Summary of Alan C. Shapiro's Multinational Financial Management Chapter 13

1. G
A
L
I
H
NATIONAL CAPITAL MARKET
AND INTERNATIONAL FINANCING

2. Someone is sitting
in the shade today
because someone
planted a tree
a long time ago.
Warren Buffett

3. Reference
Multinational Finance Management
8th Edition, Shapiro, Alan C., 2006.
+
Additional material from Investopedia
& Wikipedia.

4. 1
Corporate Sources & Uses of Funds
2
National Capital Markets
3
Development Banks
4
Project Finance
Financial Markets vs Financial Intermediaries; Globalization of Financial Markets
As International Financial Centers
World Bank Group; Regional & National Development
Financing large-scale capital investment

5. Learning Objectives
To describes trends and differences in corporate
financing
To define securitization and explain the forces that
underlie it
To explain why bank lending is on the decline worldwide
T o explain what is meant by the globalization of
financial markets
To identify the functions and consequences of financial
markets
To describe the links between national and
international capital markets
To explain why firms may choose to raise capital
overseas
To descibes the types and roles of development banks

7. Internally Generated Cash
Source of Funds
Short-term External Fund
Long-term External Fund

8. External finance come from
investor / lender.
Debt is the preferred alternatives
– accounts for the overwhelming
share of external funds.
While, New stock issues play a
relatively small and declining role
in financing investment.

9. Whether debt/ equity,
the issuer will turn to
investment banker to
assist in designing and
marketing the issue.
And compensated by
the spread between the
price at which they buy
the security and the
price at which they can
resell it to the public.

10. Financial Intermediaries
VS
Financial Markets

11. Financial Market
Any market place where buyers and sellers participate in the trade of
assets such as equities, bonds, currencies, & derivatives.
Typically defined by having transparent pricing, basic regulations on
trading, costs and fees and market forces determining the prices of
securities that trade.
Financial Intermediary
An entity that acts as the middleman between two parties in a financial
transaction.
Typical intermediary: commercial bank. Also includes investment banks,
insurance companies, broker-dealers, mutual funds and pension funds.
Investopedia

13. Securitization is the process
through which an issuer
creates a financial instrument
by combining other financial
asset and then marketing
different tiers of the repackaged
instruments to investors.
Investopedia

14. Print screen from

15. Trends in external financing:
Bank
Borrowing
German, French, & Japanese industry
Corporate
Borrowing
U.S. & British industry

16. Recent technological & telecommunications
improvement have greatly reduced the
cost of
obtaining and processing
information about the conditions that affect
the creditworthiness of potential borrowers.
“

17. Investors are now more likely to find it costeffective to lend directly to companies rather
than
indirectly
through
financial
intermediaries, such as commercial
banks.
“

18. So…?
Financial Market…win?

19. FINANCIAL SYSTEMS &
CORPORATE GOVERNANCE

20. Different financial system in terms of
Corporate Governance
Market-oriented financial system
in U.S. and U.K. (refer to Anglo-Saxon model).
Bank-centered finance financial system
in Germany, France, & Japan (CEJ type financial system).

21. Keiretsu
is a large industrial grouping with a major
bank at the center. Keiretsu ties a complex
web of tradition, cross-shareholding,
trading relationship, management, and
information swapping.

22. The one-set policy
Wikipedia

23. BANK

24. The cost of accessing
capital market directly
=
Japanese companies
turn to corporate bond
=
Shareholder-oriented
management approach

26. The world has become one vast,
interconnected market. Markets
for government securities &
certain stocks, foreign exchange
trading, interbank borrowing &
lending, operates continously
around the clock and around the
world in enormous
size.
“

27. Freer
Markets
Widely
available
information
Foundation for
Global
growth

28. National Capital Market
as International Financial Centers

29. Financial Functions
 Mobilize saving
 Allocate resources
 Facilitate risk transfer & risk mgt.
 Monitor managers
 Exert corporate control
 Supply liquidity
Factors Promoting WellFunctioning Markets
 Secure property right
 Contract easily enforceable
 Meaningful accounting information
 Transparent financial statement
 Accountability of borrowers &
investors
 Borrowers & Investors bear the
consequences of their decisions
Consequences
 Greater capital accumulation
 Better projects
 More innovation
 Managerial accountability
 Preffed time pattern of consumption
Result
 Stronger economic growth
 Greater consumer satisfaction

31. International Financial
Markets
Financial markets where
foreigner can both borrow and
lend money
Entrepots
 Channels through which
foreign fund pass
 Switzerland, Luxembourg,
Singapore, Hongkong,
Bahamas, Bahrain
Important Int’l Financial
Center




London
Tokyo
New York
Germany & France
Requirement for becoming
In’t Financial Center
 Political Stability
 Minimal government
intervention

32. Foreign Access to
Domestic Markets

33. 1
2
3
The Foreign Bond Market
Portion of the domestic bond market that represents issues
floated by foreign companies or governments
The Foreign Bank Market
Portion of domestic bank loans suppllied to foreigners for use
abroad
The Foreign Equity Market
Placing stocks in foreign market – to diversify the equity
funding risk

34. Globalization of Financial Market
has its Downside

35. Critics for Financial Market globalization:
 The investors only seeks for the highest risk-adjusted return,
they will swift to abandon countries whose economic fundamentals
are questionable.
 They will demand bigger premium for the risk of holding the
country,
 It will lead to the devaluations of the country’s currency.
 The devaluation raises the cost of imports and boost its interest
rate.

36. Financial markets are in the business of
gathering and processing information from
savers and borrowers around the worlds in
order to perform their real function, which
is to price capital and allocate to its most
uses.
Markets reflect the perceptions of risk and
reward of its participants, and do not
create the underlying reality that caused
the bad perceptions of Financial Markets.

37. Development Bank
World Bank Group, Regional & National Development Bank

38. Three types of Development bank:
Regional Development Banks

39. Function of Development bank:
• provide equity & debt financing to aid in the economic
development of under developed areas.
• Include extending intermediate- to long-term capital directly.
• strengthening local capital markets.
• supplying management consulting services.

40. World Bank Group: multinational
finance
institution
that
was
established at the end of WWII to
help provide long-term capital for
the reconstruction and development
of member countries.

41. IBRD
 IBRD makes loans for projects of high
economic priority.
 A government guarantee is a necessity for
World Bank funding.
 Bank’s main emphasized on large
infrastructure projetcs (roads, dams, power
plant, education, & agriculture).
 Loans are tied up to debtor nations economic
policies: freer trader, more open investment,
lower budget deficits, & more vigorous private
sector.

42. IFC
 Finance various projects in the private sector
through loans and equity participations and to
serve as a catalyst for flows of additional
private capital investment to developing
countries.
 Doesn’t require government guarantees.
 Emphasized on manufacturing firm that have
reasonable chance of earning the investor’s
rate of return and will provide economic
benefits of the nation.
 Concentrate its lending & equity in
investment-grade-conglomerate.
 Help companies to conduct business in a more
open and investor-friendly manner.

43. IDA
 Founded in 1960, to makes loans (soft/ highly
concessionary) for project in LDCs.
 Require a government guarantee.

45. Regional Development Bank
Provide funds for financing of manufacturing, mining, agriculture,
& infrastructure projects considered important to development.

46. Regional Development Banks
Leading Regional Development banks
:
African Development Bank (ADB)
Asian Development Bank (ADB)
European Investement Bank (EIB)
Inter-American Development Bank (IADB)
Atlantic Development Group for Latin America (ADELA)
Arab Fund for Economic & Social Development (AFESD)

47. National Development Bank
Have the same characteristics of success: they must attract
capable, investment-oriented management; and they must
have large enough supply of economically viable projects.

48. Project Finance

49. Project Financing
The raising of funds to finance a project in which the providers of
the funds look primarily to the cash flow from the project as
the source of funds to service their loans and provide the return
of and a return on their equity investment in a project.

50. Key Attributes
Of project financing
:
Focus on the economically separable nature of investment projects
suitable for project financing.
Nonrecourse lenders have resort only to the project assets and cash
flows (no sponsor).
The underlying assets in project are large, illiquid industrial assets.
Project have a finite life, at the end of which all debt and equity
investors are repaid.

52. Competition among companies for capital
force them to be more financial transparent, and
improve corporate governance with greater focus on
the rights of shareholder rather than managers.

53. Presented By: Galih H. Baskoro