International companies means that two or more countries comprising an economic entity, and engaged in the production, marketing and international business activities of the large enterprises.
The main features of international companies are: 1, in general, is one country's strength of the large companies as the main body, through the way of foreign direct investment or acquisition of local companies, establish the subsidiaries or branches in other countries; 2, generally have a full decision-making system and the highest decision-making centers, each subsidiaries or branches although has its own decision-making body, they can make decision-making activities based on their own operate areas and the different characteristics, but its decision must be subject to the highest decision-making centers; 3, as usually, they arrange their own business activities from the global strategic, reasonable range for the production of layout, site specializing in the production, point-selling products for get the maximum profits in the world market; 4, in general, because of the strong economy and technical strength, there have rapid information transfer, rapid cross-border transfer of funds and other areas of advantage. So, it has a strong international competitiveness; 5, many large international companies, because of the economic and technical strength or the productivity advantage in some products, or aim some products, or in some areas, all with varying degrees of monopoly.
In contrast to these benefits of international companies are also affected by exchange rate system, the existing capital controls and the impact of capital market segmentation.
Firstly, Exchange rate system, also known as exchange rate arrangements: refers to the national or the international community to identify, maintain, exchange rate adjustment and management principles, methods, modalities and institutions made by the system requirements. The exchange rate system is widely used to determine own national currency and other currencies in the system. The exchange rate system at the determination of exchange rate, exchange rate movements and other aspects of specific provisions, therefore, the exchange rate system on the decision of the exchange rate countries have a significant impact. At the same time it also has enormous impact of international companies.
According to amount of variation of the exchange rate system, it can be divided into a fixed exchange rate system and the floating exchange rate system. The fixed exchange rate is divided into two kinds, under the gold standard system of fixed exchange rate regime and under the Bretton Woods system of fixed exchange rate system.
Fixed exchange rate system refers to the gold standard money itself or statutory basis for determining the exchange rate, exchange rate is relatively stable. Under different monetary systems also have different fixed exchange rate system.
Floating exchange rate system refers to the currency of a country does not require the gold and foreign currency fluctuations and exchange rate parity limits, the monetary authorities no longer assume the obligation to limit exchange rate fluctuations, exchange rate is following the foreign exchange market relationship change from top to bottom of the supply and demand exchange rate system.
The process of integration in the global economy, in the past, the dollar is to dominate the world of international finance, is aim at the multi-polar development, and international monetary system will provide countries with floating exchange rates, international reserve diversification, financial liberalization and internationalization trend。
For international companies, exchange rate fluctuations will give the company a positive or negative impact, which is often referred to exchange rate risk, also known as foreign exchange risk. Foreign exchange risk also calls foreign exchange exposure, it mean that an economic entity or the individual's assets or liabilities when we denominated in foreign currencies, due to the net position in the uncovered, because of exchange rate changes, so that "exposure" may be good or bad before the result, thus faced with the possibility of advantage or disadvantage result. Since 20th century 70 years, the international exchange rate regime shifted from fixed exchange rate change to floating exchange rate system, the foreign exchange risk management is more importance of international companies.
The foreign exchange risk of international companies is faced by translation risk, transaction risk, and operational risks.
Firstly is translation exposure. As international company's productivity and business activities trend to globalization, and its foreign subsidiaries business result and the assets and liabilities by measured in local currency. However, the shareholders of international companies and financial market requirements but not the local currency is measured in their own currency. Therefore, when the international companies preparation of consolidated financial statements, they need to be change the foreign currency to their own currency. Due to exchange rate volatility, when we use the exchange rate may be different to when we recorded exchange rate, so that the exchange gains and losses was come out. The bear to change risk of asset and liability we called the exposure of assets and exposure to liabilities. As the exposure assets and exposure liabilities risk can be cancel from each other. Therefore, the total change of risk to the company's depends on the balance between the exposure assets and exposure liabilities.
The second is the transaction exposure. Transaction exposure is the effect to the achieve contractual when exchange rate movements, after that may be will create losses or gain in asset or liability in the near future when we use foreign currency to calculate future settle accounts. It includes about the basic situation: (1) to settle the business risk. That is based on deferred payment credit settle foreign currency accounts payable; because the risk is exchange rate has changed during the when transaction happened to actual settlement transaction. (2) The amount of borrowing denominated in foreign currencies at maturity, due to possible changes in the exchange rate risks. (3) Foreign exchange contracts to be performed by a party, when the contract expiration, the foreign exchange rates will change it take risks.
The third is the operational exposure. The operational exposure because of the exchange rate changes on company future's impact the profitability of international business degree, is take impact between the exchange rate changes and comprehensive price changes compare to the price of future products of international companies, the cost and quantity. As result bring about changes cash flows of the international companies in future. Business risk not limited the actual exchange rate changes the impact of the value of foreign currency transactions, but the exchange rate changes affect the company's overall business activities. Due to exchange rate changes and price changes are closely linked, they affect the business activities of transnational corporations also showed some degree of offset each other.
Second is the capital control. Capital control is the core of internal control. With the advent of global competition, companies face the national business environment and industry differ, trying to use the minimum resources to achieve maximum efficiency, not only make the best strategist in addition to corporate resources, but also use of capital controls is also a good way to enhance business performance . In this world, it full of uncertainty and low profit. If companies can be integrated with limited resources, a reasonable share of the enterprise to create sustainable competitive advantage is very beneficial.
In international companies, the parent company capital control is caused of equity investment by the parent company to implement a control. It includes not only the parent company in order to achieve the overall, combined, sustained wealth maximization objective of the exercise was a subsidiary of measures of financial and operational decision making, but also are engaged in management activities and controls.
The way of come into being relationship of control, not only one of the basic characteristics of the parent company, there is the premise of the parent company, for subsidiaries to be controlled, it constitutes the main form "external control". As a subsidiary of the "external control", the emergence of capital controls and the limitations of individual enterprises are closely related to internal control. In international companies, the capital controls theory of the parent company is based on agent theory. Parent company and subsidiaries, and the Sun are a multi-agency relationship. From the target in owners and managers, the owner - the parent company's goal is to maximize capital appreciation. Separation of powers in the two conditions, the parent company goal is to through delegate subsidiary managers to achieve. In this sense, as an agent of parent company and managers of the subsidiary, its objectives should be consistent with the parent company. However, both information asymmetry in principal-agent, agent levels, and span a large case, the subsidiary of managers in order to subsidiary maximize profit and pursuit of individual utility maximization, contrary to the objectives of the parent company, to make investors suffer losses. The parent company in order to avoid such losses, to achieve their goals, they must organize and operate its capital management and control, motivation and supervision of subsidiary managers, to make decisions for investment and allocation of capital. The parent company wants to get balance between to avoid losses and increase the agency, coordination agency relationship.
The objective of capital controls is the start of parent company capital controls. Capital has two concepts: one is the financial capital concept; the other is the concept of physical capital. The nature and essence of capital are appreciation in the move and operate. To appreciation must be preserved, no capital preservation that we can ignore the capital appreciation. Therefore, capital preservation is the parent company's core object of capital controls. Preservation of capital and profits, the cost of compensation are closely linked. Emphasize costs of compensation and profit, or emphasize capital preservation or capital appreciation, the impact of primarily by the separation of corporate ownership and management degrees. When the regardless of the ownership and management (or less isolated) condition, management objective is to maximize profits. However, when the separation of ownership and management can get a certain level, functions of enterprises has deepest changes. Parent company as a form of capital organization, bringing together investment income, creditors of the capital, as the combination of multiple interests, the interests of all parties penetration, profit maximization and corresponding performance evaluation was not suited to this variations. Therefore, business goal is to maximize the return on the owner, which in considering the time value of money and risk value of the condition, make the highest total value of the company.
The third is segmented of capital market. Capital market is the long-term capital markets. It means the securities financing and operating more than one year for loans and securities trading venue, also known as long-term capital markets. Capital market according to the different ways of financing funds can be divided into long-term bank credit and securities markets.
If based on the nature of financial instruments, capital market can be divided into equity markets and bond markets, the forward refers to the stock market, the latter refers to the bond market. The main flow of the stock market is the stock certificate, holders of shares, unless the company closed, its equity assets dividend income each year only on the company's assets cannot have an immediate claim. The credit market was flow kinds of debt instruments, including bonds, commercial paper, certificates of deposit and loans, and its based characteristics have a certain period, yields a more defined, with a full claim.
Capital market is part of the financial market, which includes all related to the long-term capital supply and demand of institutions and transactions. Long-term capital including the company's partial ownership such as stocks, long-term bonds, long-term corporate bonds, more than one year negotiable certificates of deposit, real estate, mortgages and other financial derivatives, including collective investment funds and other long-term loans, but does not include commodity futures. Capital markets activities including trading market stocks and bonds; company limited by shares increased its capital as well as natural loans.
The so-called segmented capital market or capital market segmentation is the difference between the securities market barriers to the flow, trading rules, and differences in information transmission, these factors led to the homogeneous product pricing and risk in different markets such as the difference of performance
In the conclusion, international companies are that in many countries or regions have a business, usually very large companies. These companies in different countries or regions with offices, factories or branches, usually has a headquarters to coordinate the management of the world. And the international companies affected by exchange rate system, capital control and capital market. At the exchange rate system, it divided into a fixed exchange rate system and the floating exchange rate system to affect the international companies. After that, show the three risks: translation exposure, transaction exposure and operational exposure. Deepest explain how exchange rate system affect the international companies. And then, explain the capital control that relationship between the parent company and subsidiaries. The object of owner is different from manager. So, must make the consistent. The third is capital market, capital market is a market, and rather than refer to a physical location, it refers to all transactions in this market people, institutions, and relations between them. It divided into Primary and secondary markets, it can through the conversion period make between by investors and investment requirements until they are coordinated.
