Chapter 1

Multinational
Financial Management:
An Overview

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Managing the MNC
Multinational Company (MNC):
firms that engage in some forms of international
business have subsidiaries
 small firms that conduct international business are
also categorized into International Financial
Management.

Why (entering international business)?

Competitive advantage reason: with reducing the
cost by capitalizing on opportunities in
international markets (reducing price without
reducing profit margin)
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Managing the MNC (cont.)

Company’s strategies are aimed to

improve cash flows.
to enhance shareholders wealth

Strategies:
 Expansion within a local area
 Penetration of foreign markets

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Goal of The MNC
I.e. to maximize shareholders wealth
maximizing value vs maximizing earnings
parent control of agency problems

Agency costs are larger for MNCs than domestic

firms, since:
 having subsidiaries scattered around the world
more difficult to monitor managers of distance
subsidiaries
 foreign subsidiaries managers raised in different
cultures
 the larger MNCs can also create large agency
problems
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Goal of the MNC (cont.)
How SOX (Sarbanes-Oxley Act) Improved Corporate
Governance of MNCs
 Establishing a centralized database of information
 Ensuring that all data are reported consistently among
subsidiaries
 Implementing a system that automatically checks
data for unusual discrepancies relative to norms
 Speeding the process by which all departments and all
subsidiaries have access to the data that they need
 Making executives more accountable for financial
statements by personally verifying their accuracy

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Management Styles of MNC
 Centralized vs Decentralized

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Management Styles of MNC (cont.)

7
Why Firms Pursue International
Business

Reasons why firms are entering

international business:
 Theory of Comparative Advantage
 Imperfect Markets Theory
 Product Cycle Theory

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Why Firms Pursue International
Business (cont.)

Theory of Comparative Advantage

Specialization by countries can increase
production efficiency, ex:
 technology advantages
 labor cost advantages

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Why Firms Pursue International
Business (cont.)

Imperfect Market Theory

Resources are not easily transferred
among countries (factors of
production are somewhat immobile)
cost restriction provide an
incentive for firms to seek out foreign
opportunities.

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Why Firms Pursue International
Business (cont.)
Product Cycle Theory
It may recognize additional (selling)
opportunities outside its home country.

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How Firms Engage in International
Business

 International Trade
 A relatively conservative approach to
penetrate markets (by exporting) or to obtain
supplies at a low cost (by importing).

 Licensing
 Obligates a firm to provide its technology
(copyrights, patents, trademarks, or trade
names) in exchange for fees or some other
specified benefits.

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How Firms Engage in International
Business (cont.)

 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.

 Joint Ventures
 A venture that is jointly owned and operated
by two or more firms.

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How Firms Engage in International
Business (cont.)

 Acquisitions of Existing Operations

 A firm which acquires other firms in foreign
countries as a means of penetrating foreign
markets.

 Establishing New Foreign Subsidiary

 Penetrating foreign markets by establishing
new operations in foreign countries to
produce and sell their products.

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How Firms Engage in
International Business (cont.)

15
Valuation Model for an MNC
 Domestic Model

 Valuing International Cash Flows

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Valuation Model for an MNC
(cont.)

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