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Foreign Financing: Financing in Chile

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The new manufacturing facility destined for Chile, for which you deduced an appropriate "discount rate" earlier, has not yet been financed. Management has decided that Chile will indeed be the location of the new facility in spite of the concerns expressed by some on your team. Should your company finance this project via the capital markets in Chile or the USA? Explain how you might go about making that decision and also give a "first hunch" of where you would acquire the needed capital. A full-fledged study is beyond the scope of this assignment and is not required. Anecdotal evidence would be useful though.

Summarize an article (or series of articles) regarding the foreign financing engaged by an MNC during the past five years. What key concepts apply?

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The answer to this problem explains financing of a new manufacturing facility in Chile. The references related to the answer are also included.

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I will go about evaluating the decision by systematically studying both the Chile and the US capital markets. I will select the capital market that is better. First, I consider the Chile capital market. The Chile capital market has strong government controls. These capital controls have increased financial constraints for smaller firms. Firms raising capital are taxed and this is forcing Chilean firms to adopt alternative forms of financing. Also, there are loopholes in the capital control laws but to use these loopholes requires a high upfront cost. Further, Chile banks are subject to close monitoring by the government and this makes it expensive for firms to raise financing. The rate of Banco Central de Chile is 4.5%.

When we compare these facts to the capital markets in the US, the situation is very different. US capital markets are marked with availability and accuracy of information about securities and their prices. Even though the US capital markets are regulated, they are not controlled by the US government. The US government does not impose taxes that increase the cost of capital. The passing of the Sarbanes Oxley Act 2002 has increased the cost of compliance for companies raising capital in the US markets, but these costs have added value ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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