
the use of computers and telephones. Buyers and sellers must have knowledge on the
spot rates, which is the current exchange of foreign currencies for the delivery on the
current day, and forward rates, which is the agreed-upon price on a future date
transaction. An investor should be able to know the cross rates or the exchange rate
between currencies (home currency vs. foreign currency), to asses one in engaging in
such transaction, thus allowing a person to hedge and receive the same return as if one

is transacting business in his/her home currency, also known as interest rate parity.
Interest rate parity is the relationship between spot and forward exchange rates and
interest rates. It also shows why a currency might be sold or bought at forward premium
or discount. If the spot rate is greater than the forward rate, thus constituting a forward
premium, or whenever domestic interests are higher than foreign interest rates. Forward
discount, on the other hand, is vice versa to forward premium.
Purchasing Power Parity (PPP) is the relationship in which the same products
cost roughly the same amount in different countries after taking into account the
exchange rate. PPP referred to as the law of one price, implies that the level of
exchange rates adjusts so as to cause identical goods to cost the same amount in
different countries. The equation for PPP is Ph= (Pf) (Spot rate) Or Spot rate=
Where:Ph = Price of the good in the home country and Pf = Price of the good in the
foreign country PPP eliminate situations in which the same product sells at a different
price overseas. It also assumes that there are no transportation or transactions cost (or
import restrictions) that would limit the ability to ship goods between countries.
According to Merriam-Webster Dictionary, Investing is to commit (money) in order
to earn a financial return. This is one of the important factors that a company must focus
on in order to attain that life-long success in the business world. Risk highly affects the
investment which is the reason why investors tend to be more meticulous in handling
their investments. In investing overseas it is important for the investors to consider
additional risk factors. This risk factor includes country risk, risk that arises when
investors invest or do some business in a particular country, and the exchange rate risk,
risk that exchange rate changes will reduce the number of home currency provided by a
given amount of foreign currency. We should keep in mind that returns on investment
depend on what happens to exchange rate and the performance the country where you
invest.

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