MuItinationaI Corporation (MNC

)
Foreign Exchange Markets
Product Markets Subsidiaries InternationaI
FinanciaI
Markets
Dividend
Remittance
& Financing
Exporting
& Importing
Investing
& Financing
Part I
The InternationaI FinanciaI Environment
MuItinationaI FinanciaI Management:
An Overview
MuItinationaI FinanciaI Management:
An Overview
1 1
Chapter Chapter
South-Western/Thomson Learning © 2003
- 3
Chapter Objectives
· To identify the main goaI of the
muItinationaI corporation (MNC) and
confIicts with that goaI;
· To describe the key theories that justify
internationaI business; and
· To expIain the common methods used to
conduct internationaI business.
- 4
oaI of the MNC
· The commonIy accepted goaI of an MNC is
to maximize sharehoIder weaIth.
· We wiII focus on MNCs that are based in
the United States and that whoIIy own
their foreign subsidiaries.
- 5
ConfIicts Against the MNC oaI
· For corporations with sharehoIders who
differ from their managers, a confIict of
goaIs can exist - the agency problem.
· Agency costs are normaIIy Iarger for MNCs
than for pureIy domestic firms.
¤ The sheer size of the MNC.
¤ The scattering of distant subsidiaries.
¤ The culture of foreign managers.
¤ Subsidiary value versus overall MNC value.
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Impact of Management ControI
· The magnitude of agency costs can vary
with the management styIe of the MNC.
· A centralized management styIe reduces
agency costs. However, a decentralized
styIe gives more controI to those
managers who are cIoser to the
subsidiary's operations and environment.
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CentraIized MuItinationaI FinanciaI Management
for an MNC with two subsidiaries, A and B
FinanciaI
Managers
of Parent
CapitaI Expenditures
at A
Inventory and
Accounts
ReceivabIe
Management at A
Cash
Management
at A
Financing at A
CapitaI Expenditures
at B
Inventory and
Accounts
ReceivabIe
Management at B
Cash
Management
at B
Financing at B
- 8
DecentraIized MuItinationaI FinanciaI Management
for an MNC with two subsidiaries, A and B
FinanciaI
Managers
of A
CapitaI Expenditures
at A
Inventory and
Accounts
ReceivabIe
Management at A
Cash
Management
at A
Financing at A
CapitaI Expenditures
at B
Inventory and
Accounts
ReceivabIe
Management at B
Cash
Management
at B
Financing at B
FinanciaI
Managers
of B
- 9
Impact of Management ControI
· Some MNCs attempt to strike a baIance -
they aIIow subsidiary managers to make
the key decisions for their respective
operations, but the decisions are
monitored by the parent's management.
- 0
Impact of Management ControI
· EIectronic networks make it easier for the
parent to monitor the actions and
performance of foreign subsidiaries.
· For exampIe, corporate intranet or internet
emaiI faciIitates communication. FinanciaI
reports and other documents can be sent
eIectronicaIIy too.
-
Impact of Corporate ControI
· 'arious forms of corporate controI can
reduce agency costs.
¤ Stock compensation for board members
and executives.
¤ The threat of a hostile takeover.
¤ Monitoring and intervention by large
shareholders.
- 2
Constraints
Interfering with the MNC's oaI
· As MNC managers attempt to maximize
their firm's vaIue, they may be confronted
with various constraints.
¤ Environmental constraints.
¤ Regulatory constraints.
¤ Ethical constraints.
- 3
Why are firms motivated to expand
their business internationaIIy?
Theories of InternationaI Business
Theory of Comparative Advantage
¤ Specialization by countries can increase
production efficiency.
Imperfect Markets Theory
¤ The markets for the various resources
used in production are "imperfect.¨
- 4
Why are firms motivated to expand
their business internationaIIy?
Theories of InternationaI Business
Product CycIe Theory
¤ As a firm matures, it may recognize
additional opportunities outside its home
country.
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Firm exports
product to
accommodate
foreign demand.
Firm creates
product to
accommodate
IocaI demand.
The InternationaI Product Life CycIe
Firm
estabIishes
foreign
subsidiary
to estabIish
presence in
foreign
country
and
possibIy to
reduce
costs.
a. Firm
differentiates
product from
competitors
and/or expands
product Iine in
foreign country.
b. Firm's
foreign
business
decIines as its
competitive
advantages are
eIiminated.
or
- 6
InternationaI
Business Methods
· InternationaI trade is a reIativeIy
conservative approach invoIving
exporting and/or importing.
¤ The internet facilitates international trade
by enabling firms to advertise and manage
orders through their websites.
There are severaI methods by which firms
can conduct internationaI business.
- 7
InternationaI
Business Methods
· Licensing aIIows a firm to provide its
technoIogy in exchange for fees or some
other benefits.
· Franchising obIigates a firm to provide a
speciaIized saIes or service strategy,
support assistance, and possibIy an initiaI
investment in the franchise in exchange
for periodic fees.
- 8
InternationaI
Business Methods
· Firms may aIso penetrate foreign markets
by engaging in a joint venture (joint
ownership and operation) with firms that
reside in those markets.
· Acquisitions of existing operations in
foreign countries aIIow firms to quickIy
gain controI over foreign operations as
weII as a share of the foreign market.
- 9
InternationaI
Business Methods
· Firms can aIso penetrate foreign markets
by estabIishing new foreign subsidiaries.
· In generaI, any method of conducting
business that requires a direct investment
in foreign operations is referred to as a
direct foreign investment (DFI).
· The optimaI internationaI business
method may depend on the characteristics
of the MNC.
- 20
Degree of InternationaI Business by MNCs
26%
62%
58%
33%
47%
50%
66%
12%
46%
40%
0%
10%
20%
30%
40%
50%
60%
70%
Campbell's
Soup
Dow
Chemical
ÌBM Motorola Nike
Foreign SaIes as a % of TotaI SaIes
Foreign Assets as a % of TotaI Assets
- 2
OnIine AppIication
· Check out the foIIowing internationaI trade
promotion sites.
- 22
http://www.tradenet.gov
- 23
http://www.business.gov/busadv/
index.cfm
- 24
http://www.export.gov
http://www.trade.gov
- 25
InternationaI Opportunities
· Investment opportunities - The marginaI
return on projects for an MNC is above
that of a pureIy domestic firm because of
the expanded opportunity set of possibIe
projects from which to seIect.
· Financing opportunities - An MNC is aIso
abIe to obtain capitaI funding at a Iower
cost due to its Iarger opportunity set of
funding sources around the worId.
- 26
MarginaI
Return on
Projects
PureIy
Domestic
Firm
MNC
Asset LeveI
of Firm
nvestment
Opportunities
InternationaI Opportunities
Cost-benefit EvaIuation for
PureIy Domestic Firms versus MNCs
Appropriate
Size for PureIy
Domestic Firm
Appropriate
Size for MNC
X Y
MarginaI
Cost of
CapitaI
PureIy
Domestic
Firm
MNC
Financing
Opportunities
- 27
InternationaI Opportunities
· Opportunities in Europe
¤ The Single European Act of 1987.
¤ The removal of the Berlin Wall in 1989.
¤ The inception of the euro in 1999.
· Opportunities in Latin America
¤ The North American Free Trade
Agreement (NAFTA) of 1993.
¤ The General Agreement on Tariffs and
Trade (GATT) accord.
- 28
InternationaI Opportunities
· Opportunities in Asia
¤ The reduction of investment restrictions by
many Asian countries during the 1990s.
¤ China's potential for growth.
¤ The Asian economic crisis in 1997-1998.
- 29
OnIine AppIication
· For more information on the Asian crisis,
check out the foIIowing sites:
¤ http://www.stern.nyu.edu/~nroubini/asia/Asi
aHomepage.html
¤ http://www.asienhaus.org/navigat/english/a
sienhau.htm
- 30
Exposure to InternationaI Risk
exchange rate movements
¤ Exchange rate fluctuations affect cash
flows and foreign demand.
foreign economies
¤ Economic conditions affect demand.
poIiticaI risk
¤ Political actions affect cash flows.
InternationaI business usuaIIy increases an
MNC's exposure to:
- 3
Exposure to InternationaI Risk
130,000
135,000
140,000
145,000
150,000
155,000
160,000
165,000
Jan Mar May Jul Sep Nov Jan Mar May
2000 2001
U.S. Firm's Cost of Obtaining £100,000
- 32
· 'isit FRED
®
, Fed's economic time-series
database, at http://www.stls.frb.org/fred for
numerous economic and financiaI time
series, e.g., baIance of payment statistics,
interest rates, foreign exchange rates.
· 'isit http://www.ita.doc.gov/td/industry/otea
(Office of Trade and Economic AnaIysis)
for an outIook of internationaI trade
conditions for each of severaI industries.
OnIine AppIication
- 33
Overview of an MNC's Cash FIows
ProfiIe A: MNCs focused on InternationaI Trade
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
U.S.-
based
MNC
Payments for products
Payments for suppIies
Payments for exports
Payments for imports
- 34
Overview of an MNC's Cash FIows
ProfiIe B: MNCs focused on InternationaI Trade and
InternationaI Arrangements
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
Foreign Firms
U.S.-
based
MNC
Fees for services
Costs of services
Payments for products
Payments for suppIies
Payments for exports
Payments for imports
- 35
Overview of an MNC's Cash FIows
ProfiIe C: MNCs focused on InternationaI Trade, InternationaI
Arrangements, and Direct Foreign Investment
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
Foreign Firms
Foreign Subsidiaries
U.S.-
based
MNC
Funds remitted
Funds invested
Fees for services
Costs of services
Payments for products
Payments for suppIies
Payments for exports
Payments for imports
- 36
Managing for 'aIue
· Like domestic projects, foreign projects
invoIve an investment decision and a
financing decision.
· When managers make muItinationaI
finance decisions that maximize the
overaII present vaIue of future cash fIows,
they maximize the firm's vaIue, and hence
sharehoIder weaIth.
- 37
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¯
+
n
t
t
t
k
1 =
,
1
CF E
= Value
E (CF
$,t
) = expected cash fIows to be received at
the end of period t
n = the number of periods into the future
in which cash fIows are received
k = the required rate of return by
investors
'aIuation ModeI for an MNC
· Domestic ModeI
- 38
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E (CF
t
) = expected cash fIows denominated in currency
to be received by the U.S. parent at the end of
period t
E (ER
t
) = expected exchange rate at which currency can
be converted to doIIars at the end of period t
k = the weighted average cost of capitaI of the U.S.
parent company
'aIuation ModeI for an MNC
· 'aIuing InternationaI Cash FIows
- 39
'aIuation ModeI for an MNC
· An MNC's financiaI decisions incIude how
much business to conduct in each country
and how much financing to obtain in each
currency.
· Its financiaI decisions determine its
exposure to the internationaI environment.
- 40
'aIuation ModeI for an MNC
Impact of New InternationaI Opportunities
on an MNC's 'aIue
Exchange Rate Risk
´ ) ´ ) . J
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¯
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+
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t
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ER E CF E
= Value
PoIiticaI Risk
Exposure to
Foreign Economies
How Chapters ReIate to 'aIuation
Background
on
InternationaI
FinanciaI
Markets
(Chapters
2-5)
Exchange Rate
Behavior
(Chapters 6-8)
Long-Term
Investment and
Financing
Decisions
(Chapters 13-18)
Short-Term
Investment and
Financing
Decisions
(Chapters 19-21)
Exchange Rate
Risk Management
(Chapters 9-12)
Risk and
Return of
MNC
'aIue and
Stock Price
of MNC
- 42
Chapter Review
· oaI of the MNC
¤ Conflicts Against the MNC Goal
¤ Ìmpact of Management Control
¤ Ìmpact of Corporate Control
¤ Constraints Ìnterfering with the MNC's
Goal
· Theories of InternationaI Business
¤ Theory of Comparative Advantage
¤ Ìmperfect Markets Theory
¤ Product Cycle Theory
- 43
Chapter Review
· InternationaI Business Methods
¤ Ìnternational Trade
¤ Licensing
¤ Franchising
¤ Joint Ventures
¤ Acquisitions of Existing Operations
¤ Establishing New Foreign Subsidiaries
- 44
Chapter Review
· InternationaI Opportunities
¤ Ìnvestment Opportunities
¤ Financing Opportunities
¤ Opportunities in Europe
¤ Opportunities in Latin America
¤ Opportunities in Asia
- 45
Chapter Review
· Exposure to InternationaI Risk
¤ Exposure to Exchange Rate Movements
¤ Exposure to Foreign Economies
¤ Exposure to Political Risk
· Overview of an MNC's Cash FIows
· Managing for 'aIue
- 46
Chapter Review
· 'aIuation ModeI for an MNC
¤ Domestic Model
¤ Valuing Ìnternational Cash Flows
¤ Ìmpact of Financial Management and
Ìnternational Conditions on Value
¤ How Chapters Relate to Valuation

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