Chapter 19: Financing International Tradetions

The purpose of this chapter is to explain how international trade (exports/imports) is financed. The most international trade involves a time lag during which funds are tied up while the merchandise is in transit. Commercial banks with significant international operations provide key services to facilitate import/export transactions. The financing of export/import transactions by commercial banks is called trade finance. The payment methods in international trade are listed below:

· Cash-in-advance (prepayment)

· Letters of credit

· Documentary collections (sight and time drafts)

· Consignment

· Open account

· Exhibit 19.1 has a good summary of each payment method and the related risk(s) to the exporter and importer.

· Alternative trade finance methods are also discussed. Please contact the instructor via email for clarification, if you do not u

· Understand any of the terms and/or concepts as presented.

The next topic covered in the chapter, are the primary agencies that facilitate the financing of export transactions that originate in the United States. Chief is among them, are the U.S. Export/Import Bank (www.exim.govLinks to an external site. ) and the Overseas Private Investment Corporation (www.opic.gov). Please visit these websites to familiarize yourself with the services provided by them. Again, contact the instructor if you have questions about the programs and services offered by the U.S. Export/Import Bank and the Overseas Private Investment Corporation.

Course Summary
The focus of the course as previously stated is on the multinational corporation (MNC). The MNC is defined as one that has operating subsidiaries, branches, or affiliates located in foreign countries. MNCs include firms in service activities such as consulting, accounting, construction, legal, advertising, entertainment, banking, telecommunications, and lodging.

While financial, economic and political management seems to be the focus of MNC managers with respect to their global operations, international financial management by them also requires an understanding of cultural, historical, and institutional differences with a potential effect on corporate governance. Although both domestic firms (that engage in international business) and MNCs are exposed to foreign exchange risks, MNCs alone face certain risks that are not normally a threat to domestic operations, such as political risks.

MNCs also face other tasks that can be classified as extensions of domestic finance theory. For example, the normal domestic approaches to the cost of capital, sourcing debt and equity, capital budgeting, working capital management, taxation, and credit analysis need to be modified to accommodate foreign complexities. Moreover, a number of financial instruments that are used in domestic financial management have been modified for use in international financial management. Examples are foreign currency options and futures, interest rate and currency swaps, and letters of credit.

An MNC must determine for itself the proper balance between three common operational objectives: maximization of consolidated after-tax income; minimization of the firm’s effective global tax burden; and correct positioning of the firm’s income, cash flows, and in each currency and country of activity

Last, but, not the least, is the need for MNCs to practice good corporate governance. Failures in corporate governance have become increasingly visible in recent years. The Enron case and other firms such as WorldCom, Parmalat, Global Crossing, Tyco, Adelphia, and HealthSouth have revealed major accounting and disclosure failures. The relationship among stakeholders used to determine and control the strategic direction and performance of an organization is termed “corporate governance.” Dimensions of corporate governance include the agency theory and the composition and control of the boards of directors.