International Marketing, 5th Edition

In addition to the standard channels, there are several other financing sources available almost exclusively for international business. These sources include:

1. nonfinancial institutions
2. private financial institutions
3. international agencies
4. government agencies
5. the Euromarket.

It is a common practice for MNCs to raise equity capital by selling shares, both in their own countries and in foreign markets. What they have to do is to seek listings for their stocks on foreign securities exchanges. Also several foreign stocks are available for American investors in the form of ADRs (American Depository Receipts).

Factoring houses buy accounts receivable with or without recourse at face value and then provide loans at competitive rates on 90 percent of the factors' acquired but not-yet-collected receivables. In general, factors help clients eliminate several internal credit costs by providing credit guarantee of receivables, by managing and collecting accounts receivable, and by performing related bookkeeping functions.

Mixed or blended credit is a financing package which combines an official, conventional loan with either outright grants or foreign aid grants at below-market rates, in effect reducing the actual interest rate based on the condition that donor countries' products are bought.

All three organizations have the same central goal: to promote economic and social progress in poor or developing countries by helping raise standards of living and productivity to the point at which development becomes self-sustaining.

Toward this common objective, the World Bank, IDA, and IFC have three interrelated functions, and these are to lend funds, to provide advice, and to serve as a catalyst in order to stimulate investments by others.

The IMF (International Monetary Fund) is a cooperative apolitical intergovernmental monetary and financial institution. Its role is to institute an open and stable monetary system. As a pluralist international monetary organization, its multiple activities or functions encompass financing, regulatory, and promotional purposes.

A global currency is practically impossible because of national sovereignty and inflation. Because of national pride, no nation wants to give up its identity and sovereignty, and this includes its national currency. Furthermore, nations do not have an identical inflation rate. As a result, the effect of inflation on the value of various currencies is uneven. It is thus not possible for any single currency to be used on a worldwide basis while maintaining constant value in all countries.

The rationale for hedging lies in the exchange-rate fluctuation which can move significantly and erratically even within a short time. Since it is common for a customer to take some time in accepting the quoted price, placing an order, and making payment, financial loss due to exchange-rate movement can easily occur. Without a hedge, the high degree of volatility in the foreign exchange market may erode or even wipe out the amount of anticipated profit.

The spot market is a cash market where foreign exchange is available for immediate delivery. The forward market, on the other hand, provides companies with an opportunity to buy or sell currencies at some specified time in the future at a specified rate.

An exporter should not use the spot rate for quotation since foreign currency as payment is not received until a later date. Because there is no immediate conversion, the forward rate is the more appropriate one. The expectation in terms of interest rate inflation has already been factored into the forward rate agreed upon.

Devaluation is supposed to expand exports and reduce imports. When the U.S. dollar is devalued, American products become relatively inexpensive. As a result, foreigners can import more U.S. goods without having to spend more of their money. The devalued dollar however is bad for U.S. importers who will have to spend more U.S. dollars just to maintain their import level.

There is a substantial time lag between the change in currency value and its impact on the physical flow of trade. The lag occurs because suppliers and buyers need time to adjust their habits and decisions before they start getting used to the new exchange rate.

In the case of the gold standard, each country is required to link its currency value to gold by legally defining a par value based on a specified quantity of gold for its standard monetary unit. Thus, exchange rates have fixed par values as determined by the gold content of the national monetary links.

The par value system requires a fixed exchange ratio or par value. The agreement fixes the world's paper currencies in relation to the U.S. dollar which is fully convertible into gold. As the other international currency in addition to gold, the dollar provides added reserves for stability as well as liquidity for gold and currencies.

The crawling peg, a semi-fixed system, adjusts the exchange rate slowly by small amounts at any point in time on a continuous basis to correct for any overvaluation and undervaluation. The continuous but small adjustment mechanism was designed to discourage speculation by setting an upper limit that speculators could gain from devaluation in one year.

The purpose of the wide band is to compensate for the rigidity of the fixed-rate systems (which allow only small margins of fluctuation on either side of parity) by allowing the currency value to fluctuate, say, 5 percent on each side of the par. The more flexible movement warns speculators of the more adverse consequence when their guess about the direction of the exchange rate proves to be wrong.

In the case of floating, a currency is allowed to seek its own value based on the demand, supply, and market conditions. There is no movement limit.

In the absence of government intervention, the float is said to be clean. The float becomes dirty when there is a central-bank intervention to influence exchange rates.

An MNC can hedge its foreign exchange exposure in a number of ways. One method involves the interbank market which offers spot and forward transactions. These contracts specify the purchase and sale of currencies at a certain price, either for immediate or future delivery. If the company wants a standardized contract, it may choose to buy (sell) either a futures contract or an options contract. The standardization feature provides market liquidity, making it easy to enter and exit the market at anytime.

The forward market offers a contract size tailored to individual needs. It is usually limited to very large customers who deal in foreign trade.

The futures (and options) market offers standardized contracts in terms of currency amount and contract months. It is open to anyone who needs hedge facilities or has risk capital with which to speculate.

A country's inflation reduces the countr's currency value. A country with high inflation tends to have a weak currency which is usually accompanied by high interest rates. The higher interest cost does not necessarily make it an undesirable place to take out loans. As a matter of fact, inflation discourages lending but encourages borrowing, because a loan when due can be repaid with less expensive money.

Leading and lagging have to do with the speed with which collection and payment are made. When foreign currencies are rising against the U.S. dollar, a U.S. firm should make immediate payments to foreign creditors (i.e., leading). Furthermore, it probably should hasten collection of debts (in dollars) from abroad. On the other hand, if the dollar is rising in value, it should delay making payments to foreign creditors (i.e., lagging).