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Multinational Financial Management: Opportunities and Challenges
Multinational Financial Management: Opportunities and Challenges
Multinational Financial Management: Opportunities and Challenges
Multinational
Financial
Management:
Opportunities and
Challenges
Learning Objectives
Learning Objectives
1
The Multinational Enterprise
(MNE)
The OctoberDecember 2014 quarter was a challenging one with
unprecedented currency devaluations. Virtually every currency in the world
devalued versus the U.S. dollar, with the Russian Ruble leading the way.
While we continue to make steady progress on the strategic transformation of
the companywhich focuses P&G on about a dozen core categories and 70 to
80 brands, on leading brand growth, on accelerating meaningful product
innovation and increasing productivity savingsthe considerable business
portfolio, product innovation, and productivity progress was not enough to
overcome foreign exchange.
Chairman, President and Chief Executive Officer A.G. Lafley, January 27, 2015
2
Exhibit 1.1 Global Capital Markets
3
Exhibit 1.2 Selected Global Currency
Exchange Rates (cont.)
4
The Theory
of Comparative Advantage
The theory of comparative advantage provides a basis
for explaining and justifying international trade in a
model world assumed to enjoy:
free trade;
perfect competition;
no uncertainty;
costless information; and
no government interference.
The Theory
of Comparative Advantage
The theory contains the following features:
Exporters in Country A sell goods or services to unrelated
importers in Country B
Firms in Country A specialize in making products that can
be produced relatively efficiently, given Country As
endowment of factors of production, that is, land, labor,
capital, and technology
Firms in Country B do likewise, given the factors of
production found in Country B
In this way the total combined output of A and B is
maximized
The Theory
of Comparative Advantage
Because the factors of production cannot be moved freely
from Country A to Country B, the benefits of specialization
are realized through international trade
The way the benefits of the extra production are shared
depends on the terms of trade, the ratio at which
quantities of the physical goods are traded
Each countrys share is determined by supply and demand
in perfectly competitive markets in the two countries
Neither Country A nor Country B is worse off than before
trade, and typically both are better off, albeit perhaps
unequally
5
The Theory
of Comparative Advantage
Although international trade might have
approached the comparative advantage model
during the nineteenth century, it certainly does not
today, for the following reasons:
Countries do not appear to specialize only in those
products that could be most efficiently produced by that
countrys particular factors of production (as a result of
government interference and ulterior motivations)
At least two factors of production capital and technology
now flow directly and easily between countries
The Theory
of Comparative Advantage
Modern factors of production are more numerous than in
this simple model
Although the terms of trade are ultimately determined by
supply and demand, the process by which the terms are
set is different from that visualized in traditional trade
theory
Comparative advantage shifts over time, as less developed
countries become developed and realize their latent
opportunities
The classical model of comparative advantage did not
really address certain other issues, such as the effect of
uncertainty and information costs, the role of differentiated
products in imperfectly competitive markets, and
economies of scale
The Theory
of Comparative Advantage
Comparative advantage is however still a relevant
theory to explain why particular countries are most
suitable for exports of goods and services that
support the global supply chain of both MNEs and
domestic firms.
The comparative advantage of the 21st century,
however, is one based more on services, and their
cross-border facilitation by telecommunications and
the Internet.
The source of a nations comparative advantage is
still created from the mixture of its own labor skills,
access to capital, and technology.
6
The Theory
of Comparative Advantage
Many locations for supply chain outsourcing exist
today.
It takes a relative advantage in costs, not just an
absolute advantage, to create comparative
advantage.
Clearly, the extent of global outsourcing is reaching
out to every corner of the globe.
7
Market Imperfections: A Rationale for
the Existence of the Multinational Firm
8
Exhibit 1.4 Ganado Corp: Initiation of
the Globalization Process