CHAPTER 1: MULTINATIONAL FINANCIAL

MANAGEMENT: AN OVERVIEW
This chapter provides a background on the goals
of an MNC and potential risk and returns from
engaging in international business
The specific objectives of this chapter
(1) Identify the main goal of MNC and conflicts with
that goal
(2) Describe the key theories that justify
international business
(3) Explain the common methods used to conduct
international business
MULTINATIONAL FINANCIAL MANAGEMENT:
AN OVERVIEW
Goal of the MNC
- Common goal of an MNC is to maximize
shareholder wealth
- Nevertheless, its happened where the conflicts
against the MNC goal
- E.g. Managers of a firm may make decision that
conflict with firms goal to maximize shareholder
wealth
- Shareholders who differ from their managers,
conflict of goals can exist & often referred as
Agency Problem
MULTINATIONAL FINANCIAL MANAGEMENT:
AN OVERVIEW
- Its hard and larger for MNC ensuring the
managers maximize shareholder wealth due to:
(1) MNC subsidiaries scattered around the world
and monitoring managers of distant subsidiaries
in foreign countries is more difficult
(2) Foreign subsidiary managers raised in different
cultures may not follow uniform goals.
(3) The sheer size of the larger MNCs create large
agency problems
MULTINATIONAL FINANCIAL MANAGEMENT:
AN OVERVIEW
- Financial managers of MNCs with several
subsidiaries may tempted to make decision that
maximize the values of their respective
subsidiaries
- This objective will not necessarily coincide with
maximizing the value of overall MNC
- Its difficult for the parent to monitor all decisions
made by subsidiary managers
MULTINATIONAL FINANCIAL MANAGEMENT:
AN OVERVIEW
Impact of Management Control
- Magnitude of agency costs can vary with the
management style of MNC
- Centralized Management Style reduced agency
costs because it allows managers of parent to
control foreign subsidiaries & reduces the power
of subsidiary managers.
- However, parents manager may make poor
decisions for subsidiary if they are not informed
as subsidiary managers.

MULTINATIONAL FINANCIAL MANAGEMENT:
AN OVERVIEW
Decentralized Management Style Its likely to
result in higher agency costs because subsidiary
managers may make decisions that do not focus on
maximizing the value entire MNC
- As a results, some MNCs attempt to achieve the
advantages of both styles
- Its allowed subsidiary managers to make a key
decisions on respective operation but decisions are
monitored by parents management.
MULTINATIONAL FINANCIAL MANAGEMENT: AN
OVERVIEW
Impact of Corporate Control
At MNC is subject to various forms of corporate
control that can used to reduce agency problem
such as
(1) Compensate its board members and executive
with its stock to encourage them make decisions
that maximize MNCs stock price
(2) Threat of hostile takeover if the MNC is efficiently
managed
(3) Most MNC are commonly monitored by large
shareholder (mutual funds & pension funds)
MULTINATIONAL FINANCIAL MANAGEMENT:
AN OVERVIEW
Constraints Interfering with MNCs Goal
(1) Environmental Constraints- E.g. building codes,
disposal of production waste materials and pollution
control
- Its would incur additional costs and certain
countries imposed tougher anti-pollution laws
(2) Regulatory Constrains Each nation enforces own
regulatory such as taxes, currency convertibility etc.
(3) Ethical Constraints No consensus standard of
business conduct to applies to all countries
- Business practices is perceived unethical in one
country but ethical to others. E.g. Bribery
MULTINATIONAL FINANCIAL MANAGEMENT:
AN OVERVIEW
Theories of International Business
The common theories why firms motivated to
expand their business internationally as follow:
(1) Theory of Comparative Advantage
- The growth of multinational business is due to
specialization by certain countries that can
increase production efficiency
- E.g. Japan & USA (Technology) while Jamaica &
Mexico (Low of cost of basic labor)

MULTINATIONAL FINANCIAL
MANAGEMENT: AN OVERVIEW
(2) Imperfect Markets Theory
- Every countries differ with respect to resources available
for production of goods
- Imperfect Market conditions where factors of
production are somewhat immobile
- There also may restriction on funds & other resources
used for production or transferred among countries
- Due to Imperfect firms often capitalize on foreign
countrys resource and incentive to seek out foreign
opportunities

MULTINATIONAL FINANCIAL
MANAGEMENT: AN OVERVIEW
(3) Product Cycle Theory
(1) Firm creates product to accommodate local demands


(2) Firms exports product to accommodate foreign demands


(3) Firms establishes foreign subsidiary to establish presence in foreign country
and possibly to reduce costs


(4)a Firms differentiates product from competitors and expands product line in foreign
country OR
(4) b Firms foreign business declines as its competitive advantages are eliminated
MULTINATIONAL FINANCIAL
MANAGEMENT: AN OVERVIEW
International Business Methods
The common methods firms conduct international
business:
(1) International Trade
- Firms penetrate markets (exporting) or to obtain supplies
at low cost (importing).
- Minimal risk using this approach
(2) Licensing
- Obligates a firm to provide its technology (copyrights,
patents, trademarks) in exchange for fees or some other
specified benefits
MULTINATIONAL FINANCIAL
MANAGEMENT: AN OVERVIEW
(3) 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
(4) Joint Ventures
- A venture that is jointly owned and operated by
two or more firms
- Firms penetrate foreign markets by engaging in JV
with firms that reside in those markets.


MULTINATIONAL FINANCIAL MANAGEMENT: AN
OVERVIEW
(5) Acquisitions of Existing Operations
- Firms acquired other firms in foreign countries as
a means of penetrating foreign markets
- It would allow firms to have full control over
foreign businesses and quickly obtain a large
portion of foreign market share
(6) Establishing New Foreign Subsidiaries
- Established a new operations in foreign countries
to produce & sell their products
- However, its required a large investment
MULTINATIONAL FINANCIAL MANAGEMENT:
AN OVERVIEW
Exposure to International Risk
Nevertheless, international business usually increases an
MNCs exposure to:
(1) Exposure to Exchange Rate Movements
- Its result in the exchange of one currency for another to
make payment
- Its due exchange rate fluctuate over time, the cash
outflows required to make payments change
accordingly
- The fluctuation can also effect a foreign demand for a
firms product
MULTINATIONAL FINANCIAL MANAGEMENT: AN
OVERVIEW
E.g. When home currency strengthens ($USD), product
denominated in ($USD) become more expensive to
foreign customers which may cause a decline in the
demand and decline in cash inflows
(2) Exposure to Foreign Economies
- When MNCs enter foreign market, the demand for their
products is dependent on economic conditions in those
market
- As a results, the cash flow of MNC are subject to foreign
economic conditions
MULTINATIONAL FINANCIAL MANAGEMENT: AN
OVERVIEW
(3) Exposure to Political Risk
- Its represents political actions taken by the host
government or public that affect the MNC cash flows
- E.g. imposing higher taxes, buy-out or take-over
subsidiary.