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Financial Management in the International BusinessChapter 20 Introduction Scope of financial management includes three sets of related decisions: Investment decisions, decisions about what activities to finance. Financing decisions, decisions about how to finance those activities. Money management decisions, decisions about how to manage the firm’s financial resources most efficiently. Investment Decisions Capital budgeting: quantifies the benefits, costs and risks of an investment. Managers can reasonably compare different investment alternatives within and across countries. Complicated process: Must distinguish between cash flows to project and those to parent. Political and economic risk can change the value of a foreign investment. Connection between cash flows to parent and the source of financing must be recognized. Project and Parent Cash Flows Project cash flows may not reach the parent: Host-country may block cash-flow repatriation. Cash flows may be taxed at an unfavorable rate. Host government may require a percentage of cash flows to be reinvested in the host country. Adjusting for Political and Economic Risk Political risk: Expropriation - Iranian revolution, 1979. Social unrest - after the breakup of Yugoslavia, company assets were rendered worthless. Political change - may lead to tax and ownership changes. Euromoney Magazine’s Country Risk Ratings Financing Decisions (a) Source of financing: Global capital markets for lower cost financing. Host-country may require projects to be locally financed through debt or equity. Limited liquidity raises the cost of capital. Host-government may offer low interest or subsidized loans to attract investment. Impact of local currency (appreciation/depreciation) influences capital and financing decisions. Financing Decisions (b) Financial structure: Debt/equity ratios vary with countries. Tax regimes. Follow local capital structure norms? More easily evaluate return on equity re