Assignment: International Operations: International Monetary System, Accounting and Financial Management
Objective 1. Examine forces that shape international markets in money and energy, and the impact of these forces on business.
Objective 2. Determine how the choice of business models affects business success and requires adaptation in response to changes impacting on business.
Competency: Quantitative literacy, critical thinking, effective communication.
Discussions: Individual Activity
Topic 1. Financing International Operations: Prada's Foreign IPO
Most multinational companies (MNCs) secure equity funding in their home countries; however, some may choose a global IPO in which "they can simultaneously access equity from multiple countries" (Madura, 2015, p. 523). In placing the stock, these MNCs focus on a few countries where they have large subsidiaries that require financing. The MNC's stock is listed on a foreign exchange in the foreign country and is denominated in its local currency allowing investors to trade their stocks there. The local investors will only purchase stocks in a global IPO if the MNC offers a large number of stocks locally as this ensures a more liquid and active local secondary market for the stock, makes trading them easier for the local investors (Madura, 2015).
Based on the required readings and research, discuss:
• Why did Prada need additional capital?
• Why did Prada choose to issue its IPO in Hong Kong? What were the advantages and disadvantages of doing so?
• What circumstances might make a foreign IPO ineffective for a company like Prada?
• What other financing options were available to Prada?
• What currency exposure risks did Prada face? How could the company have hedged against them?
• For a family-owned private company such as Prada, how did the dilution effect of the IPO impact their control of the company?
Sources used in the development of the Prada Mini Case Study (not required reading!):
• Daniel, J.D., Radebaugh, L.H., & Sullivan, D. P. (2015). International business (15th ed.). Upper Saddle River, NJ: Pearson Education
• Madura, J. (2015). International financial management (12th ed.). Stamford, CT: Cengage Learning
Topic 2. Foreign Exchange, Accounting Issues Mini Case Studies: Ecuador Dollarization & Parmalat Scandal
2A. Ecuador Dollarization: Individuals whose surnames begin with the letters A-M respond.
2B. Parmalat Scandal: Individuals whose surnames begin with the letters N-Z respond
Topic 2A. Ecuador Dollarization Mini Case Study
Dollarization is the replacement of a foreign country's currency with the U.S. dollar. Dollarization is different from pegging, when pegging, the foreign countries retain their local currencies. The decision to dollarize cannot be easily reversed as the country does not have a local currency anymore (Madura, 2015). For example, the Gulf Cooperation Council (GCC: Saudi Arabia, United Arab Emirates, Bahrain, Qatar, and Omar) peg their local currencies to the U.S. dollar using a fixed exchange rate i.e. their currencies change up and down with the changes in the U.S. dollar; and accordingly, their economies are affected by the U.S. economy. This also has an impact on their revenues are most of their oil exports are in U.S. dollar.
From 1990 to 2000 Ecuador's local currency, the sucre, depreciated around 97% against the U.S. dollar. The sucre weakness led to volatile interest rates, high inflation, and unstable trade conditions. In an effort to stabilize economic conditions and trade, Ecuador replaced the sucre with the U.S. dollar in 2000, and used it as its currency. By November of the same year, economic growth has increased, and in inflation decreased. So it seems that dollarization had a favorable effect (Madura, 2015).
Read
Berríos, R. (2006). Cost and benefit of Ecuador's dollarization experience. Perspectives on Global Development & Technology, 5(1/2), 55-68. doi :10.1163/156915006777354491 Based on the required readings and research, discuss:
• Why did Ecuador choose to dollarize?
• Fast forward: What is the impact of the dollarization on the country today? In retrospect, was it a good decision to dollarize?
• How important is transparency of the financial system when dollarizing?
• What is the combined impact of dollarization and low revenue (due to decreasing oil prices) on the Ecuadorian economy today?
Source used for the development of the Ecuador Dollarization Mini Case Study (not required reading):
Madura, J. (2015). International financial management (12th ed.). Stamford, CT: Cengage Learning
Topic 2B. Parmalat Scandal Mini Case Study
In 2003, Parmalat Group, Italy's eighth largest company, and which is ranked among the top ten international food products companies, collapsed and entered bankruptcy protection after disclosing that nine billion dollars were was missing from its accounts. Its management and controlling shareholder were then indicted for fraud. Parmalat's global investors around, especially in Italy and the United States suffered severe losses as a result of that fraud (Segato, 2006).
Melis (2005) stated that "the ownership and control structure of Italian listed companies is characterised by a high level of concentration, and by the presence of a limited number of shareholders, linked by either family ties or agreements of a contractual nature (i.e. shareholders' agreements), who are willing and able to wield power over the corporation. Parmalat was a complex group of companies controlled by a strong blockholder (the Tanzi family) through a pyramidal device;" and "despite ownership disclosure rules, the structure of the group is not easy to trace, especially at an international level. This is not unusual among large Italian groups" (p. 479).
Based on the required readings and research, discuss:
• What is the role that Parmalat's management and its accounting department played in this case?
• Compare and contrast the U.S. GAAP and the IFRS; which is a better system, and why? Should the United States move to IFRS?
• Some of the Anglophone business media have branded the Parmalat case as a particularly Italian scandal, where they suggested that
Parmalat's case is countryspecific that is more likely to happen in Italy than in any other country. Do you agree/disagree with this statement? Explain your rationale.
• The Parmalat case has exposed how deficient the Italian rules of corporate governance are. Explain the importance of corporate governance when doing business internationally.
Sources used in the development of the Parmalat Mini Case Study (not required reading!):
• Melis, A. (2005). Corporate governance failures: To what extent is Parmalat a particularly Italian case? Corporate governance, 13(4); 478-488.
• Segato, L. (2006). A Comparative Analysis of Shareholder Protections in Italy and the United States: Parmalat as a Case Study. Northwestern Journal of International Law & Business, 26(2), 373-446.
Topic 3. Lessons Learned
Based on your discussion of the Prada, Ecuador, and Parmalat mini cases and the course readings, discuss the broader lessons for international business and the managerial implications. What advice would you give to the company your team selected to study for Team Report #2?
Topic 4: In the News!
Post one news source in Session 7 - In the News! and explain briefly how the news story bears on this Session's course topics.
Please include in-text citations and references in APA format.
Required Reading
Chevis, G. (2014). The language of accounting: Practice differences in the U.S. and around the globe. Baylor Business Review, 32(2), 18-21.
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Edmondson, G., & Cohn, L. (2004). How Parmalat went sour. Businessweek, (3865), 46-48.
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Melis, A. (2005). Corporate Governance Failures: to what extent is Parmalat a particularly Italian Case?.Corporate Governance: An International Review, 13(4), 478-488. doi:10.1111/j.1467-8683.2004.00443.x
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Gibbons, R. (2011). Strategies to protect against global uncertainty. Financial Executive, 27(7), 52-55.
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Protect Against Loss When Managing Multiple Currencies. (2013). Controller's Report, 2013(10), 12-13.
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Berríos, R. (2006). Cost and benefit of Ecuador's dollarization experience. Perspectives on Global Development & Technology, 5(1/2), 55-68. doi :10.1163/156915006777354491
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Vasconcellos, R., & Nicklaus, G. (2011). Economic Stability and Uncertainty Combined: The Impact of Dollarization on the Ecuadorian Economy and United States Trade, 20042010. Proceedings Of The Northeast Business & Economics Association, 509-513.
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Bybee, R. (2016). Inversion Acceleration. Dollars & Sense, (324), 14.
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Surowiecki, J. (2016). Why firms are fleeing. New Yorker, 91(43), 21.
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Zargani, L., Kaisar, A., & Jones, N. (2011, January 27). Bertelli's bold move: Prada's longawaited IPO planned for Hong Kong. WWD, 201(19), 1.
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Chu, K., & USA, T. (n.d). Companies see cachet in Hong Kong.USA Today.
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