MULTINATIONAL

FINANCIAL
MANAGEMENT
Alan C. Shapiro
Sixth Edition

POWER POINT LECTURES:

J. F. GRECO, Ph.D.
California State University,
Fullerton

CHAPTER 1
Introduction: Multinational Enterprise and
Multinational Financial Management

CHAPTER

OVERVIEW:

Part I. The Rise of the

Multinational
Corporation
Part II. Multinational Financial
Management: Theory
and Practice

PART I.
THE RISE OF THE MULTINATIONAL
CORPORATION

I. The MNC: Definition

a company with production and

distribution facilities in more
than one country.

THE RISE OF THE MULTINATIONAL

CORPORATION

B. Traditional Economic
Theory
1.
a.
b.

Classical Theory:
Smith, Ricardo
Comparative
Advantage:

macroeconomic differences

THE RISE OF THE MULTINATIONAL

CORPORATION

2. MNC supercedes theory

relating to:
a. mobility of factors
b. different costs/skills
between nations

THE RISE OF THE MULTINATIONAL

CORPORATION

C. EVOLUTION OF THE MNC

Reasons to Go Global:
1.
2.
3.

raw materials
markets
minimize costs of
production

THE RISE OF THE MULTINATIONAL

CORPORATION
RAW MATERIAL SEEKERS

exploit markets in other countries

historically first to appear
modern-day counterparts
Anaconda Copper
Standard Oil

THE RISE OF THE MULTINATIONAL

CORPORATION
MARKET

SEEKERS

produce and sell in foreign markets

heavy foreign-direct investors
representative firms:
IBM
Nestle
Levi Strauss

THE RISE OF THE MULTINATIONAL

CORPORATION
COST

MINIMIZERS

seek lower-cost production abroad

motive: to remain cost competitive
representative firms:
Texas Instruments
Atari
Zenith

THE RISE OF THE MULTINATIONAL

CORPORATION

II. THE PROCESS OF

OVERSEAS EXPANSION

A. Exporting:

preferred market entry strategy

1. Advantages:

low cost
low risk
learning opportunity

THE RISE OF THE MULTINATIONAL

CORPORATION
2. Disadvantages

inability to realize full

sales potential

3. Use
a.
b.
c.

of:

Foreign agents
Sales subsidiaries
Distribution system

THE RISE OF THE MULTINATIONAL

CORPORATION

B. OVERSEAS PRODUCTION

greater commitment to the local

market

1. Advantages:
a. Increased sales
b. Supply stability
c. Control
d. Comprehensive service

THE RISE OF THE MULTINATIONAL

CORPORATION

2. Question:
create or acquire

3. Acquisition
-allows speedy
transfer of
unused
parent skills;
-used more by small
firms.

THE RISE OF THE MULTINATIONAL

CORPORATION

C. LICENSING
-local firm agrees to produce for a
fee.
1. Advantages:
a.
b.
c.

Minimum investment
Faster market entry
Less risk

THE RISE OF THE MULTINATIONAL

CORPORATION

2.
a.
b.
c.

Disadvantages of licensing:
Low cash flow
Quality standards
New competitor

THE RISE OF THE MULTINATIONAL

CORPORATION

D. THE MNC: A BEHAVIORAL

VIEW
1. State of mind:
committed to producing,
undertaking investment
and marketing, and
financing globally.

THE RISE OF THE MULTINATIONAL

CORPORATION

E. THE GLOBAL MANAGER

1. Understands political and
economic differences;
2. Searches for most costeffective suppliers;
3. Evaluates changes on value
of the firm.

PART II.
MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE

I. THE MULTINATIONAL
FINANCIAL SYSTEM
A. Main Objective of MNC:
Maximize shareholder wealth
B. Other Objectives Reflect
Ability to Link:
via affiliate transfer
mechanisms

THEORY AND PRACTICE

C. Mode of Transfer:
Reflects freedom to select a
variety of financial channels.
D. Timing Flexibility:
Most MNC have some flexibility
in timing of fund
flows.

THEORY AND PRACTICE

E. Value
The ability to avoid national
taxes has led to controversy.

THEORY AND PRACTICE

II. FUNCTIONS OF FINANCIAL
MANAGEMENT
A. Two Basic Functions:
1. Financing
2. Investing

THEORY AND PRACTICE

B. Additional Factors Facing the
MNC Executive
1. Political risk
2. Economic risk

THEORY AND PRACTICE

III. THEORETICAL FOUNDATIONS
A. Useful Concepts from
Financial Economics:
1. Arbitrage
2. Market Efficiency
3. Capital Asset Pricing

THEORY AND PRACTICE

B. Importance of Total Risk
1. Adverse Impact
lower sales and higher costs
2. Justifies hedging activities of
MNC
3. Diversification reduces risk

THEORY AND PRACTICE

IV. THE GLOBAL FINANCIAL
MARKET PLACE
A. Interlinkage by Computers
B. Market Acts as A Global
Referendum Process:
Currencies may rise or fall