Voyevodins' Library _ "International Business: Competing in the Global Marketplace" / Charles W.L. Hill ... Chapter 20 ... subsidy, swaps, systematic risk, tariff, tax credit, tax haven, tax treaty, technical analysis, temporal method, theocratic totalitarianism, time draft, time-based competition, timing of entry, total quality management, totalitarianism, trade creation, trade deficit, trade diversion, trade surplus, trademark, transaction costs, transaction exposure, transfer fee, transfer price, translation exposure, transnational corporation, transnational financial reporting, transnational strategy, Treaty of Rome, tribal totalitarianism, turnkey project, unbundling, uncertainty avoidance, universal needs, value creation, values, vehicle currency, vertical differentiation, vertical foreign direct investment, vertical integration, voluntary export restraint (VER), wholly owned subsidiary, World Bank, World Trade Organization (WTO), worldwide area structure, worldwide product division structure, zero-sum game Voevodin's Library: subsidy, swaps, systematic risk, tariff, tax credit, tax haven, tax treaty, technical analysis, temporal method, theocratic totalitarianism, time draft, time-based competition, timing of entry, total quality management, totalitarianism, trade creation, trade deficit, trade diversion, trade surplus, trademark, transaction costs, transaction exposure, transfer fee, transfer price, translation exposure, transnational corporation, transnational financial reporting, transnational strategy, Treaty of Rome, tribal totalitarianism, turnkey project, unbundling, uncertainty avoidance, universal needs, value creation, values, vehicle currency, vertical differentiation, vertical foreign direct investment, vertical integration, voluntary export restraint (VER), wholly owned subsidiary, World Bank, World Trade Organization (WTO), worldwide area structure, worldwide product division structure, zero-sum game



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Chapter 20 Outline

Global Money Management: the Efficiency Objective

Money management decisions attempt to manage the firm's global cash resources--its working capital--most efficiently. This involves minimizing cash balances and reducing transaction costs.

Minimizing Cash Blanances

For any given period, a firm must hold certain cash balances. This is necessary for serving any accounts and notes payable during that period and as a contingency against unexpected demands on cash. The firm does not sit on its cash reserves. It typically invests them in money market accounts so it can earn interest on them. However, it must be able to withdraw its money from those accounts freely. Such accounts typically offer a relatively low rate of interest. In contrast, the firm could earn a higher rate of interest if it could invest its cash resources in longer-term financial instruments (e.g., six-month certificates of deposit). The problem with longer-term instruments, however, is that the firm cannot withdraw its money before the instruments mature without suffering a financial penalty.

Thus, the firm faces a dilemma. If it invests its cash balances in money market accounts (or the equivalent), it will have unlimited liquidity but earn a relatively low rate of interest. If it invests its cash in longer-term financial instruments (certificates of deposit, bonds, etc.), it will earn a higher rate of interest, but liquidity will be limited. In an ideal world, the firm would have minimal liquid cash balances. We will see later in the chapter that by managing its total global cash reserves through a centralized depository (as opposed to letting each affiliate manage its own cash reserves), an international business can reduce the amount of funds it must hold in liquid accounts and thereby increase its rate of return on its cash reserves.

Reducing Transaction Costs

Transaction costs are the cost of exchange. Every time a firm changes cash from one currency into another currency it must bear a transaction cost--the commission fee it pays to foreign exchange dealers for performing the transaction. Most banks also charge a transfer fee for moving cash from one location to another; this is another transaction cost. The commission and transfer fees arising from intrafirm transactions can be substantial; according to the United Nations, 40 percent of international trade involves transactions between the different national subsidiaries of transnational corporations. As we will see later in the chapter, multilateral netting can reduce the number of transactions between the firm's subsidiaries, thereby reducing the total transactions costs arising from foreign exchange dealings and transfer fees.

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