Lecture 1 - Multinational Financial Management

Bachelor of Accounting(Hons)
International Finance: Markets and

Management
Multinational Financial Management

(Week 1)
Nuriza bt Abdullah / Ms Iza
nurizaabdullah@segi.edu.my
012-2274642
BlackBoard
Part 1
INTRODUCTION
Last Updated: 9 December 2015 © I-Station Solutions Sdn Bhd 3

Learning Objectives
On successful completion of this topic students should

understand the following:
• The main goal of the MNC and potential conflicts
with that goal.
• Key theories that seek to explain international business.
• Common methods used to conduct

international business.
© I-Station Solutions Sdn Bhd 4

Learning Outcomes
On successful completion of this topic students should be

able to:
• Identify the main goal of the MNC and potential conflicts
with that goal.

• Describe the key theories that seek to
explain
• Outline the common methods used to
conduct international business.

Introduction
What is International Finance?
• International finance is the study of monetary interactions

between two or more countries.
• International finance focuses on areas such as foreign

direct investment and currency exchange rates.
• Increased globalization has magnified the importance of

international finance.

Global Top 100 MNC
China's Xiaomi adds manufacturing muscle in
India to boost phone production
• China’s Xiaomi Corp is enlisting more contract manufacturers
to make its phones in India, adding heft in a country where it is
already one of the biggest smartphone brands.
• Xiaomi has been manufacturing phones in India for over half a
decade and has rapidly grown in the highly competitive market
where voice calling and data costs are one of the lowest in the
world.
Introduction
• Why a company wants to develop business

at
international level?
• What are the ways that a firm can use to
conduct international business?
• Will there be any problem in management when the firm
become a MNC?

Introduction
• The commonly stated goal of a firm is to maximize its

value and thereby maximize shareholder wealth.
• Developing business at an international level is an
important means of enhancing value for many firms.
• Many firms have evolved into multinational
corporation
(MNCs):
• Firms that engage in some form of international
business.

Introduction
• Initially, firms may merely attempt to export products or

import supplies from a foreign manufacturer.
• Over time, however, many recognize additional foreign
opportunities and eventually establish subsidiaries in
foreign countries.
• WHY?

International Opportunities and Risks
 Generating more revenue

 Investment opportunities
 Competing for new sales
 Diversifying
 Reducing costs
 Financing opportunities
 MNCs can obtain capital funding at a lower cost due to their
larger opportunity set of funding sources around the world.
However:
 International business usually increases an MNC’s exposure to:
 exchange rate movements
 foreign economies
 political risk
Introduction
For example Tesco (United Kingdom)
Generate more than a third of their sales outside Europe.

Lotus’s Officially Takes Over Tesco Stores
in Malaysia
What is Lotus’s actually?
• Lotus’s is a retail chain that originated in Thailand by CP Group and

now has expanded to Malaysia through acquisition of Tesco
Malaysia since December 2020.
• Lotus’s has Malaysia’s most extensive online grocery home
shopping network with over 100 delivery trucks and operations in
Penang, Johor Bahru, Melaka, Negeri Sembilan, and Ipoh.
• Partnering with Lazada, Shopee, HappyFresh and foodpanda for
Malaysians to shop on their preferred online platforms.
Part 2
CONFLICTS WITH THE MNC
GOAL

Goal of the MNC
• The commonly accepted goal of an MNC is to maximize

shareholder wealth.
• We will focus on MNCs that wholly own their foreign
subsidiaries.
• Financial managers throughout the MNC have a single
goal of maximizing the value of the entire MNC.

Agency
Relationshi
p
hires
shareholder manager
Saturday, November 5, 2022

performs
Agency
Problems
shareholder manager
Saturday, November 5, 2022
Conflicts with the MNC Goal
• When a corporation’s shareholders differ from its

managers, a conflict of goals can exist—the
agency problem.
• Agency costs are normally larger for MNCs than
for purely domestic firms, due to:
• the difficulty in monitoring distant managers
• the different cultures of foreign managers
• the sheer size of the larger MNCs, and
• subsidiary managers may be tempted to make
decisions that maximize the values of their respective
subsidiaries.

1. Impact of Management Control
• The magnitude of agency costs can vary with the

management style of the MNC.
• A centralized management style reduces agency costs.
However, a decentralized style gives more control to
those managers who are closer to the subsidiary’s
operations and environment.

Centralized Multinational Financial Management
for an MNC with two subsidiaries, A and B
Cash Financial Cash

Management Managers Management
at A of Parent at B
Inventory and Inventory and

Accounts Accounts
Receivable Receivable
Management at Management at B
A
Financing at A Financing at B
Capital Expenditures Capital Expenditures

at A at B
International Financial Mangement, 2nd edition, Jeff Madura and Roland Fox
ISBN
Last 978-19-4D0ec8e0m-3b2er2290-195© 2011 Cengage Learning EMEA
Updated: 13
Centralized Multinational Financial
Management
• Can reduce agency
• It allows managers of the parent direct control of
foreign subsidiaries
• Reduce the power of subsidiary managers.
• However, parents managers may make poor decisions

for the subsidiary if they are not as informed as
subsidiary managers about local financial conditions.

Decentralized Multinational Financial Management
for an MNC with two subsidiaries, A and B
Cash Financial Financial Cash

Management Managers Managers Management
at A of A of B at B
Inventory and Inventory and

Accounts Accounts
Receivable Receivable
Management at Management at B
A
Financing at A Financing at B
Capital Expenditures Capital Expenditures

at A at B
International Financial Management, 2nd edition, Jeff Madura and Roland Fox
ISBN 978-1-490D8e0c-e3m2b2e9r -2901©5 2011 Cengage Learning EMEA
Last Updated: 15
Decentralized Multinational Financial
Management
• Higher agency costs
• Subsidiary managers may make decisions that do not
focus on maximizing the value of the entire MNC.

• Gives more control to those managers who are closer to
the subsidiary’s operations and environment.

Impact of Management Control
• Some MNCs allow subsidiary managers to make the

key decisions for their respective operations, but the
parent’s management monitors the decisions.
• Today, electronic networks make it easier for the parent
to monitor the actions and performance of its foreign
subsidiaries.

2. Impact of Corporate Control
• Various forms of corporate control can reduce agency

costs:
• share options
• hostile takeover threat
• investor monitoring

1. Share options
• A form of corporate control, based on motivation, is to
partially compensate the board members and
executives with share options.
• Such inventive packages, which may include shares as
well, can encourage directors to make decisions that
maximize the MNC’s share price

2. Hostile takeover threat

• Stock market analysts and shareholders will sell the
shares of companies they believe to be badly run.

• If this view is widespread in the market, the share price
will fall. Another firm might then acquire the MNC at a

low price.

3. Investor monitoring
• Monitoring by individuals, pressure groups and
institutions, including investment trusts, pension funds

and insurance companies, all of whom are major
shareholders in the stock market.
• Their monitoring by means of the financial press, annual
and interim reports.

Constraints Interfering with the MNC’s Goal
MNC managers are confronted with various constraints:

• environmental constraints – pollution controls,
disposal of production waste materials, etc.

• regulatory constraints – taxes, employee
rights, etc.
• ethical constraints – business practice that is
perceived to be unethical in one country may be

totally ethical in another.

Part 3
THEORIES OF
INTERNATIONAL BUSINESS

Theories of International Business – Economic
theories
• Address the problem at national level, looking at

how countries can increase their overall level of
wealth through international trade.
• Why are firms motivated to expand their
business internationally?
1. Theory of Comparative Advantage
• Specialization by countries can increase
production
efficiency.

Theories of International Business – Economic
theories
2. Imperfect Markets Theory

• The markets for the various resources used in
production are “imperfect.”
• Factors of production are somewhat immobile e.g.
labour, land, etc…
3. Product Cycle Theory
• Business Theory
• As a firm matures, it may recognize additional
opportunities outside its home country.

The International Product Life Cycle
1. Firm creates 2. Firm exports

product to product to 3. Firm
accommodate accommodate establishes
local demand foreign demand foreign
subsidiary to
establish
presence in
4a. Firm foreign country
or and possibly to
differentiates
product from 4b. Firm’s foreign reduce costs
competitors and/or business
expands product declines as its
line in foreign competitive
country advantages are
eliminated

Part 4
INTERNATIONAL BUSINESS
METHODS

International Business Methods
1. International trade
• Trading: (by exporting) or to obtain supplies at a
low cost (by importing).
• The risk is minimal because the firm does not
invest any of its capital abroad.
• If the firm experiences a decline in it s exporting
or importing, it can normally reduce or
discontinue this part of its business at a low cost.

2. Licensing
• Licensing involves selling copyrights, patents,
trademarks, or trade names or legal rights in

exchange for fees known as royalties.
• Thus a company is selling the right to produce
their goods. For example, Pepsi-Cola licenses

Heineken to make and sell Pepsi-Cola in the
Netherlands.

2. Licensing
• Licensing allows firms to use their technology in
foreign markets without a major investment in

foreign countries and without the transportation
costs that result from exporting.
• A major disadvantage of licensing is that it is
difficult for the firm providing the technology to

ensure quality control in the foreign production
process.

2. Licensing

3. Franchising
• Under a franchising agreement the franchisor
provides specialized sales or service strategy,
support assistance, and possibly an initial
investment in the franchise in exchange for
periodic fees.

Top franchise in the world

Franchise Industry Start-up costs
Subway Sandwiches & salads $85.2K - 260.35K
7-eleven Inc. Convenience store $30.8K - 1.5M
McDonald’s Fast food $1.03M - 2.18M
KFC Fast food $1.31M - 2.47M
Ace Hardware Home Improvement $750K - 1000K
Retail
Baskin-Robbins Ice cream, frozen yogurt, $118.7K - 374.4K
frozen beverages

4. Joint ventures
• A venture that is owned and operated by two or
more firms.
• Most joint ventures allow two firms to apply their
respective comparative advantages in a given
product.

5. Acquisitions of existing operations - in

foreign countries allow firms to quickly gain
control over foreign operations as well as a
share of the foreign market.

• Many MNCs use a combination of methods to increase

• In general, any method of conducting business that
requires a direct investment in foreign operations is
referred to as a direct foreign investment (DFI).

International Opportunities
Investment opportunities
• The marginal returns on MNC projects are above
those of purely domestic firms since MNCs have
expanded opportunity sets of possible projects from
which to select.
Financing opportunities
• MNCs can obtain capital funding at a lower cost due
to their larger opportunity set of funding sources
around the world.

Part 5
VALUATION MODEL FOR AN
MNC

Valuation Model for an MNC
Domestic Model
E CF

t =1
1 k  t
E (CF ) = expected cash flows to be received at

Valuation Model for an MNC
Valuing International Cash Flows
E E ER 
n j, j,
CF 1
t t

m j 1 
Value =  t =1 

 k t 
 
E (CFj,t ) = expected cash flows denominated in a particular
currency (domestic currency)
E (ERj,t ) = expected exchange rate at which the MNC can
convert the foreign currency at the end of period
t
k = the weighted average cost of capital of the
MNC
Example
• Consider a UK firm that expects to earn £1,000,000 in

the UK and 1,500,000 euros for the euro currency area.
• Assuming that a euro is worth 60 pence, what is the
expected cash flows?
• With the WACC of 10%, what is the value of the
cash
flows?

THE END

Lecture 1 - Multinational Financial Management

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Bachelor of Accounting(Hons)

International Finance: Markets and

Multinational Financial Management

Last Updated: 9 December 2015 © I-Station Solutions Sdn Bhd 3

On successful completion of this topic students should

• Common methods used to conduct

© I-Station Solutions Sdn Bhd 4

On successful completion of this topic students should be

with that goal.

© I-Station Solutions Sdn Bhd 5

What is International Finance?

• International finance is the study of monetary interactions

• International finance focuses on areas such as foreign

• Increased globalization has magnified the importance of

© I-Station Solutions Sdn Bhd 6

• Why a company wants to develop business

© I-Station Solutions Sdn Bhd 9

• The commonly stated goal of a firm is to maximize its

© I-Station Solutions Sdn Bhd 10

• Initially, firms may merely attempt to export products or

Last Updated: 9 December 2015 © I-Station Solutions Sdn Bhd 11

 Generating more revenue

For example Tesco (United Kingdom)

Generate more than a third of their sales outside Europe.

© I-Station Solutions Sdn Bhd 13

• Lotus’s is a retail chain that originated in Thailand by CP Group and

© I-Station Solutions Sdn Bhd 16

• The commonly accepted goal of an MNC is to maximize

© I-Station Solutions Sdn Bhd 17

Saturday, November 5, 2022

• When a corporation’s shareholders differ from its

© I-Station Solutions Sdn Bhd 20

• The magnitude of agency costs can vary with the

© I-Station Solutions Sdn Bhd 21

Cash Financial Cash

Inventory and Inventory and

Capital Expenditures Capital Expenditures

• However, parents managers may make poor decisions

© I-Station Solutions Sdn Bhd 14

Cash Financial Financial Cash

Inventory and Inventory and

Capital Expenditures Capital Expenditures

focus on maximizing the value of the entire MNC.

© I-Station Solutions Sdn Bhd 25

• Some MNCs allow subsidiary managers to make the

© I-Station Solutions Sdn Bhd 26

• Various forms of corporate control can reduce agency

• hostile takeover threat

© I-Station Solutions Sdn Bhd 27

© I-Station Solutions Sdn Bhd 28

2. Hostile takeover threat

shares of companies they believe to be badly run.

will fall. Another firm might then acquire the MNC at a

© I-Station Solutions Sdn Bhd 29

institutions, including investment trusts, pension funds

and interim reports.

© I-Station Solutions Sdn Bhd 30

MNC managers are confronted with various constraints:

disposal of production waste materials, etc.

perceived to be unethical in one country may be

© I-Station Solutions Sdn Bhd 31

© I-Station Solutions Sdn Bhd 32

• Address the problem at national level, looking at