Chapter 1 Multinational Financial Manage

Chapter 1
Multinational
Financial
Management: An
Overview
Learning Objectives
 Identify the management goal and organizational

structure of the Multinational Corporation (MNC；
跨國公司).
 Describe the key theories that justify
international business.
 Explain the common methods used to conduct
international business.
 Provide a model for valuing the MNC.
2
What is the
appropriate
definition of an
MNC?
補充資料
Multinational Corporation (MNC) Supplement
4
補充資料
Multinational Corporation (MNC) Supplement
子公司
母公司
5
1
Managing the MNC
6
Managing the MNC
Managers are expected to make decisions that will maximize

the stock price.
企業應該在某個風險程度下，致力為股東（擁有公司股
權者）創造最大的報酬
企業主管為了追求相當的投資報酬，應該為股東盡量降
低風險
Focus of this text: MNCs whose parents fully own foreign

subsidiaries (U.S. parent is sole owner of subsidiary).
7
Managing the MNC
How Business Disciplines Are Used to Manage the MNC

 Common finance decisions include:
 Whether to discontinue operations in a particular country
 Whether to pursue new business in a particular country
 Whether to expand business in a particular country
 How to finance expansion in a particular country
 Finance decisions are influenced by other business discipline functions:
 Marketing
 Management
 Accounting and information systems
8
Managing the MNC
Agency Problems (代理問題)

 The conflict of goals between managers and shareholders (兩者之間因
目標不一致，而產生利益衝突。)
 Agency Costs
 Definition: Cost of ensuring that managers maximize shareholder
wealth.
9
Managing the MNC
 Agency Costs
 Costs are normally higher for MNCs than for purely domestic firms
for several reasons:
 Monitoring managers of distant subsidiaries in foreign countries is
more difficult. (MNCs are large with dispersed operations) (地理分
散營運的大型公司監督控管困難)
 Foreign subsidiary managers raised in different cultures may not
follow uniform goals. (經理人擁有不同文化背景)
 Sheer size of larger MNCs can create large agency problems.
(MNCs produce and sell a large number of products. Complexity
provides opportunity for managers to deviate from overall goals) (生
產與銷售大量的產品及服務，複雜性造成經理者可能偏離目標)
 Some non-U.S. managers tend to downplay the short-term effects of
decisions. (經理人自私自理行為)
10
Managing the MNC
Agency Problems (cont.)

 Parent control of agency problems
 Parent should clearly communicate the goals for each subsidiary
to ensure managers focus on maximizing the value of the
subsidiary.
 Corporate control of agency problems
 Entire management of the MNC must be focused on
maximizing shareholder wealth.
 Sarbanes-Oxley Act (SOX)
 Ensures a more transparent process for managers to report on
the productivity and financial condition of their firm.
11
SOX Methods to Improve Reporting
Agency Problems (cont.)

 How SOX Improved Corporate Governance of MNCs
 Establishing a centralized database of information
 Ensuring that all data are reported consistently among
subsidiaries
 Implementing a system that automatically checks for unusual
discrepancies relative to norms
 Speeding the process by which all departments and
subsidiaries have access to all the data they need
 Making executives more accountable for financial statements
12
Sarbanes-Oxley Act (沙賓法案)
 美國為了解決投資人對於資本市場的不信任以及輿論的施壓，迅速的
於2002年制定並且通過了新的企業改革法案—沙賓法案，企圖使失
常的資本市場藉由此法的新規定來回到正常軌道。
 2001年秋天倒閉的安隆(Enron)案，牽涉到會計帳務的詐欺和經營倫理的
問題
 沙賓法案是美國證券市場管理法制七十年來最大的一次變革。這個法
案包括下列幾個部份：
 設立專責的會計監督機關
 強化查核人員的獨立性
 加重管理階層的企業責任
 財務揭露強化
 降低證券分析師之利益衝突
 強化證券交易委員會的職權
 要求相關機關提出研究報告
 明定企業詐欺的刑事責任並且提高刑罰
13
Management Structure of MNC
Management Structure of MNC

 Centralized (See Exhibit 1.1a) (集權)
 Allows managers of the parent to control foreign subsidiaries and
therefore reduce the power of subsidiary managers. (決策權集中
在母公司的高階管理者)
 Decentralized (See Exhibit 1.1b) (分權)
 Gives more control to subsidiary managers who are closer to the
subsidiary’s operation and environment. (決策權下授到子公司的
管理者)
 How the Internet Facilitates Management Control
 Makes it easier for parent to monitor the actions and performance
of its foreign subsidiaries.
14
Exhibit 1.1a Management Styles of MNCs
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Exhibit 1.1b Management Styles of MNCs
Centralized?
or
Decentralized?
2
Why MNCs Pursue
International Business
18
Why does a firm
expand
internationally?
Why MNCs Pursue International
Business
Theory of Competitive Advantage (比較利益理論):

Specialization increases production efficiency.
Imperfect Markets Theory (不完全市場理論): Factors of
production are somewhat immobile, providing incentive to
seek out foreign opportunities.
Product Cycle Theory (產品生命週期理論): As a firm
matures, it recognizes opportunities outside its domestic
market. (Exhibit 1.2)
20
Theory of Competitive Advantage
比較利益理論
 Labor productivity differs within country and across

countries because of varying technology
 科技不同，跨國間勞動力、生產力不同
 Nations have relative advantages in certain products (e.g.,
Portugal had advantage in wine and England had advantage
in cloth)
 各國在特定產品具有相對優勢
 Countries benefit by shifting production and making
products where they have an advantage and by trading with
other
 將生產力移轉至較具優勢的產品上，將多生產出來的商品與其
他國家的商品做交換
21
Imperfect Markets Theory
不完全市場理論
 Factors of production (e.g., labor, land) cannot easily

move across borders, so countries specialize using what
they have. Consequently, the MNC must sometimes go to
the resources.
 不完全市場：生產因素(如勞力、土地) 不易跨國移動
，因此國家專精於使用其所擁有的資源
22
Product Cycle Theory
產品生命週期理論
 The product cycle theory suggests that at some point in

time, the firm will attempt to capitalize on its perceived
advantages in markets other than where it was initially
established.
 產品生命週期理論主張，企業在成立之初，必定會選
擇自己最瞭解而不確定性（或風險）也最低的本國市
場從事生產與銷售。久之，國內市場漸對產品的吸納
趨於飽和狀態，為了維持或刺激銷售成長，涉足海外
市場就成為思考的重點方向。
23
Exhibit 1.2 International Product Life Cycles
3
Methods to Conduct
International Business
25
How does a firm
expand
internationally?
How Firms Engage in International
Business
International Trade (國際貿易；出口)

Licensing (授權)
Franchising (加盟連鎖)
Joint Ventures (合資)
Acquisitions of Existing Operations (收購)
Establishment of New Foreign Subsidiaries (獨資設
立外國分支機構)
27
Business
International Trade
 Relatively conservative approach that can be used by
firms to:
 penetrate markets (by exporting).
 obtain supplies at a low cost (by importing).
 Minimal risk — no capital at risk

 How the Internet Facilitates International Trade
 The internet facilitates international trade by allowing firms
to advertise their products and accept orders on their 28
websites.
International Trade (國際貿易；出口)
 企業將產品輸出至國外，供其他國家消費者購買
 優點：
 不需要太多的資本支出
 暴露的風險最低
 當出口的表現不佳時，可以較低成本的方式退出國際
市場
 缺點：
 運輸成本
29
Business
Licensing
 Obligates a firm to provide its technology (copyrights,
patents, trademarks, or trade names) in exchange for fees
or some other specified benefits.
 Allows firms to use their technology in foreign markets
without a major investment and without transportation
costs that result from exporting.
 Major disadvantage: difficult to ensure quality control in
foreign production process
30
Licensing (授權)
 企業與外國企業簽訂授權合約，提供對方生產技
術或專利，並向其收取授權金及權利金的商業行
為
 優點
 不需要太多的資本支出
 節省運輸成本
 缺點
 無法控管外國企業運用技術或專利所生產出來的產品品質
 在比較不重視智慧財產權的國家，授權的技術容易被外國企業盜
取或複製
31
Business
Franchising
 Obligates firm to provide a specialized sales or service strategy,
support assistance, and possibly an initial investment in the franchise in
exchange for periodic fees.
 Allows penetration into foreign markets without a major investment in
foreign countries.
 企業(加盟總部)提供外國加盟主經營管理的Know-How及後勤支
援，共同經營一個品牌。
32
Business
Joint Ventures
 A venture that is jointly owned and operated by two or more
firms. A firm may enter the foreign market by engaging in a
joint venture with firms that reside in those markets.
 Allows two firms to apply their respective cooperative
advantages in a given project.
33
Joint Ventures (合資)
 企業到海外與一家外國企業共同出資設立新公司
 由國內企業提供技術與專利
 外國企業提供土地及廠房
 雙方共同承擔風險及共享利潤
 優點
 企業可快速熟悉新市場
 較容易爭取到外國政府的支持
 缺點
 雙方理念不合，在利益分配及經營決策上容易產生衝突，而最終
導致拆夥
34
Business
Acquisitions of Existing Operations

 Acquisitions of firms in foreign countries allows firms to
have full control over their foreign businesses and to
quickly obtain a large portion of foreign market share.
 Subject to the risk of large losses because of larger
investment.
 企業到海外購買現存外國企業的股權，取得其經營權
，以便進入該外國市場
 優點：能掌控收購後的經營權
 缺點：有時會受到外國政府的阻撓，特別是在市場較
封閉或政府干預較高的國家
35
Business
Establishment of New Foreign Subsidiaries

 Firms can penetrate markets by establishing new
operations in foreign countries.
 Requires a large investment.
 直接赴海外獨資設立分支機構，專門負責生產或銷售
的業務，而該分支機構可能以分公司或子公司的型態
營運
 優點：企業可完全控制分支機構的經營權
 缺點：資本支出及負擔的風險最高，一旦經營不善，
則必須以較高的成本退出外國市場 36
Business
Summary of Methods
 Any method of increasing international business that
requires a direct investment in foreign operations is
referred to as direct foreign investment (DFI).
 International trade and licensing usually not included.
 Foreign acquisition and establishment of new foreign
subsidiaries represent the largest portion of DFI.
37
補充資料
Supplement
Establishment of
New Foreign
Subsidiaries
expenditure
Capital
Acquisitions of
Existing Operations
Joint Ventures
Franchising
International Trade
or Licensing
38
portion of DFI
Business
Summary of Methods (cont.)

 Exhibit 1.3 Cash Flow Diagrams for MNCs
 The first diagram reflects an MNC that engages in
international trade. International cash flows result from
paying for imports or receiving cash flow from exports.
 The second diagram reflects an MNC that engages in some
international arrangements. Outflows include expenses such
as expenses incurred from transferring technology or
funding partial investment in a franchise or joint venture.
Inflows are receipts from fees.
 The third diagram reflects an MNC that engages in direct
foreign investment. Cash flows exist between the parent
39
company and the foreign subsidiary.
Exhibit 1.3 Cash Flow Diagrams for MNCs
4
Valuation Model for an
MNC
41
Valuation Model for an MNC
Domestic Model
n
 E CF$,t 
V   t 
t 1  1  k  
Where
 V represents present value of expected cash flows
 E(CF$,t) represents expected cash flows to be received at the
end of period t,
 n represents the number of periods into the future in which
cash flows are received, and
 k represents the required rate of return by investors.
42
Domestic Model (cont.)

 Dollar Cash Flows
 The dollar cash flows in period t represent funds received
by the firm minus funds needed to pay expenses or taxes or
to reinvest in the firm.
 Cost of Capital
 The required rate of return (k) in the denominator of the
valuation equation.
 A weighted average of the cost of capital based on all the
firms projects.
43
補充資料
Supplement
Future Value and Present Value
44
Example
 If you were to invest $10,000 at 5-percent
interest for one year, your investment would
grow to $10,500.
 $10,000 is the principal repayment ($10,000 × 1)
$500 would be interest ($10,000 × 0.05)
Principal $10 ,000 $10 ,000
Interest ($10,000  0.05)  $500
0 1
45
 The total amount can be calculated as:
Principal repayment + Interest
=$10,000+ $10,000 × 0.05
=$10,000×(1+0.05)=$10,500
 The total amount due at the end of the

investment is called the Future Value (FV).
46
Future Value
 In
the one-period case, the formula for
FV can be written as:
FV = C0×(1 + r)
Where C0 is cash flow today (time zero), and

r is the appropriate interest rate.
 In this case: C0 = $10,000
r = 5%
47
Example
 If you were to be promised $10,000 due in
one year when interest rate is 5-percent,
your investment would be worth $9,523.81
in today’s dollars.
The amount $10 ,000
0 1
The amount  ( 1  0.05 )  $10 ,000
$10 ,000
=>  $9 ,523.81
1.05 48
 The amount that a borrower would need to
set aside today to be able to meet the
promised payment in one year is called the
Present Value (PV).
 The present day value of an amount that is

received at a future date.
49
Present Value
 In
the one-period case, the formula for
PV can be written as:
C1
PV 
1 r
Where C1 is cash flow at time 1, and
 In this case:
 C1 = $10,000
 r = 5%
50
Summary in the One-Period Case
 Future value: FV = C0×(1 + r)
Where C0 is cash flow today (time zero), and
C1
 Present value: PV 
1 r
Where C1 is cash flow at time 1, and
51
Example
 Suppose a stock currently pays a
dividend of $1 which is expected to
grow at 9% per year for the next five
years.
 What will the dividend be in five years?
$1.09  (1  9% )
=
$1 $1  (1  9%) $1  (1  9% )2 ................ FV=?
0 1 2 3 4 5
FV of the dividend =$1×(1+9%)5=$1.5386
52
Future Value
 The general formula for the future value
of an investment over many periods can
be written as:
FV = C0×(1 + r)T
Where
C0 is cash flow at time 0
r is the appropriate interest rate
T is the number of periods over which
the cash is invested. 53
Compounding
$1 (1.09) 5
$1 (1.09) 4
$1 (1.09)3
$1 (1.09) 2
$1 (1.09)
$1 $1.09 $1.1881 $1.2950 $1.4116 $1.5386
0 1 2 3 4 5
54
 Simple interest
 Interest is not compounded.
 The sum of the original dividend plus five increases
of 9 percent on the original $1 dividend
Interest: $1  ( 0.09 ) + $0.09 + $0.09 + $0.09 + $0.09 =$0.45
Principal: $1 $1 $1 $1 $1
$1 $1 $1 $1 $1 $1
0 1 2 3 4 5 55
 The dividend in year five, $1.5386, is
considerably higher than the sum of the
original dividend plus five increases of
9 percent on the original $1 dividend:
$1.5386 > $1.45
This is due to compounding.
56
Present Value
 How much would an investor need to
lend today so that he could receive $1
two years from today? (r = 9%)
=> PV*(1+9%)2 = $1
=> PV = $1/(1.09)2 = $0.84
PV $1
$1
2
 $0.84
( 1.09 )
57
Summary in the Multiperiod Case
 Future value: FV = C0×(1 + r)T
Where C0 is cash flow today (time zero)
T is the number of periods over which the cash is invested.
CT
 Present value: PV 
(1 r )T
Where CT is cash flow at time T

T is the number of periods over which the cash is invested.
58
Multinational Modell

E CF$,t    E CF j ,t  E S j ,t 
m
j 1
Where
 CFj,t represents the amount of cash flow denominated in a
particular foreign currency j at the end of period t,
 Sj,t represents the exchange rate at which the foreign currency

(measured in dollars per unit of the foreign currency) can be
converted to dollars at the end of period t.
59
Multinational Model (cont.)

 Valuation of an MNC that uses two currencies
 Could measure its expected dollar cash flows in any period by
multiplying the expected cash flow in each currency by the
expected exchange rate at which that currency would be
converted to dollars and then summing those two products.
 Valuation of an MNC that uses multiple currencies
 
E CF$,t    E CF j ,t  E S j ,t 
m
j 1
 Derive an expected dollar cash flow value for each currency

 Combine the cash flows among currencies within a given period
60
Multinational Model (cont.)

 Valuation of an MNC’s cash flows over multiple periods
 Apply single period process to all future periods
 Discount the estimated total dollar cash flow for each
period at the weighted cost of capital
 E CF  E S 
m
n j ,t j ,t
V 
j 1
t 1 1  k  2
61
What are the risks
of an MNC which
expands
internationally?
Uncertainty Surrounding MNC Cash Flows (Exhibit 1.4)

 Exposure to international economic conditions — If economic
conditions in a foreign country weaken, purchase of products decline
and MNC sales in that country may be lower than expected. (Exhibit
1.5)
 Exposure to international political risk — A foreign government
may increase taxes or impose barriers on the MNC’s subsidiary.
 Exposure to exchange rate risk — If foreign currencies related to the
MNC subsidiary weaken against the U.S. dollar, the MNC will receive
a lower amount of dollar cash flows than was expected.
Summary of International Effects (Exhibit 1.5)
63
Exhibit 1.4 How an MNC’s Valuation is Exposed to
Uncertainty
Exhibit 1.5 Potential Effects of International Economic
Conditions
補充資料
Cross-Cultural Differneces (文化差異) Supplement
66
67
68
69
Source: Managing cross-cultural differences in a multinational company 70
5
Organization of the
Text
79
Organization of the Text (Exhibit 1.6)
Chapters 2-8 discuss international markets and

conditions from a macroeconomic perspective focusing
on external forces that can affect the value of an MNC
Chapters 9-21 take a microeconomic perspective and
focus on how the financial management of an MNC can
affect its value
80
Exhibit 1.6 Organization of Chapters
Chapter 1
Summary
Let’s Review Some Concepts.
82
Summary
 The main goal of an MNC is to maximize shareholder

wealth. When managers are tempted to serve their own
interests instead of those of shareholders, an agency
problem exists. MNCs tend to experience greater agency
problems than do domestic firms. Proper incentives and
communication from the parent may help to ensure that
subsidiary managers focus on serving the overall MNC.
83
Summary
International business is justified by three key theories.

 The theory of comparative advantage suggests that each country
should use its comparative advantage to specialize in its
production and rely on other countries to meet other needs.
 The imperfect markets theory suggests that because of imperfect
markets, factors of production are immobile, which encourages
countries to specialize based on the resources they have.
 The product cycle theory suggests that after firms are established
in their home countries, they commonly expand their product
specialization in foreign countries.
84
Summary
 The most common methods by which firms conduct

international business are international trade, licensing,
franchising, joint ventures, acquisitions of foreign firms,
and formation of foreign subsidiaries. Methods such as
licensing and franchising involve little capital investment
but distribute some of the profits to other parties. The
acquisition of foreign firms and formation of foreign
subsidiaries require substantial capital investments but
offer the potential for large returns.
85
Summary
 The valuation model of an MNC shows that the MNC’s

value is favorably affected when its expected foreign cash
inflows increase, the currencies denominating those cash
inflows increase, or the MNC’s required rate of return
decreases. Conversely, the MNC’s value is adversely
affected when its expected foreign cash inflows decrease,
the values of currencies denominating those cash flows
decrease (assuming that they have net cash inflows in
foreign currencies), or the MNC’s required rate of return
increases.
86

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Chapter 1 Multinational Financial Manage

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Chapter 1

 Identify the management goal and organizational

Managers are expected to make decisions that will maximize

Focus of this text: MNCs whose parents fully own foreign

How Business Disciplines Are Used to Manage the MNC

Agency Problems (代理問題)

Agency Problems (cont.)

Agency Problems (cont.)

Management Structure of MNC

Theory of Competitive Advantage (比較利益理論):

 Labor productivity differs within country and across

 Factors of production (e.g., labor, land) cannot easily

 The product cycle theory suggests that at some point in

International Trade (國際貿易；出口)

 Minimal risk — no capital at risk

Acquisitions of Existing Operations

Establishment of New Foreign Subsidiaries

Summary of Methods (cont.)

Domestic Model (cont.)

 The total amount due at the end of the

Where C0 is cash flow today (time zero), and

 The present day value of an amount that is

$1 $1.09 $1.1881 $1.2950 $1.4116 $1.5386

$1.5386 > $1.45

This is due to compounding.

Where CT is cash flow at time T

 Sj,t represents the exchange rate at which the foreign currency

Multinational Model (cont.)

 Derive an expected dollar cash flow value for each currency

Multinational Model (cont.)

Uncertainty Surrounding MNC Cash Flows (Exhibit 1.4)

Chapters 2-8 discuss international markets and

 The main goal of an MNC is to maximize shareholder

International business is justified by three key theories.

 The most common methods by which firms conduct

 The valuation model of an MNC shows that the MNC’s

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