What is a MNC?MNC Multi National Corporation

Defined as any company that engages in some type of international business

Engage in International financial Management i.e. investing and financing decisions

What is the goal of a MNC?Maximization of Shareholder wealthSometimes MNC managers make decisions that conflict with the overall goal of the organisation. These are called Agency problemsThe costs of ensuring that managers maximize shareholder wealth are called Agency costs

Controlling Agency problemsParent Control clearly communicate goals to subs and implement manager compensation which is directly linked to the goal congruenceCorporate control Large institutional investors can influence the management of a company.

Management styles of the MNC?Centralized All decisions made by parentDecentralized- Decisions made by subsidiariesHybrid A mix of the above that attempts to allow sub managers to make their respective decisions while monitoring them closely at the parent level

Why engage in International Business?Theory of Competitive AdvantageImperfect Markets TheoryProduct Cycle Theory

Ways of Engaging in International BusinessInternational Trade Exporting and ImportingLicensing A firm provides its technology for some benefit. This requires no major investment, but there may be quality control issuesFranchising Similar to licensing, but usually applies to a specialized service/product

Ways of Engaging in International Business contdJoint VenturesAcquisitions of existing Companies Quick way to penetrate foreign marketEstablishing New Foreign Subsidiaries Takes longer, but can be tailored according to parent company needs.

Valuing a MNCValue of Domestic FirmV= PV of Future cashflows (discount rate is cost of capital )Valuing International cashflowsForeign cashflows need to be converted to home currency at expected exchange rate at the end of the period.

Uncertainty Surrounding an MNCs cash flowsInternational Economic conditionsIntenational Political RiskExchange Rate risk

Agency costs are more for larger MNCs as they have subsidiaries internationally and monitoring costs are more. In addition, different cultures may place emphasis on different goals Competitive Advantage When a company specializes in a product, trade between countries is essential in order to gain access to other products. Hence MNCs penetrate foreign markes

Imperfect Market Factors of production are immobile and not free moving in many cases, so MNCs have to penetrate these foreign markets in order to access these factors of production

Product Cycle (Most popular theory supporting the formation of the MNC) A company will establish itself in its home country and then as foreign demand for the product Arises and increases, the company will start to export goods.They will then move to the foreign markets to reduce transportation costs. Then they have to find ways to maintain the competitive advantage in these countries, or expand into different countries.