3 Theories of International Business:

1. Theory of comparative advantage

For countries to specialize in one good rather than all.
USA and Japan specialize in technology while Jamaica and Mexico in agriculture.
Then, trade between countries occur
2. Imperfect Market Theory
Because there are restrictions (transfer of labor and other resources) and costs it cause for
firms to seek foreign opportunities.
The market has to be imperfect otherwise there will be equality in costs and remove the
comparative advantage.
3. Product cycle theory:
The firm first stablish in his home country and if foreign customers demand for the firms
product they may stablish in another country.
The firm may first export the product and if the demand is high and to reduce costs they
may move to another country.
The firm must differentiate the product and maintain an advantage over other firms
products.
Methods of International Business
International Trade:
Firms use it to penetrate markets (by exporting) or to obtain low cost supplies (importing)
The firm does not place any of its capital at risk.
If there is a decline it can reduce or discontinue the trade at a low cost.
Firms can use internet to sell their products over a webpage and list all items with their prices.
Technology is used to monitor inventory if a warehouse is having low amount of a product.
Licensing:
Obligate the firm to provide the copyright, patent, trademark in exchange for fees or some
other benefit.
Licensing allow firms to use their technology in foreign markets without a major investment in
foreign countries and no transportation costs from exporting.
A disadvantage is the firm cannot provide quality control in the foreign production process.
Franchising:
Obligate the firm to provide sales or service strategy, support assistance and an initial
investment in the franchise in exchange for fees.
Joint Venture:
Is a venture that is jointly owned and operated by two or more firms.
Acquisitions of existing operations
Firms acquire other firms in foreign countries to penetrate foreign markets.
Firms will have full control over their foreign business and will have a large portion of foreign
market share.
Establishing new foreign subsidiaries
Firms can penetrate in foreign markets by establishing new operations firms in a foreign country
to produce and sell their products.

Risks a Domestic Company will face when turning to MNC
Exposure to international Economic conditions:
The amount of consumption in a country is influenced by the income earned by consumers in a
country, therefore if economic conditions weaken the income of consumers will be low,
consumer purchases of products decline, and an MNC sales in the country stablished will be
lower than expected. This will reduce the MNC cash flows and its value.
Exposure to international political risks:
Political risk in any country can affect the levels of an MNC sales.
Can increse taxes or impose barriers to a MNC subsidiary.
Exposure to exchange rate risk
The exchange rate may vary; if the dollar weakens the MNC will receive a lower amount of
dollar cash flows than was expected.
If the dollar strenghten, the MNC will need a large amount of dollars to obtain the foreign
currencies that it needs to make its payments.
This can reduce MNC dollar cash flows and reduce value of that MNC.
MNC Valuation Model:
1. The level of Future cash flow
2. The timing
3. The riskiness of FCF
Chapter 2
Balance of Payments:
- Summary of transactions between domestic and foreign residents for a specific country over a specified
period of time.
2 Types
Current Account: summary of flow of funds due to purchases of goods or services or the provision of
income on financial assets.
1. Payments for merchandise and services
o Merchandise exports and imports represent tangible products that are
transported between countries. Service exports and imports represent
tourism and other services. The difference between total exports and
imports is referred to as the balance of trade.
2. Factor income payments
o Represents income (interest and dividend payments) received by investors
on foreign investments in financial assets (securities).
3. Transfer payments
o Represent aid, grants, and gifts from one country to another.

Capital Account: summary of flow of funds resulting from the sale of assets between one specified
country and all other countries over a specified period of time.
1. Direct foreign investment
o Investments in fixed assets in foreign countries

2. Portfolio investment
o Transactions involving long term financial assets (such as stocks and bonds)
between countries that do not affect the transfer of control.
3. Other capital investment
o Transactions involving short-term financial assets (such as money market
securities) between countries.
4. Errors and omissions
o Measurement errors can occur when attempting to measure the value of
funds transferred into or out of a country.
Financial Accounts:
Portfolio Investments when I buy stocks from another country.
DFI
For the currency not to lose value, the country create incentives to receive money back.
- Increase of tax rates, interest rates.

Factors affecting Current Accounts (summary of flow of funds due to purchases of goods) Exports - Imports
1.Cost of labor: CA
2.rate of inflation CA
3.national income CA
4.goverment restrictions CA
5.exchange rates: CA The $ will be expensive, others will use more money to buy $

Any method of increasing international business that requires a direct investment in foreign operations is called
Direct Foreign investment.
International trade and Licensing are not Direct Foreign investment bc they are not involved in direct
investment in foreign operations but to a limited degree.
Foreign acquisitions and Establishing new foreign subsidiaries require substantial investment in foreign
operations and use largely Direct Foreign Investment.
Factors affecting DFI Goods / Services Assets
1.changes in restrictions: DFI
2.privatization DFI
3.potential economic growth: DFI
4.tax incentives: DFI
5.exchange rates expectations. DFI

Factors Affecting Direct Foreign Investing (DFI)
o Changes in Restrictions
New opportunities have arisen from the removal of government
barriers.
o Privatization
DFI is stimulated by new business opportunities associated with
privatization.
Managers of privately owned businesses are motivated to ensure
profitability, further stimulating DFI.
o Potential Economic Growth
Countries with greater potential for economic growth are more
likely to attract DFI.
o Tax Rates
Countries that impose relatively low tax rates on corporate
earnings are more likely to attract DFI.
o Exchange Rates
Firms typically prefer to pursue DFI in countries where the
local currency is expected to strengthen against their own

Factors affecting Portfolio Investments: Financial Assets
1. Tax rates on Dividends/Interests DFI
2. Expected Interest Rates DFI
3. Expected Exchange Rate DFI
4. Financial Market Efficiency DFI

Factors affecting Exchange Rates:
1. Relative Inflation Rate ER
2. Relative Real Interest ER
3. Relative Income level ER
4. Goverment controls ER
5. Market Mechanism: Expectations about future economic conditions.
Chapter 3
Bond market:
1. Foreign bonds are issued by borrower foreign to the country where the bond is placed.
2. Eurobonds are bonds sold in countries other than the country of the currency denominating the bond
- Bonds from the US, payed in $, sold in Europe.
Chapter 5
What is a Currency Derivative?
1. A currency derivative is a contract whose price is derived from the value of an underlying currency.
A forward contract is an agreement between a corporation and a financial institution:
-is tailormade and less liquid.
To exchange a specified amount of currency
At a specified exchange rate called the forward rate
On a specified date in the future
futures contracts: is to agree a price today, to buy or sell in the future.
Option contract:
2. What people are involved in Forward/Future Markets:

Speculators Hedgers
Gain profits from the exchange of currencies
Help hedgers and markets to be liquid

Trade currencies to avoid loses/risks.
Hedger pay with forgone gains.
Sell currency depending on the business needs
Will lock a price