NGUYEN CONG THANH

Ph.D. researcher in International Finance, RMIT University

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Master in Development Economics, ISS - Erasmus University Rotterdam
Master in Public Policy Analysis, Fulbright University Vietnam
Master of Science in Banking - Finance, HCMC University of Economics & Finance
 Chapter 1
Multinational Corporations Finance:
An Overview

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 LEARNING OUTCOMES

 To identify the main goal of the multinational

corporations (MNCs) and conflicts with that goal
 To describe the key theories that justify
international business
 Risks of international business

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 DEFINITION OF MNCS

Multinational corporations (MNCs)

are defined as firms that engage in
some form of international business.

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EXAMPLES OF MNCS

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 maximize
shareholder
wealth

Satisfy demand
of government ,
lenders ,
employees

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Conflict between firm’s manager and
shareholders

Representative cost in multinational companies

is often larger than domestic companies

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 Enron was, at one point, one of the
THE ENRON
largest companies in the United States.
SCANDAL
 Enron began losing money in 1997. The
company also started racking up a lot
of debt Jeffrey Skilling
 Fearing a drop in share prices, Enron's (CEO)
management team hid the losses by
misrepresenting them through tricky
accounting
 In 2001, share prices from over $90 to
under $1. The company ended up filing
for bankruptcy in December 2001
=> SEC inspected the company
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Parent control
 Ensure all subsidiaries can follow the goal of
profit maximization from MNCs (parent
company).
 Evaluate the suitability of business decisions
from subsidiaries compared to MNCs.
 Award managers of subsidiaries who can
satisfy the goals from MNCs.
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Other party control
 Other companies will acquire MNCs in case
managers make wrong decisions that reduce firm
value. These companies will likely remove weak
managers.
 Institutional investors can claim the management
board on wrong decisions from managers,
require to change senior managers and the
management board, and request some changes
in business decisions. 10
RESTRICTIONS OBSTRUCT OBJECTIVES

Regulative
Restriction
- Tax
- Money
transaction
- Transfer income
abroad

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Centralize multinational
financial Management

Decentralize
multinational financial
Management

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 Why are firms motivated to expand
their business internationally?

Theory of Comparative Advantage

 Specializations by countries can increase

production efficiency.

Imperfect Markets Theory

 The markets for the various resources used in

production are “imperfect.”

 Why are firms motivated to expand
their business internationally?

Product Cycle Theory

 As a firm matures, it may recognize additional

opportunities outside its home country.

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 MNC’S

International business

International Trade Joint Venture

Acquisition of
Licensing
existing operations
Franchising Establishing new
foreign subsidiaries

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 INTERNATIONAL TRADE
 Trading rather than investing abroad

 The conservative approach to international

business

 Used to penetrate markets (by exporting)

 Obtain supplies at low cost (by importing)

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 LICENSING

 Involves selling copyrights, patents,

trademarks etc, in exchange for fees
(royalties)

 A company is selling the right to produce

their goods.

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 FRANCHISING

 The franchisor provides sales, service,

strategy, support and possibly some initial
investment in exchange for periodic fees.

 Managed by local residents

 Allows firms to penetrate foreign markets

without major investment.
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 Criteria Franchising Licensing

Support and training Provided by franchiser Not provided

Royalty payments Periodic payments Initial payments

Logo and trademark

are retained by
Use of trademark/logo Can be licensed
franchiser and used by
franchisee

McDonald’s, Subway,
Examples Microsoft Office
7-11, Dukin Donuts

Franchiser exercises Licensor does not have

Control
control over franchisee control over licensee

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 JOINT VENTURES

Owned and operated by

two or more firms

Many firms penetrate foreign

markets by engaging in a joint
venture with firms that
reside in those markets

Applying their respective comparative

advantages in a given project
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Firms frequently acquire other
firms in foreign countries as a
means of penetrating foreign
markets.
Allow firms to have full control over
their foreign businesses and to
quickly obtain a large portion of
foreign market share.

The fastest way to grow.

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Feature Require a large investment

Tailored exactly to the firm’s needs

Need a lot of time

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 International Economic conditions: the
consumption in any country is influenced by
the income earned by consumers in that
country.
 International Political risk
 Exchange rate risk

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 QUESTION AND APPLICATIONS
Exercise 17 Page 17

Anheuser-Busch, the producer of Budweiser and other beers, has

recently expanded into Japan by engaging in a joint venture with

Kirin Brewery, the largest brewery in Japan. The joint venture

enables Anheuser-Busch to have its beer distributed through

Kirin's distribution channels in Japan. In addition, it can utilize

Kirin's facilities to produce beer that will be sold locally. In

return, Anheuser-Busch provides information about the

American beer market to Kirin.

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 QUESTION AND APPLICATIONS
a) Explain how the joint venture can enable Anheuser-Busch to achieve
its objective of maximizing shareholder wealth.
b) Explain how the joint venture can limit the risk of the international
business.
c) Many international joint ventures are intended to circumvent barriers
that normally prevent foreign competition. What barrier in Japan is
Anheuser-Busch circumventing as a result of the joint venture? What
barrier in the United States is Kirin circumventing as a result of the joint
venture?
d) Explain how Anheuser-Busch could lose some of its market share in
countries outside Japan as a result of this particular joint venture.

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 ASSIGNMENT
Nantucket Travel Agency specializes in tours for American tourists.
Until recently, all of its business was in the U.S. It just established a
subsidiary in Athens, Greece, which provides tour services in the
Greek islands for American tourists. It rented a shop near the port of
Athens. It also hired residents of Athens, who could speak English
and provide tours of the Greek islands. The subsidiary's main costs
are rent and salaries for its employees and the lease of a few large
boats in Athens that it uses for tours. American tourists pay for the
entire tour in dollars at Nantucket's main U.S. office before they
depart for Greece.

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 ASSIGNMENT
a) Explain why Nantucket may be able to effectively capitalize on
international opportunities such as the Greek island tours.
b) Nantucket is privately-owned by owners who reside in the U.S. and work in
the main office. Explain possible agency problems associated with the
creation of a subsidiary in Athens, Greece. How can Nantucket attempt to
reduce these agency costs?
c) Greece's cost of labor and rent are relatively low. Explain why this
information is relevant to Nantucket's decision to establish a tour business
in Greece.
d) Explain how the cash flow situation of the Greek tour business exposes
Nantucket to exchange rate risk. Is Nantucket favorably or unfavorably
affected when the euro (Greece's currency) appreciates against the dollar?
Explain.
e) Nantucket plans to finance its Greek tour business. Its subsidiary could
obtain loans in euros from a bank in Greece to cover its rent, and its main
office could pay off the loans over time. Alternatively, its main office could
borrow dollars and would periodically convert dollars to euros to pay the
expenses in Greece. Does either type of loan reduce the exposure of
Nantucket to exchange rate risk? Explain.
f) Explain how the Greek island tour business could expose Nantucket to
country risk. 37