INTRODUCTION OF MNC

Meaning of International
Finance?
study of the institutions, policies, and practices that
govern
 global financial management and/or
 financial aspects of global business

International finance is the branch of economics that

studies the dynamics of exchange rates, foreign
investment, and how these affect international trade.
COCA COLA
NESTLE
CANON
Mc Donald’s
HONDA
PROTON SAGA
MAS
MAYBANK
 DEFINITION
Multinational Corporation (MNC) is defined as a firm
that engaged in some form of international business
Any transaction between parties from more than one
country is part of international business
International Business is transaction conducted
across the boundry of a country
 DEFINITION
MNC build factories overseas and taking advantages
of the lower cost
MNC borrow money from a bank in one country to
finance operations in another country
Many countries are involved in buying material or
input in one country then shipped to another for
processing or assembly
 INTRODUCTION
INTERNATIONAL BUSINESS ENVIRONMENT
 THEORIES OF INTERNATIONAL
BUSINESS
Theory of Comparative Advantage
Imperfect Market Theory
Product Cycle Theory
 THEORIES OF INTERNATIONAL
BUSINESS
Theory of Comparative Advantage
Countries tend to use their advantages to
specialized in their production of goods that can be
produced with relative efficiency
Comparative Advantages allow firms to penetrate
foreign markets
Revenues earned from specialized products is used
to import products rather than attempting to
produce all the products that they need
 THEORIES OF INTERNATIONAL
BUSINESS
Imperfect Market Theory
Countries differ with respect to resources available
for the production of goods
Market were perfect if factors of production would
be mobile and freely transferable
The unrestricted mobility of factors would be
equality in costs and return
Imperfect markets provide an incentive for firms to
seek out foreign opportunities
 THEORIES OF INTERNATIONAL
BUSINESS
Product Cycle Theory
Firms become established in the domestic market
The competition is readily available in the market
Other way to expand their businesses is going to
foreign market
As their products reach maturity, or declining
stages at home country, the firm has to produces in
another country while the product is still new to
these country
 RISE OF THE MNCs
MNC’s can be categorized into:
1. Raw material seekers
2. Market seekers
3. Cost minimizes
4. Lack of modern technologies & equipments
Raw Material Seekers
 RISE OF THE MNCs
Raw material seekers
This firm aims to exploit the raw materials that
could be found overseas
Example: Dunlop in Malaysia used rubber to
produce tyre.
Market Seekers
 RISE OF THE MNCs
Market seekers
Multinational firms that go overseas to produce and
sell in foreign market
Example : Mc Donalds & Nestle
Cost Minimizes
 RISE OF THE MNCs
Cost minimizes
Is a fairly recent category of firms doing business
internationally
These firms seek out and invest lowest cost
production sites overseas to remain cost-
competitive both at home and abroad
Example: Intel technology
 RISE OF THE MNCs
Lack of modern technologies & equipments
The firms do not have modern technologies and
equipments
Therefore they have to buy it from some other
country
They have to do business internationally
 GOAL OF THE MNCs
Goal of the MNC is to maximize shareholder’s
wealth as measured by the share prices
Operational Financial Objective:
1. Maximization of consolidated after-tax income
2. Minimization of the firm’s effective global tax
burden
3. Correct positioning of the firm’s income,
cashflows and available funds
 METHOD OF FOREIGN MARKET
EXPANSION
The most common method are:
1. International Trade
2. Licensing
3. Franchising
4. Joint venture
5. Acquisition
6. Establishing new subsidiaries
RISKS ENGAGE IN INTERNATIONAL
BUSINESS
When the MNC deals in international business, it will
faces greater risks than the purely domestic
companies
However, in terms of total risks, MNC has lower total
risks compared to domestic companies
Because the MNC’s ability to diversify its risks in
more than one country
RISKS ENGAGE IN INTERNATIONAL
BUSINESS
Two categories of risks:
1. Foreign Exchange Risks
2. Country risks
 Geographical Risks

 Political Risks

 Economic risks

 Legal Risks

 Socio-culture risk
RISKS ENGAGE IN INTERNATIONAL
BUSINESS
Foreign Exchange Risks
Is the risk or loss that MNC faces from the
fluctuation of exchange rate
Country risks
Is referred to as those risks that associated with a
particular country in terms of geographical risks,
political risks, economic risks, legal risks and socio-
culture risks
 BENEFITS OF INTERNATIONAL
BUSINESS
Varieties of goods produced
Better quality of products
Reduction of costs
Transfer of knowledge/ technologies
Diplomat relationship
Investment opportunities
Financing opportunities
 MULTINATIONAL FINANCIAL
MANAGEMENT
The Financial Management style of the MNC:
1. Centralized Financial Management
2. Decentralized Financial Management
 MULTINATIONAL FINANCIAL
MANAGEMENT
Centralized Financial System
 MULTINATIONAL FINANCIAL
MANAGEMENT
Centralized Financial System
Under this system, the manager of the parent
company control the financial decisions of the
foreign subsidiaries and therefore reduce the power
of the subsidiary managers
Even though the corporation costs can be reduced,
the parent company’s manager make poor decisions
for the subsidiaries because they are not well
informed as subsidiaries managers about the
financial problems faced by the subsidiaries
 MULTINATIONAL FINANCIAL
MANAGEMENT
Decentralized Financial System
 MULTINATIONAL FINANCIAL
MANAGEMENT
Decentralized Financial System
This management style allow the subsidiaries
managers to make financial decision pertaining to
their subsidiaries.
This may result in higher corporation costs
This system gives more control to those managers
who are closer to the subsidiaries’ operations and
environment