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- 1. Multinational Corporation (MNC) Foreign Exchange Markets Product Markets Subsidiaries International Financial Markets Dividend Remittance & Financing Exporting & Importing Investing & Financing The International Financial Environment
- 2. A1 - 2 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.
- 3. A1 - 3 Goal of the MNC The commonly accepted goal of an MNC is to maximize shareholder wealth. We will focus on MNCs that are based in the United States and that wholly own their foreign subsidiaries.
- 4. A1 - 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.
- 5. A1 - 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. However, a decentralized style gives more control to those managers who are closer to the subsidiarys operations and environment.
- 6. A1 - 6 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 parents management.
- 7. A1 - 7 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.
- 8. A1 - 8 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.
- 9. A1 - 9 Constraints Interfering with the MNCs Goal As MNC managers attempt to maximize their firms value, they may be confronted with various constraints. Environmental constraints. Regulatory constraints. Ethical constraints.
- 10. A1 - 10 Why are firms motivated to expand their business internationally? Theories of International Business 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.
- 11. A1 - 11 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.
- 12. A1 - 12 International Business 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.
- 13. A1 - 13 International Business Methods Licensing allows a firm to provide its technology in exchange for fees or some other benefits. 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.
- 14. A1 - 14 International Business Methods Firms may also penetrate foreign markets by engaging in a joint venture (joint ownership and operation) with firms that reside in those markets. 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.
- 15. A1 - 15 International Business Methods 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.
- 16. A1 - 16 International Opportunities Investment opportunities - The marginal return on projects for an MNC is above that of a purely domestic firm because of the expanded opportunity set of possible projects from which to select. Financing opportunities - An MNC is also able to obtain capital funding at a lower cost due to its larger opportunity set of funding sources around the world.
- 17. A1 - 17 International Opportunities Opportunities in Europe The Single European Act of 1987. The removal of the Berlin Wall in 1989. The inception of the euro in 1999. Opportunities in Latin America The North American Free Trade Agreement (NAFTA) of 1993. The General Agreement on Tariffs and Trade (GATT) accord.
- 18. A1 - 18 International Opportunities Opportunities in Asia The reduction of investment restrictions by many Asian countries during the 1990s. Chinas potential for growth. The Asian economic crisis in 1997-1998.
- 19. A1 - 19 Exposure to International Risk exchange rate movements Exchange rate fluctuations affect cash flows and foreign demand. foreign economies Economic conditions affect demand. political risk Political actions affect cash flows. International business usually increases an MNCs exposure to:
- 20. A1 - 20 Managing for Value 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 firms value, and hence shareholder wealth.
- 21. A1 - 21 E (CF$,t ) = expected cash flows to be received at the end of period t n = the number of periods into the future in which cash flows are received k = the required rate of return by investors Valuation Model for an MNC Domestic Model
- 22. A1 - 22 E (CFj,t ) = expected cash flows denominated in currency j to be received by the U.S. parent at the end of period t E (ERj,t ) = expected exchange rate at which currency j can be converted to dollars at the end of period t k = the weighted average cost of capital of the U.S. parent company Valuation Model for an MNC Valuing International Cash Flows
- 23. A1 - 23 Valuation Model for an MNC An MNCs 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.
- 24. A1 - 24 Valuation Model for an MNC Impact of New International Opportunities on an MNCs Value Exchange Rate Risk Political Risk Exposure to Foreign Economies