Economies of scale: As the domestic market saturates it starts viewing overseas market as a potential source of growth , continuous growth is essential for achieving further economies of scale Comparative Advantage: The locational advantage offered by a country by way of lower costs serve as an important incentive
Vertical diversification :companies going for vertical diversification may sometimes need to expand overseas due to non availability of opportunities in the domestic market. General Diversification Benefits : A corporate may like to invest overseas for the benefits of diversification across various markets
Product Life Cycle : As a product moves to maturity stage its production process becomes more standardised and developing countries with lower cost of production become come forward to try and move prodcution facilities to their countries. Non transferable knowledge: Sometimes due to reluctance in sharing the knowledge or secrets companies have to set up their own units to enter foreign lands.Example coca cola
Brand Equity: Companies with a good brand equity have an incentive to expand overseas as they see marketing would be easier. For example Levis set up operations in India to exploit its international reputation as a producer of good quality denim Protection of Brand Equity: Sometimes to maintain high quality standards the companies shy from giving licenses and prefer to establish their own manufacturing units
Following its Clients :Some service firms may find it both attractive and necessary to expand along with their clients.Example major auditing firms generally extend their operations to countries where their clients expand , because of their clients requirements to have single auditor across the globe.
Opportunity Cost
The cost of foregone alternative , especially useful in case of patents Sunk Cost :Historical costs should not be considered,exapmle cost of survey done is historical cost
Non cash elements such as deprecition,goodwill etc are not considered in project appraisal Tax effect ; Plays a vital role in project appraisal
Risk Factors
Social, Political and Economic risks effect the discount rate of the project hence in project appraisal the discount rate plays an important role.
Blocked funds
Money generated by a company's foreign operations that cannot be moved from one country to another because of one or more regulations in the country in which the money was generated. For example, a government may place a limit on the maximum amount that may be moved out of a country over a given period of time. Having an excessive amount in blocked funds may harm a company's cash flow.
Restrictions on Repatriation
Transfer pricing : Refers to the policy of invoicing purchase and sale transactions between a parent company and its foreign subsidiary so that the terms are suitable for the parent company. Royalities : The subsidiary company may pay royalities for the usage of parent company name and product
Leading and Lagging : leading and lagging payment between parent company and subsidiary base on exchange rate forecast so that it is profitable for parent company. Financing structure : An project can be funded on full equity, or debt of a combination. Where repatriation is difficult ,the parent company prefers giving loans so that repatriation of capital is easier.
Currency of invoicing :Either a vehicle currency is opted for a more stable currency between parent and subsidiary,or between two subsidiaries is chosen to minimise exchange rate risks Reinvoicing centres : Trades between companies in the same group can be routed through the reinvoiving centre,which is typically set in a tax haven
Countertrade : Trade between parent and subsidiary can sometimes be as a barter,the parent company then selling it to thord party,thereby indirectly transferring profits of subsidiary
cash flows.As cash flows have been converted to the domestic currency ,it should be domestic nominal discount rate. Kd = Since the depreciation rate is on historical cost the discount rate should be nominal rate. Kb =Since the borrowing capacity would be measured in nominal terms,this should be nominal rate Kc = As the nominal foreign currency interest rates would have to be paid in the absence of the concessionary loan,that rate should be used as the discount rate. Kp = There is a possibility of cash flows not being remitted,a risk premium is attached to it .
Surplus Management
Least transaction cost-least bid-ask spread Liquidity Availability of investment vehicles Withholding taxes
Objective
Maximize interest income Minimize currency risk Ensure sufficient liquidity
Selection of instrument
Yield Marketability Exchange Rate risk Price risk Transaction cost
Control Standardised cash management across all legal entities. Global compliance with headquarters treasury policies and procedures, including SarbanesOxley (SOX) and Office of Foreign Assets Control (OFAC) requirements.
Risk management More effective management of FX exposures and interest rate risks through global oversight. Netting of exposures leading to cost savings from fewer FX conversions and bank transfers. Global view and management of limits on bank exposure.
Scale economies Increased productivity by leveraging centralisation of treasury activities and technology to achieve more output with fewer human resources. Better process management through standardised key performance indicators (KPIs). Transition to a centralised treasury is no easy task. Treasurers should keep in mind several critical success factors for a smooth transition:
Scale economies Increased productivity by leveraging centralisation of treasury activities and technology to achieve more output with fewer human resources. Better process management through standardised key performance indicators (KPIs). Transition to a centralised treasury is no easy task. Treasurers should keep in mind several critical success factors for a smooth transition:
Executive management support Senior corporate management must sponsor the project to ensure sufficient resources for a successful transition. Division, regional, and local senior management must also be on board to ensure coordination with corporate treasury to get the project done
Executive management support Senior corporate management must sponsor the project to ensure sufficient resources for a successful transition. Division, regional, and local senior management must also be on board to ensure coordination with corporate treasury to get the project done