Transcript Managing the Multinational Enterprise

Team assignment 4 (5 points)
Charlotte, US
US$5 million
or
US$ 5 million ÷ $1.5/€ = €3.33
million
Sales
Costs of sales
Net profit
•
0
40%
Tampere, Finland
€15 million
US$ 5 million
Profit
Tax rate (effective)
Luxembourg City
€3.33 million
€15 million
€15 million - €3.33 million =
€11.67 million
0
10%
0
€15 million
25%
(1-10%) * €11.67 million =
€10.50 million
How would you price intra-firm exports of intermediate goods manufactured in Charlotte of US to the next production stage in
Tampere, Finland, for maximizing total net profit? The exchange rate was $1.5/€ on the day when Charlotte-Luxembourg
transaction was made. All profits should be translated into €. Fill the question marks in the table (3.5 points in total).
0
Team assignment 4 (5 points)
Charlotte, US
Sales
Costs of sales
US$5 million
or
US$ 5 million ÷ $1.25/€ = €4 million
Net profit
•
0
40%
Tampere, Finland
€15 million
US$ 5 million
Profit
Tax rate (effective)
Luxembourg City
€4 million
€15 million
€15 million - €4 million =
€11 million
0
10%
0
€15 million
25%
(1-10%) * €11 million =
€9.9 million
Assuming no hedging techniques had been used, what would be the total net profit if the exchange rate on the day of
Charlotte-Luxembourg transaction was $1.25/€? All profits should be translated into € (0.5 point).
0
Team assignment 4 (5 points)
Charlotte, US
Net profit
€15 million
US$ 5 million
Profit
Tax rate (effective)
Tampere, Finland
US$5 million
or
US$ 5 million ÷ $1.3/€ = €3.85
million
Sales
Costs of sales
Luxembourg City
0
40%
€3.85 million
€15 million
€15 million - €3.85 million =
€11.15 million
0
10%
0
€15 million
25%
(1-10%) * €11.15 million =
€10.04 million
0
•
In an effort to hedge foreign currency risk, you had previously bought a forward call option of $1.3/€ at an ignorable cost. The
option can be exercised on the day of Charlotte-Luxembourg transaction, when the spot rate was $1.5/€. What would be the
total net profit (0.5 point)? What would be the total net profit if the spot rate was $1.25/€ (0.5 point)? All profits should be
translated into €.
•
First, calculate the potential net profit under the call option rate if the option was exercised.
•
•
•
•
When the spot rate was $1.5/€, the two alternative profit would be:
1) exercise the option and use the call option rate of $1.3/€, the total profit would be €10.04 million;
2) do not exercise the option and follow the spot rate of $1.5/€, the total profit (as calculated in question 1) would be €10.50 million.
In order to make a higher profit, we should choose not to exercise the option.
•
•
•
•
When the spot rate was $1.25/€, the two alternative profit would be:
1) exercise the option and use the call option rate of $1.3/€, the total profit would be €10.04 million;
2) do not exercise the option and follow the spot rate of $1.25/€, the total profit (as calculated in question 1) would be €9.9 million.
In order to make a higher profit, we should choose to exercise the option.
Emerging phenomenon in international finance:
The rise of sovereign wealth funds (SWFs)
Sources:
Mark Gordon and Sabastian V. Niles, 2012, “Sovereign wealth funds:
An overview”, in Karl P. Sauvant, Lisa E. Sachs, Wouter P.F. Schmit
Jongbloed (eds.), Sovereign investment: Concerns and policy reactions,
pp. 24-56. Oxford, UK: Oxford University Press.
Shai Bernstein, Josh Lerner and Antoinette Schoar, 2013, “The
investment strategies of sovereign wealth funds”, Journal of Economic
Perspectives, 27(2), pp. 219-237.
William L. Megginson, Miao You and Liyan Han, 2013. “Determinants of
sovereign wealth fund cross-border investments”, Financial Review,
48(4), pp. 439-572.
SWFs (cont’d)
SWFs are investment vehicles established by governments to
invest a portion of their excess foreign exchange reserves in
search of higher returns than are typically earned on
official reserves.
 They are generally invested in safe, low-return instruments
such as U.S. Treasury bonds,
 The primary economic purposes of these funds include:
diversification of national wealth, revenue stabilization,
sharing of national wealth across generations, and achieving
equity-like investment returns.

SWFs (cont’d)
billion
Hedge funds: $2.1 trillion
SWFs (cont’d)

Skyrocketing:


They increased ten-fold in the last two decades from $500 billion in 1990 to more than $6
trillion today (largely due to rising price of petroleum and appreciation of local currency such as
Chinese RMB).
Unclear and myriad corporate objectives:

First, as a source of capital for future generations

Second, as a stabilizer by reducing the volatility of government revenues

Finally, as holding companies, in which the government places its strategic investments
SWFs (cont’d)
Largest exporter
12th largest exporter
SWFs (cont’d)

SWFs played an important role by providing emergency liquidity to major U.S. and European
financial institutions at the outset of the recent financial crisis.

Selected Infusions of SWFs into the U.S. financial institutions during the global financial crisis 2007-09
Date
Target company
SWF(s)
Investment size in billions of US$ (% in target)
2009/06/03
2007/12/19
Morgan Stanley
China Investment Corporation (CIC)
1.2 (9.9%)
5 (9.9%)
2008/07/28
2007/12/24
Merrill Lynch
Temasek (Singapore)
3.4 (13.8%)
4.4 (9.4%)
2008/02/01
JC Flowers
China Investment Corporation (CIC)
4
2008/01/15
Citigroup
GIC (Singapore), KIA (Kuwait), Prince
Alwaleed bin Talal (Saudi Arabia)
12.9 (9.3%)
2007/11/27
2007/05/22

7.5 (4.9%)
Blackstone
China Investment Corporation (CIC)
3 (9.7%)
For political concerns, SWFs typically did not receive special governance rights (e.g., board membership)
although their ownership might be greater than many other owners.
SWFs (cont’d)

Their cross-border investment strategies

Megginson et al (2013) studied a sample 1,590 investments in 78 target countries by 15
major SWFs during 1985-2011 and found that SWFs are purely, or primarily,
commercially driven.

More transactions came from SWFs from strong economic performance, high degrees
of openness to trade, and less developed local capital markets

SWFs are more likely to invest in countries with high levels of investor protection, strong
economic performance, and well developed local capital markets

SWFs are more likely to invest in countries sharing the same culture and engaging in
bilateral trade

All these findings are similar to other private foreign institutions
Course structure
Classes 1-4
International business environment
Regional vs. global
Triad and IB activities
Politics, culture, trade and finance
Classes 5-9
Firm-specific advantages and firm management
Organization
Production
Marketing
International HRM
Political risk management
International financial management
Class 10
Country-specific advantages
Classes 11-14
Locational choice and regional management
European Union, North America, Japan, and Emerging Markets
Chance
Demand
Conditions
Factor Conditions
Structure of firms
and rivalry
CSAs in certain industries/products
The diamond model:
Porter’s explanation of determinants of national competitiveness
From Mike Porter’s The competitive advantage of nations.
Chance
 Human resources
 Quality, skills, and cost
Factor Conditions
 Physical resources
 Land, water, mineral deposits, timber, hydro
power
Demand
sources, and fishing grounds
Conditions
 Knowledge resources
 Scientific, technical, and market knowledge
 Capital resources
Structure of firms
andtype,
rivalryand cost of financial resources
 Amount,
 Infrastructures
 Transportation, communications, health-care, etc.
The diamond model:
Porter’s explanation of determinants of national competitiveness
Chance
 Composition
of the home demand
Factor Conditions
 Various niches, buyer sophistication
 The size and growth of the home demand
 Internationalization of domestic demand
Structure of firms
and rivalry
The diamond model:
Porter’s explanation of determinants of national competitiveness
Demand
Conditions
Chance
Factor Conditions
Demand
Conditions
 Competitive downstream industries through efficient, early, or
rapid access to cost-effective inputs;
 Competitive related industries that can coordinate and share
activities in the value chain
Structure of firms
 Competing products/services
and rivalry
 Complementary products/services
The diamond model:
Porter’s explanation of determinants of national competitiveness
Chance
 The ways in which firms are managed and choose to compete
 The motivations of companies and their employees and managers
 The Factor
competition
Conditions intensity in the respective industry
Structure of firms
and rivalry
The diamond model:
Porter’s explanation of determinants of national competitiveness
Demand
Conditions
Chance
Factor Conditions
Demand
Conditions
 Chance events are occurrences that are outside of control of a firm
 New inventions
 Political decisions by foreign governments
 Wars
 Significant shifts in world
financial
Structure
of firmsmarkets or exchange rates
and rivalry
 Discontinuities in input costs
such as oil shocks
 Surges in world or regional demand
 Major technological breakthroughs
The diamond model:
Porter’s explanation of determinants of national competitiveness
Chance
 Government influences
 Subsidies
 Education policies
Factor Conditions
 The regulation or deregulation of
capital markets
 The establishment of local product
standards and regulations
 The procurement of goods and services
Structure of firms
 Tax laws
and rivalry
 Antitrust regulation
The diamond model:
Porter’s explanation of determinants of national competitiveness
Demand
Conditions
Clustering: Interconnection and Concentration of All These Factors
Chance
Demand
Conditions
Factor Conditions
Structure of firms
and rivalry
CSAs in certain industries/products
CSAs: Cluster-specific advantages
An example: CSAs for American ICT multinationals such as Google.
Silicon Valley
Chance events:
Chance
• PC
revolution
• WWW revolution
Factor Conditions
Factor conditions:
•Plenty of high-quality computer
sciences and engineering
graduates
•Abundant VC capital network
Supporting industries and institutions:
•HR intermediaries: e.g., Smart Valley Inc.
•High-standard universities: e.g., Stanford
•Information sharing networks: e.g., Enterprise
Network; Software Industry Coalition.
•Collective lobbyists for deregulation and low
tax: e.g., Regulatory Forum; Council on Tax
and Fiscal Policy
Structure of firms and rivalry:
•Information sharing across IT researchers is
common
•Risk-taking and entrepreneurship is a local
Structure
of firms
culture embedded
in the
wild west California
and
rivalry
style
CSA for ICT industries/products
An example: CSAs for American ICT multinationals such as Google.
Demand conditions:
•Relatively richer consumers
•Sophisticated buyers located in
Demand
the founding
district of ICT
Conditions
industries
Government:
•Public R&D funding: e.g.,
SBIR, DARPA, etc.
•Public VCs: e.g., CalPERS
•Tax exempt for selected VC
activities.
Limitations of the Diamond Model
The rise of the Great Lakes area as a cluster of auto industry
Up to 58 hours closer
Asia’s pacific ports
5 days
LA-Long Beach
An example: North Am auto industry
Canadian railways and ports of entry/exist serving the US markets
GDP US$1.7 trillion
GDP US$15 trillion
3 billion bbl per year just for
running vehicles, not including
production etc.
An example: North Am auto industry (cont’d):
Oil reserves in Canada; Oil pipelines between Canada and US; Auto industry in the US.
FTA since Jan 1988
NAFTA since Jan 1994
An example: North Am auto industry (cont’d)
Free-trade agreement
The double diamond: Regional integration of multiple countries
Prince Rupert and Vancouver in British Columbia as ports of entry
CN and CP railways as inter-state transportation
Chance events
e.g., oil reserves
e.g., a decent market with high purchasing power
Pacific gateway initiative
(NA)FTA since 1988
Keep the border open
e.g., skilled labor
Chance events
e.g., the largest vehicle market with high purchasing
power
An extension:
Multiple diamond model


The Finnish miracle: Nokia
Source: Anil Hira, 2012, “Secrets behind the Finnish miracle: the rise of Nokia”. International
Journal of Technology and Globalization, 6(1/2), pp. 38-64.
The Finnish miracle: Nokia

Nokia

2/3 of the Information and Communications
Technology (ICT) sector in Finland

1/5 of exports

3–4% of GDP

45% of business sector R&D (research and
development), and 1/3 of national R&D

conducts 60% of its research in Finland

employs 20,000 in Finland, half of whom are in
R&D

The Finnish ICT cluster includes 6000 firms, of
which 200 are first-tier subcontractors of Nokia.
ICT constitutes 10% of GDP (up from 4% in
1990).
The Finnish miracle: Nokia



The story of Nokia is compelling because Finland was not the context (in
regard to natural comparative advantage) in which one would expect to
see leadership as an international R&D hub.
Finland is an odd place for the emergence of a global competitor in IT.

a small domestic population of 5.2 million

a relatively remote location

a traditional economy based on natural resources (lumber, pulp, and
paper)
Yet, there were signs of previous Finnish capacity to develop globally
competitive products requiring high value-added and levels of skill, e.g.,
The School of Decorative Arts and the Society of Crafts and Design in
Helsinki.
The Finnish miracle: Nokia

A double diamond model between Finland
and the Soviet Union (SU) from 1950 and
1990




The Soviet Union’s demand for reparations as a result
of Finnish alliance with the Germans in WWII – $300
million (75% in telecom-related production, etc.).
Lack of foreign exchange led to increase in efficiency
Not eligible for the European Marshall Plan aid for tech
transfers, motiving Nokia to build proprietary tech
capacity
The SU accounted for 15-25% of Finnish foreign trade
in 1950s  some 40% in 1990, when the SU
collapsed.
The Finnish miracle: Nokia


In 1967, with the encouragement of the government, the Nokia Corporation, including
FCW, FRW, and the original Nokia wood mill activities, was officially launched.
Industry structure:


Good cooperation

1964-71, Nokia – Salora Oy on radio and phone

1975, Nokia – Salora on branding and promotion activities

1979, Nokia – Solora built a joint venture of Mobira Oy (mobile radio), precursor of today’s Nokia
Telecommunications (NTC)
Expanding military and public sector

1969, expansion of highway traffic led to construction of a nationwide mobile network based on
manual Car Mobile Telephone (CMT) technology

1972, Post, Telephone and Telegraph public agency (PPT) offered the first mobile phone services on
the CMT network

However, there was still significant gap in supply-demand. Private players such as Televa Oy entered
into the business, which was taken over by Nokia in 1981.
The Finnish miracle: Nokia

The Nordic quadruple diamond model

The Nordic Mobile Telephone Group (Nordisk Mobil Telefon or NMT), including
both private and public partners from Finland, Sweden, Norway, and Denmark,
was established in 1969 to develop a new mobile telephone system.

Full automatic operation and charging

System and terminal compatibility among all four countries

Full roaming capability among all four countries

Mobile-to-mobile calls

High reliability

Similar use and same facilities as conventional fixed phone

Privacy protection

Open specs, with no exclusive supplier rights

By 1980s, the Nordic countries constituted the largest world market in terms of
mobile phone subscribers.

By taking over Mobira, another Finnish mobile phone manufacturer, and Finland’s
largest electrical wholesaler, and Swedish Ericsson Group’s data divison, Nokia
became the largest IT group in Scandinavia.
Ericsson’s data
division
Mobira
The Finnish miracle: Nokia

The European multiple (>4) diamond model

Nokia’s successful expansion in the Nordic countries led to
Nokia’s shift of focus on the entire Europe

It started sourcing external finance in Switzerland

In 1982, promoted by the Nordic countries and the Netherlands, the
European Conference of Postal and Telecommunications
Administrations (CEPT), formed a new standards group, Groupe
Special Mobile (GSM), to standardize the emerging wireless industry
across Europe.

In 1987, Nokia joined the forces with France’s Alcatel and West
Germany’s AEG to promote GSM as an European standard.

In 1988, the European Economic Community (EEC), the precursor of
EU, as an European standard, which would become an international
standard.

Finland became one of the earliest adopter of this pan-European
standard by building nationwide GSM.
The SU-Finland double diamond 1950-90
The SU
The SU industry structure and supporting institutions
The SU-based resources
The SU customers
The rise of Nokia and
wireless industry
The SU government
Finnish Government
Finland-based resources
Finnish customers
Finnish industry structure and supporting institutions
The Nordic quadruple diamond since 1969s
Swedish, Norwegian, and Danish
Swedish, Norwegian, and Danish industry structure and
supporting institutions
Swedish, Norwegian, and
Danish resources
The Swedish, Norwegian, an
Danish customers
The rise of Nokia and
wireless industry
Swedish, Norwegian, and Danish
governments
Finnish Government
Finland-based resources
Finnish customers
Finnish industry structure and supporting institutions
The European multiple (>4) diamond since 1980s
Europe
European industry structure and supporting institutions
European resources
European customers
The rise of Nokia and
wireless industry
European government
Finnish Government
Finland-based resources
Finnish customers
Finnish industry structure and supporting institutions
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