multinational financial management:an overview
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Multinational Financial Management:An Overview . it is the international fiance Maura book chapter 1 slide. it will be helpful for student. find basic introduction about international finance.TRANSCRIPT
Multinational Financial Management:An Overview
Multinational Financial Management:An Overview
11 Chapter Chapter
B1 - 2
Chapter Objectives
• To identify the main goal of the multinational corporation (MNC) and conflicts with that goal;
• To describe the key theories that justify international business; and
• To explain the common methods used to conduct international business.
B1 - 4
Conflicts Against the MNC Goal
• For corporations with shareholders who differ from their managers, a conflict of goals can exist - the agency problem.
• Agency costs are normally larger for MNCs than for purely domestic firms.¤ The sheer size of the MNC.¤ The scattering of distant subsidiaries.¤ The culture of foreign managers.¤ Subsidiary value versus overall MNC value.
B1 - 5
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.
• Increase agency Cost> However, a decentralized style gives more control to those managers who are closer to the subsidiary’s operations and environment.
B1 - 6
Centralized Multinational Financial Managementfor an MNC with two subsidiaries, A and B
FinancialManagersof Parent
Capital Expendituresat A
Inventory andAccounts
ReceivableManagement at A
CashManagement
at A
Financing at A
Capital Expendituresat B
Inventory andAccounts
ReceivableManagement at B
CashManagement
at B
Financing at B
B1 - 7
Decentralized Multinational Financial Managementfor an MNC with two subsidiaries, A and B
FinancialManagers
of A
Capital Expendituresat A
Inventory andAccounts
ReceivableManagement at A
CashManagement
at A
Financing at A
Capital Expendituresat B
Inventory andAccounts
ReceivableManagement at B
CashManagement
at B
Financing at B
FinancialManagers
of B
B1 - 8
Impact of Management Control
• Some MNCs attempt to strike a balance - they allow subsidiary managers to make the key decisions for their respective operations, >> but the decisions are monitored by the parent’s management.
B1 - 9
Impact of Management Control
• Electronic networks make it easier for the parent to monitor the actions and performance of foreign subsidiaries.
• For example, corporate intranet or internet email facilitates communication. Financial reports and other documents can be sent electronically too.
B1 - 10
Impact of Corporate Control
• Various forms of corporate control can reduce agency costs.¤ Stock compensation for board members
and executives.¤ The threat of a hostile takeover.¤ Monitoring and intervention by large
shareholders.
B1 - 11
Constraints Interfering with the MNC’s Goal
• As MNC managers attempt to maximize their firm’s value, they may be confronted with various constraints.¤ Environmental constraints.¤ Regulatory constraints.¤ Ethical constraints.>> Mini Discussion
B1 - 12
Why are firms motivated to expand their business internationally?
Theories of International Business
Theory of Comparative Advantage¤ Specialization by countries can increase
production efficiency> Advance Technology or Cheap labor
Imperfect Markets Theory¤ The markets for the various resources used
in production are “imperfect.”> immobility of factors of production > Costly and Restricted
B1 - 13
Why are firms motivated to expand their business internationally?
Theories of International Business
Product Cycle Theory¤ As a firm matures, it may recognize
additional opportunities outside its home country.
B1 - 14
Firm exports product to accommodate foreign demand.
Firm creates product to accommodate local demand.
The International Product Life Cycle
Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs.
a. Firm differentiates product from competitors and/or expands product line in foreign country.
b. Firm’s foreign business declines as its competitive advantages are eliminated.
or
B1 - 15
InternationalBusiness Methods
• International trade is a relatively conservative approach involving exporting and/or importing.¤ The internet facilitates international trade
by enabling firms to advertise and manage orders through their websites.
There are several methods by which firms can conduct international business.
B1 - 16
InternationalBusiness Methods
• Licensing allows a firm to provide its technology in exchange for fees or some other benefits.> Quality control is difficult
• Franchising obligates a firm to provide a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.> KFC, McDonald’s, Pizza Hut
B1 - 17
InternationalBusiness Methods
• Firms may also penetrate foreign markets by engaging in a joint venture (joint ownership and operation) with firms that reside in those markets.> Xerox Corp
• 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.
B1 - 18
InternationalBusiness Methods
Summary
• Firms can also penetrate foreign markets by establishing new foreign subsidiaries.
• In general, any method of conducting business that requires a direct investment in foreign operations is referred to as a direct foreign investment (DFI).
• The optimal international business method may depend on the characteristics of the MNC.
B1 - 19
Degree of International Business by MNCs
26%
62% 58%
33%
47%50%
66%
12%
46%40%
0%
10%
20%
30%
40%
50%
60%
70%
Campbell'sSoup
DowChemical
IBM Motorola Nike
Foreign Sales as a % of Total Sales
Foreign Assets as a % of Total Assets
B1 - 20
Managing for Value
• Value of an MNC is important to stakeholders
• Like domestic projects, foreign projects involve an investment decision and a financing decision.
• When managers make multinational finance decisions that maximize the overall present value of future cash flows, they maximize the firm’s value, and hence shareholder wealth.
B1 - 21
n
ttt
k1=
$,
1
CF E = Value
E (CF$,t ) = expected cash flows to be received at the end of period tn = the number of periods into the future in which cash flows are receivedk = the required rate of return by investors
Valuation Model for an MNC
• Domestic Model
B1 - 22
n
tt
m
jtjtj
k1=
1 , ,
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ER ECF E
= Value
E (CFj,t ) = expected cash flows denominated in currency j to be received by the U.S. parent at the end of period tE (ERj,t ) = expected exchange rate at which currency j can be converted to dollars at the end of period tk = the weighted average cost of capital of the U.S. parent company
Valuation Model for an MNC
• Valuing International Cash Flows
B1 - 23
Valuation Model for an MNC
• An MNC’s financial decisions include how much business to conduct in each country and how much financing to obtain in each currency.
• Its financial decisions determine its exposure to the international environment.
B1 - 24
Valuation Model for an MNC
Impact of New International Opportunities on an MNC’s Value
Exchange Rate Risk
n
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m
jtjtj
k1=
1 , ,
1
ER ECF E
= Value
Political Risk
Exposure toForeign Economies
B1 - 25
Uncertainty Surrounding an MNCs Cash Flows
• International Economic Condition¤ Economic conditions affect demand> Income
• International Political risk (country risk)¤ Political actions affect cash flows> Tax, barrier,
boycott by consumers
• Exchange rate risk¤ Exchange rate fluctuations affect cash flows
and foreign demand> weak foreign currency
International business usually increases an MNC’s exposure to: