INTERNATIONAL FINANCE

Chapter 1
Multinational Financial Management:
An Overview
 LEARNING OUTCOMES

 To identify the main goal of the multinational

corporation (MNC) and conflicts with that goal;
 To describe the key theories that justify international
business
 Risks of international business
 International business
MNC’S

International Trade Joint Venture

Acquisition of existing
Licensing
operations
Franchising Establishing new
foreign subsidiaries
 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)

 LICENSING

Involves selling copyrights, patents, trademarks

etc, in exchange for fees (royalties)

A company is selling the right to produce their

goods.
 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.

 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
 Firms frequently
ACQUISITIONS
acquire OFotherEXISTING
firms in
OPERATIONS
foreign countries as a
means of penetrating
Allow
foreignfirms to have full
markets.
control over their
foreign businesses and
to quickly obtain a
large portion of foreign
market share.
The fastest way to
grow.
Feature Require a large investment
ESTABLISHING NEW FOREIGN SUBSIDIARIES

Tailored exactly to the firm’s needs

Need a lot of time

 QUESTION AND APPLICATIONS

Question17 Page 17
OPERATIONAL OBJECTIVES OF MNCS

maximize
shareholder
wealth

Satisfy demand
of government ,
lenders ,
employees
 CORPORATE CONTROL OF AGENCY
PROBLEMS.

Conflict between firm’s manager and shareholders

Representative cost in multinational companies is often

larger than domestic companies
 CORPORATE CONTROL OF AGENCY
PROBLEMS.
 Enron was, at one point, one of the
largest companies in the United States. THE ENRON 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
 RESTRICTIONS OBSTRUCT OBJECTIVES

Env
rest
iron
m r ict io n
rict ent l re st
a
-
Reg
ion M or l
ulat Regulative
eth ica
- ion Restriction r al r d
Ant n e
i
law -polutio Ge tanda
- Tax s
n 1
- Money transaction
- Transfer income
abroad
2 3

1
GOVERNANCE STRUCTURE
Centralize multinational OF A
MULTINATIONAL COMPANY
financial Management

Decentralize multinational
financial Management
 CENTRALIZE GOVERNANCE

Manager of mother
company

Cash governance of Cash governance of

subsidiary A subsidiary B

Receivable and inventory Receivable and inventory

subsidiary A governance subsidiary B governance

Expenditure
Finance in Expenditure in Finance in
in subsidiary
subsidiary A subsidiary B subsidiary B
A
 DECENTRALIZE GOVERNANCE

Managers of Managers of
subsidiary A subsidiary B

Cash governance of Cash governance of

subsidiary A subsidiary B

Receivable and inventory Receivable and inventory

subsidiary A governance subsidiary B governance

Expenditure
Finance in Expenditure in Finance in
in subsidiary
subsidiary A subsidiary B subsidiary B
A
 THEORIES OF INTERNATIONAL
BUSINESS

Why are firms motivated to expand

their business internationally?

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.”
THEORIES OF INTERNATIONAL
BUSINESS

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.
PRODUCT CYCLE THEORY
 RISKS OF INTERNATIONAL BUSINESS

 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
 QUESTION AND APPLICATIONS

Question 22 Page 19