PART I
THE INTERNATIONAL FINANCIAL ENVIRONMENT
Multinational Corporation (MNC)
Foreign Exchange Markets
Dividend
Remittance
Exporting & Financing Investing
& Importing & Financing
Product Markets Subsidiaries International
Financial
Markets
1
Chapter
MULTINATIONAL FINANCIAL
MANAGEMENT: AN OVERVIEW
GOAL OF THE MNC
The commonly accepted goal of an MNC is to
maximize shareholder wealth.
We will focus on MNCs that are based in the United
States and that wholly own their foreign subsidiaries.
This enables financial managers throughout the
MNC to have a single goal of maximizing the value
of the entire MNC instead of maximizing the value
of any particular foreign subsidiary.
CONFLICTS AGAINST THE MNC GOAL
For corporations with shareholders who differ
from their managers, a conflict of goals can
exist - the agency problem.
Agency costs are normally larger for MNCs
than for purely domestic firms.
The pure size of the MNC.
The scattering of distant subsidiaries.
The culture of foreign managers.
Subsidiary value versus overall MNC value.
IMPACT OF MANAGEMENT CONTROL
The magnitude of agency costs can vary with the
management style of the MNC.
A centralized management style reduces agency
costs. However, a decentralized style gives more
control to those managers who are closer to the
subsidiary’s operations and environment.
Some MNCs attempt to strike a balance - they allow
subsidiary managers to make the key decisions for
their respective operations, but the decisions are
monitored by the parent’s management.
CENTRALIZED MULTINATIONAL FINANCIAL
MANAGEMENT
for an MNC with two subsidiaries, A and B
Cash Financial Cash
Management Managers Management
at A of Parent at B
Inventory and Inventory and
Accounts Accounts
Receivable Receivable
Management at A Management at B
Financing at A Financing at B
Capital Expenditures Capital Expenditures
at A at B
DECENTRALIZED MULTINATIONAL FINANCIAL
MANAGEMENT
for an MNC with two subsidiaries, A and B
Cash Financial Financial Cash
Management Managers Managers Management
at A of A of B at B
Inventory and Inventory and
Accounts Accounts
Receivable Receivable
Management at A Management at B
Financing at A Financing at B
Capital Expenditures Capital Expenditures
at A at B
IMPACT OF MANAGEMENT CONTROL
Electronic networks make it easier for the parent to
monitor the actions and performance of foreign
subsidiaries.
For example, corporate intranet or internet email
facilitates communication. Financial reports and
other documents can be sent electronically too.
Various forms of corporate control can reduce
agency costs.
Stock compensation for board members and executives.
The threat of a hostile takeover.
Monitoring and intervention by large shareholders.
CONSTRAINTS INTERFERING WITH THE
MNC’S GOAL
As MNC managers attempt to maximize their
firm’s value, they may be confronted with various
constraints.
Environmental constraints.
Regulatory constraints.
Ethical constraints.
THEORIES OF INTERNATIONAL BUSINESS
Why are firms motivated to expand their business
internationally?
Theory of Comparative Advantage
Specialization by countries can increase production
efficiency.
Imperfect Markets Theory
The markets for the various resources used in
production are “imperfect.”
Product Cycle Theory
As a firm matures, it may recognize additional
opportunities outside its home country.
THE INTERNATIONAL PRODUCT LIFE CYCLE
Firm creates Firm exports
product to product to Firm
accommodate accommodate establishes
local demand. foreign demand. foreign
subsidiary
to establish
presence in
a. Firm or foreign
differentiates b. Firm’s country
product from foreign and
competitors business possibly to
and/or expands declines as its reduce
product line in competitive costs.
foreign country. advantages are
eliminated.
INTERNATIONAL BUSINESS METHODS
There are several methods by which firms can conduct
international business.
International trade is a relatively conservative
approach involving exporting and/or importing.
The internet facilitates international trade by
enabling firms to advertise and manage orders
through their websites.
Licensing allows a firm to provide its technology in
exchange for fees or some other benefits.
INTERNATIONAL BUSINESS METHODS
Franchising obligates a firm to provide a
specialized sales or service strategy, support
assistance, and possibly an initial investment in
the franchise in exchange for periodic fees.
Firms may also penetrate foreign markets by
engaging in a joint venture (joint ownership and
operation) with firms that reside in those markets.
Acquisitions of existing operations in foreign
countries allow firms to quickly gain control over
foreign operations as well as a share of the
foreign market.
INTERNATIONAL BUSINESS METHODS
Firms can also penetrate foreign markets by
establishing new foreign subsidiaries.
In general, any method of conducting business
that requires a direct investment in foreign
operations is referred to as a direct foreign
investment (DFI).
The optimal international business method may
depend on the characteristics of the MNC.
INTERNATIONAL OPPORTUNITIES
Investment opportunities - The marginal return
on projects for an MNC is above that of a
purely domestic firm because of the expanded
opportunity set of possible projects from which
to select.
Financing opportunities - An MNC is also able
to obtain capital funding at a lower cost due to
its larger opportunity set of funding sources
around the world.
INTERNATIONAL OPPORTUNITIES
Cost-benefit Evaluation for
Purely Domestic Firms versus MNCs
Purely
Investment Domestic
Opportunities Firm MNC
Marginal
Return on
Projects MNC
Purely
Marginal Domestic
Cost of Firm
Capital
Financing Appropriate
Opportunities Size for Purely Appropriate
Domestic Firm Size for MNC
X Y Asset Level
of Firm
EXPOSURE TO INTERNATIONAL RISK
International business usually increases an MNC’s
exposure to:
Exchange rate movements
Exchange rate fluctuations affect cash flows and
foreign demand.
Foreign economies
Economic conditions affect demand.
Political risk
Political actions affect cash flows.
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