Tema 1: Context and Scope of International Businesses

and Finances of a firm

1.The internationalisation of the firm
Scope and objectives
The scope of international business and finance covers all the transactions carried out by a firm
with a foreign counterparty.

- What kind of transactions? Some examples are as follows:

 Selling products and services abroad;
 Buying inputs abroad;
 Obtaining financial resources in a foreign country;
 Investing in a foreign deposit bank;
 Acquiring a foreign firm.

Objectives of internationalisation:

- Searching for foreign markets to sell its products or services;

- Searching for resources the firm does not have access in its country or it does at a high
cost;
- Searching for efficiency

A higher number of shareholders you need a lower % of the capital to control the firm

As a manager you want the lowest spreed of shareholders in order to have liberty

Internationalised firms, multinational companies and FDI

About FDI (Foreign Direct Investment)

- FDI refers to develop or acquiring subsidiaries abroad by a parent company;

- FDI may be implemented either:

 By acquiring existing firms;

 By establishing new foreign subsidiaries.

 - Types of subsidiaries:

 Production subsidiaries;

 R&D subsidiaries (empresas que tienen un gran knowledge de un tema

en concreto que necesitamos)

 Commercial subsidiaries.

Theoretical approaches
When the objective is searching for markets, there are 2 main approaches:

- “OIL” : To make use of the existing competitive advantages in other countries (tengo la
ventaja)
- “LLL” : To acquire and to make use (simultaneously) of competitive advantages in
other countries (desarrollo y aprovecho esa ventaja)

Concerning the speed of the process, there are 2 main approaches:

- Gradualist approach: Step by step

- “Born Global companies” : Global since the beginning

“OIL” Approach (by J. Dunning)

“O” (Ownership) advantages: the firm has some advantages in a foreign market that some
competitors do not have. This is a condition sine qua non to initiate an internationalisation
strategy. Generally, the “O” advantages refer to intangible assets such us technology and
knowledge.

“I” (Internalisation) advantages. On the assumption of the existence of “O” advantages in a

firm, “I” advantages refer to benefits of exploiting them by carrying them out within the
hierarchical corporate structure of the firm instead of out of it.

“L” (Location) advantages: On the assumption of the existence of “O” and “I” advantages in a
firm, “L” advantages refer to benefits of exploiting them by carrying out the production in the
foreign country instead of the home country. (ej: taxes,cost of labor..)

- What kind of “L” advantages may be identified?

“LLL” Approach (by Mathews)

“LLL” approach is more recent (2006)

“L” (Linkage) advantages: Competitive advantages can be developed through collaborative

strategies with other partners, e.g. international joint ventures.

“L” (Leverage) advantages: Thanks to collaborative strategies the firm is saving resources or, in
other words, is leveraging its limited resources.
“L” (Learning) advantages: Thanks to collaborative strategies the firm is getting new
competitive advantages.

Gradualism vs “Born Global”

Gradualist approach, known as Uppsala Model, states that the firm tends to gradually increase
its involvement in foreign markets.

Born global. This kind of firms are combining resources and selling products in a global market
since the beginning.

Ways of internationalization
Types of contractual agreements
With partners or alone?
The firm may carry out the internationalisation alone. In the case of FDI, the firm controls
100% of the capital.

In the case of subsidiaries with no 100% control, we may identify several kind of partners:

- Technological partner;
- Financial partner;
- Local partner.

Joint venture is, by definition, a cooperation between firms.

Other structures of partnership:

- Contracts to distribute good and services;

- Strategic alliance between firms: An arrangement between two companies that have
decided to share resources to undertake a specific and mutually beneficial project.
2 International finance and the firm
What are the tasks of a financial manager in an internationalised firm? (1)
A) Should analyse the international environment in order to know:

- The international institutional framework

- The theoretical framework for international transactions
- The international financial markets and its products
- A financial market may be qualified as international if:
 There is a cross-border financial transaction;

 A non cross-border financial transaction with an asset (liability) issued in

foreign currency;
- Types of international financial markets according to the asset:
 Currency markets (Forex);
 Banking markets;
 Debt markets;
 Equity markets;
 Commodities markets.

What are the tasks of a financial manager in an internationalised firm? (2)

B) Financial management should carry out the following tasks:

- Obtain financial resources in international financial markets;

- Manage international risks:
 Exchange risk;
 Interest rate risk;
 Commodities price risk;
 Credit risk;
 Country risk.
- Assess international investments;
- Manage the financial structure of the firm and optimise the cost of capital;
- Manage working capital;
- Manage intra-group transactions;
- Manage international taxation.

Bibliography

Durán Herrera, J.J. and F. Gallardo Olmedo (2013). Finanzas Internacionales para la Empresa.
Colección Economia y Empresa - Pirámide Editores, Madrid.

- Chapter 1: ‘La empresa internacionalizada y su actividad financiera’