International Finance

Seminar
3 March 2007

“ Growing Together …
A Place to Learn and Grow
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Tony
“
 Opening Profile:

The Daimler-Chrysler AG Global Alliance

•The $92 billion merger of Daimler-Benz and Chrysler
to form Daimler-Chrysler Akteingesellschaft
represents a triumph of the global economy and the
end of car companies as national emblems of
industrial might.
•The two CEOs announced that they expect
immediate growth opportunities by using each
other’s facilities, capacities, and infrastructure.
•DaimlerChrysler expects to realize benefits of DM
2.5bn ($1.4bn) through the exchange of components
and technologies, combined purchasing power, and
shared distribution logistics, and they expect further
synergies to accrue by sharing know-how in
engineering and manufacturing.
•These are 2 giant industrial companies with a Tony total
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 Brief Facilitator’s Resume
Tony Silitonga has been working for more than twenty (20) years in different
countries, different industries, with different multinationals, such as: IBM, Atlantic
Richfield Oil & Gas Company (Indonesia), Standard Chartered Bank (Philippines),
Merrill Lynch (USA), and China Development Corporation (Taiwan).

He is a member founder of Indonesian Finance Association (IFA), FORESPECT

and Optima Quadra.

Graduated from Bandung Institute of Technology major in Petroleum Engineering, he

has got his Master in Business Management (MBM) majoring in Finance and
Strategic Management from Asian Institute of Management (AIM), Makati
(Philippines), and MBA from Columbia Business School (CBS), New York (USA)
Finance-Exchange scholars’ program. Recently, he is finalizing his Dissertation for
Doctorate in Business Administration (DBA) from De LaSalle University – Manila
(Philippines), major in Finance, Strategic Management, and Good Corporate
governance.

He is now Executive Director of Indonesian Institute for Corporate Directorship

(IICD), an institution that was founded in the year 2000 by 10 leading Indonesian
Universities, members of IDEANET (International Directors East Asia Network), and
was financed by leading International Institutions, such as: The World Bank, and
Asian Development Bank. IICD has a vision of Internalizing Best Practices of Good
Corporate Governance and Directorship.
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Selected Hands-on
Advisories:

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 Selected Hands-on
Consultancies:
STANDARD CHARTERED BANK, The Philippines
MERRILL LYNCH, New York, USA
STERLING TRANSTRADE, Manila, The Philippines
DRUGSTORE, INC., Manila, The Philippines
ELNUSA HOLDING CO., Jakarta, Indonesia
GLOBAL FOREST, INC., Singapore
VISEAN ONLINE PTY LTD, Richmond, VIC, Australia
GRANSTAR MOTOR, Manila, The Philippines
PT.INHUTANI III, Jakarta, Indonesia

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 M IC
ECONO
L LE
C A G
I TI A
L L
PO NEW ENTRANTS

RIVALRY
SUPPLIER BUYER

N SUBSTITUTE
G Y
RE ATU L O
SO R N O
U AL CH
RC TE
ES SOCIAL

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International Finance
1 Meeting
st

9
Tony Silitonga
Multinational
Enterprise and
Multinational
Financial
Management

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Tony Silitonga
 Topics
I. The Rise of the Multinational
Corporation
II. The Internationalization of
Business and Finance
III. Multinational Financial
Management: Theory and
Practice

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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

I. The MNC: Definition

a company with production and
distribution facilities in more
than one country.

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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

A. Forces Changing Global Markets

Massive deregulation
Collapse of communism
Privatizations of state-owned industries
Revolution in information technology
Wave of M&A
Emergence of free market policies
Rise of Big Emerging Markets (BEMs)

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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

B. Prime Transmitter of Competitive

Forces in the Global Economy:
The MNC emphases group performance
such as
Global coordinated allocation of resources
Market – entry strategy
Ownership of foreign operations
Production, marketing and financial activities

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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

C. EVOLUTION OF THE MNC

Reasons to Go Global:
1. More raw materials
2. New markets
3. Minimize costs of
production

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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

RAW MATERIAL SEEKERS

exploit markets in other countries
historically first to appear
modern-day counterparts
British Petroleum
Exxon

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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

MARKET SEEKERS
produce and sell in foreign markets
heavy foreign direct investors
representative firms:
IBM
MacDonald’s
Nestle
Levi Strauss

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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

COST MINIMIZERS
seek lower-cost production abroad
motive: to remain cost competitive
Texas Instruments
Intel
Seagate Technology

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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

D. THE MNC: A BEHAVIORAL

VIEW
State of mind:
committed to producing,
undertaking investment
and marketing, and
financing globally.
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 PART I. THE RISE OF THE
MULTINATIONAL CORPORATION

E. THE GLOBAL MANAGER

1. Understands political and
economic differences;
2. Searches for most cost-
effective suppliers;
3. Evaluates changes on value
of the firm.

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 Part II. The Internationalization of
Business and Finance

Globalization
A. Political and Labor Union
Concerns

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 Part II. The Internationalization of
Business and Finance

B. Consequences of Global
Competition

Acceleration of the global economy

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 PART III. MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE
I. THE MULTINATIONAL
FINANCIAL SYSTEM
A. Main Objective of MNC:
Maximize shareholder
wealth
B. Other Objectives Reflect
Ability to Link:
via affiliate transfer
mechanisms

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 PART III. MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE

C. Mode of Transfer:
Reflects freedom to select a variety
of financial channels.
D. Timing Flexibility:
Most MNC have some flexibility in
timing of fund flows.

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 PART III. MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE

E. Value
The ability to avoid national taxes
has led to controversy.

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 PART III. MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE

II. FUNCTIONS OF FINANCIAL

MANAGEMENT
A. Two Basic Functions:
1. Financing
2. Investing

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 PART III. MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE

B. Additional Factors Facing

the MNC Executive
1. Political risk
2. Economic risk

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 PART III. MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE

III. THEORETICAL FOUNDATIONS

A. Useful Concepts from
Financial Economics:
1. Arbitrage
2. Market Efficiency
3. Capital Asset Pricing

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 PART III. MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE

B. Importance of Total Risk

1. Adverse Impact
lower sales and higher
costs
2. Justifies hedging activities
of MNC
3. Diversification reduces
risk
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 PART III. MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE

IV. THE GLOBAL FINANCIAL

MARKET PLACE
A. Inter-linkage by
Computers
B. Market Acts as A Global
Referendum Process:
Currencies may rise or
fall
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 1. “Globalization and Its Critics: A Survey of Globalization” by
the Economist: on profit, on the poor, on government, on legitimacy,
on finance, on WTO, and on manifesto.
2. Amartya Sen, "How to Judge Globalism," The American
Prospect vol. 13 no. 1, January 1, 2002 - January 14, 2002

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History of
International
Financial System

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Tony Silitonga
There are three historically important
periods in the evolution of the system:

A. Pre-1944 Era (Gold

Standard Era): exchange rates
were based on gold;
B. 1944-1973 Era (Bretton
Woods): exchange rates were
pegged;
C. Post-1973 Era: exchange
rates are market determined.

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A. Pre-1944 Era (Gold Standard Era):
exchange rates were based on gold;
Currency is valued against Gold & mint parity
is established between two currencies
Stage 1- Gold specie standard-currency in
circulation was gold coins
Stage 2- Gold Bullion Standard-currency in
circulation is paper currency convertible in fixed
amount of gold
Stage 3-Gold exchange standard
eg:-1$=0.00125 ounce gold
1pound = 0.005ounce gold

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A. Pre-1944 Era (Gold Standard Era):
exchange rates were based on gold;
Fixed Exchange Rate System: “Rule of Game”
Each currency was set in value per ounce of
gold:
$20.67/oz.; 4.25 British pound / oz.
==> Ex = $20.67/ 4.25
1 British pound = $4.86 (=par value)

Based on PPP or cross-rate:

Most traders quote currency values against
the US$ if the exchange for a currency is
stated without using US$ as a reference, it
is known as a cross rate.

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A. Pre-1944 Era (Gold Standard Era):
exchange rates were based on gold;
Government stood ready to buy or sell gold at
parity value and gold is allowed to move in
and out of country add faith (credit) to
currency.
Impacts ???
A. Imposed monetary discipline on participating
countries.
A country could not expand its money supply at
a rate faster than gold accumulation
inherently anti-inflationary.
B. Free-flow of gold may correct trade imbalance
Gold flows out of trade-deficit country and
reduces its money supply (Remember gold is
money.) The economic and business
activities slow down (due to higher interest
rates).
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Residents consume less Reduce
B. 1944-1973 Era (Bretton Woods):
exchange rates were pegged;
1. Fixed Exchange Rate: “Adjustable
peg”;
+/- 1% of par value; all currencies
pegged to gold.
2. Only governments can convert US $
into gold:
$35/oz.gold.
3. Trade imbalance
Deficits: selling foreign currency and buying
home currency to prevent it from
devaluation below par value.
Surplus: buying foreign currency and selling
home currency to prevent it from
appreciating above par value.
4. IMF, World Bank, SDR to improve
economic cooperation and liquidity.
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B. 1944-1973 Era (Bretton Woods):
exchange rates were pegged;

Collapse in 1971 because:

(1) budget deficit and high inflation in
US -- financing Vietnam War.
(2) oversupply of US dollar and
inadequate amount of gold to be
converted.

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C. Post-1973 Era: exchange rates are
market determined.

The exchange rate is determined by supply and

demand which are affected by inflation
rates, interest rates, growth, expectation,
etc. may have high volatility.

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Alternatives Exchange Rates System

Least
A. Free Float
B. Managed Float
C. Target Zone
D. Fixed Rate
E. Hybrid (Any Combination of A, B, and C)

Degree of government control

Most

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Alternatives Exchange Rates System
Managed Float
Reducing uncertainty of exchange rate movement by
controlling bank intervention (buy or sell foreign
currency).
(1) Smooth out daily fluctuations, eliminate “excessive”
volatility.
(2) Lean against the wind; delay exchange rate adjustment.
(3) Unofficial pegging.

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Alternatives Exchange Rates System
Target-zone arrangement
linking currencies in a target-zone and adjusting
economic policy to keep exchange rate in a
range/zone.
European Monetary System
European currency unit
coordination of econ. policy: fiscal deficits, growth,
money supply, etc.
Intervention will not work if the monetary policy is
inappropriate.
Exchange rate cannot be stabilized.

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Alternatives Exchange Rates System
Fixed Rate
These countries depend on international trade with each other for
survival. Fixed rate aids trade.
The success of such a system relies heavily on the willingness of
individual govt. to sacrifice internal econ. policy goals for the
maintenance of external policy goals (i.e. fixed rate).
It requires a single banking system and single monetary policy so that
capital can flow freely between countries and yet maintain a fixed
rate system.
Higher interest rates will attract massive capital flows which threaten the
fixed rate system.
In order to maintain the fixed rate system, interest rate differences must
be eliminated by having one solid monetary policy (and therefore one
interest rate) for all of the community.

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Monetary System

Domestic Monetary System (DMS)

International
Function of DMS Monetary System (IMS)

1. Provision of adequate liquidity

2. Operation of smooth adjustment mechanism is process
in the economy that work to assure a nation external
economic equilibrium, well balanced international payment
system
3. Confidence in the system: Govt. policies must be such
that they gain confidence of private sector business firms and
investors

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Monetary System

Domestic Monetary System (DMS)

International Monetary System (IMS)
Components of IMS

1. IMF
2. Foreign Exchange market
3. Official Reserves
4. Private Demand for Foreign Exchange
5. Intervention & swap network

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International Monetary System (IMS)
Evolution
Gold Exhange Standard
after world war1, countries found it difficult to stick to gold
standard because of increased differential inflation. world trade
declined thoroughly and faced great depression in 1930’s..Then
came the world war 2...after its conclusion in 1944,
Bretton woods
conference took place & the new system of exchange rates .In the
60’s inflation had risen very high & private parties outside US to
accumulate the dolar. Also the US trade deficit increased. It was
clear that dolar had been overvalued & might have to be
devalued to restore the equilibrium in he US trade balance. So
every one wanted to change $ into hard European currency. Thus
the US$ was devalued against most of the currencies & gold
convertibility of $ was suspended. A new agreement “the smith
sonian agreement “ was entered into. US$ was devalued & a
wider range of currency fluctuation was permitted (2.25% instead
of 1%)
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 International Monetary System (IMS)
Evolution (Post War)
1. Shortage (1946-52) – World demand for $ exceeded supply. American
goods were in demand.
2. Stability (1953-57) – By 1952, Western Europe had regained prewar
levels of industrial production facilitated by generous provisions of $
credits and aids under “European recovery” program of 1947-52
(known as marshal plan healthy and stable economic environment).
Forex markets in Europe were liberalized.
3. Emerging payments problem (1958-63) - Formation of common market,
common external tariff was introducedresulted in American
corporations faced problems. They had to invest within the group.
Sharp increase in the capital outflow from US to Europe showed
adversely on BOP of US.
4. Capital controls (1964-70) – In 1963 Kennedy government imposed
interest equalization tax (IET). 15% tax was charged to US investors
for buying foreign stock. This made funds costlier for foreign
borrowers. This did not solve the problem, So further capital controls
were introduced.
5. International financial crisis (1971-73) – Bretton woods system was based
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upon strong and stable US $.
 International Monetary System (IMS)
Evolution (Post War)
6. Petrodollar (1974-81) -OPEC-organisation of oil exporting countries
gave two Oil shocks & surplus is called Petrodollar
7. International debt crisis (1982-83)- Mexico - due to widest debt
service problems facing the developing nation (Debt service is the
total debt at the end of the year in % of exports of goods and
services in year indicated).
8. Forex market Evolution(1985)
Plaza accord – In 1981-84 US$ appreciated and imported goods
become more attractive to Americans. This increase trade deficit
was introduced. Two new supra-national institutions were born

“The IMF” and “The World Bank”.

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 International Monetary System (IMS)
Evolution (Post War)
9. Emergence of Japan as leading international financial power & source
of global capital I 1980’s
10.In 1987 seven countries (G-7) reached accord in Paris to support the
falling US $ by pegging exchange rates within a narrow range
11.During 1989-92 many changed in political system from communist to
multiparty govt. converting planned economies to free economies.
12. Unification of European market after NAFTA(north free trade
agreement) between USA, Mexico and Canada 1993 & APEC(Asia
Pacific Economic Corporation) has intensified regional development.
Increasing importance of emerging capital market as a part of global
finance in the 1990s
13. South East Asian Currency Crisis of 1997-1998
14. Euro as a common currency in 1998
Eurobank,Eurocurrency,Eurograms,European currency-Euro?
Petrodollar recycling

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 International Monetary System IMS)
Application ???
A. England
German re-unification  large expenses
and high inflation  tightened monetary
policy to slow inflation rate  Result: interest
rates rose significantly  capital flow from UK
and Italy to earn high interest rates  UK
could not afford to increase interest rates
high enough to keep capital at home.
UK withdrew from the EMR
(Exchange rate mechanism)
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 International Monetary System IMS)
Application ???
B. Mexico - Peso devalued in 1976 and 1982. Why?
(1) Govt. overpromised: providing social service, education, medical
care, etc. to buy vote.
How to finance their subsidiary: increases taxes or borrow? (print Peso
 increase inflation)
 devaluation in 1976.
(2) Discovered oil in the late 1970s and Mexico became rich. ==>
spent and borrowed more (mortgaged oil). not enough  print Peso
 Devaluation in 1982.

Summary:
When oil price increased, Mexican govt. raised their living standard.
When oil price decreased, Mexican govt. did not cut spending but
borrowed more.
 maintained fixed Peso/dollar exchange rate which increased real
value of Peso.
 Before 1982, real value of Peso was high and had balance of
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payments deficits.
International Monetary System IMS)
Application ???

What about …

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Jeffrey Sachs, Aaron Tornell, Andres Velesco, “The Collapse of the
Mexican Peso: What Have We Learned?”

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