Multinational Financial Management PDF

Multinational Financial Management: An Overview Global with Electronic Banking Dr. Mary Joy C. Teodosio, LPT Multinational Corporations (MNCs) – Defined as firms that engage in some form of international business – The managers conduct international financial management, which involves intern...

Multinational Financial Management: An Overview Global with Electronic Banking Dr. Mary Joy C. Teodosio, LPT Multinational Corporations (MNCs) – Defined as firms that engage in some form of international business – The managers conduct international financial management, which involves international investing and financing decisions that are intended to maximize the value of the MNC. – These companies must recognize how their foreign competitors will be influenced by movements in exchange rates, foreign interest rates, labor costs, and inflations. How business disciplines are used to manage the MNC? – Management is used to develop strategies that will motivate and guide employees who work in an MNC and to organize resources so that they can efficiently produce products or services. – Marketing is used to increase consumer awareness about the products and to monitor changes in consumer preferences. – Accounting and information systems of the MNC, which can be used to report financial information to investors and to evaluate the outcomes of various strategies implemented by the MNC. – Finance is used to make investment and financing decisions for the MNC. Common Finance Decisions – Whether to discontinue operations in a particular country – Whether to pursue new business in a particular country – Whether to expand business in a particular country – How to finance expansion in a particular country Managing the MNC  Agency Problem  Conflict of goals between a firm’s managers and shareholders  Managers of an MNC may make decisions that conflict with the firm’s goal of maximizing shareholder wealth.  Agency cost – the cost of ensuring that managers maximize shareholder wealth 1. MNC’s with subsidiaries scattered around the world may experience larger agency problems because monitoring the managers of distant subsidiaries in foreign countries is more difficult. 2. Foreign subsidiary managers who are raised in different cultures may not follow uniform goals. 3. The sheer size of the larger MNCs can also create significant agency problems, because it complicates the monitoring of managers. Agency Problem  Parent Control of Agency Problem  The parent should clearly communicate the goals for each subsidiary to ensure that all of them focus on maximizing the value of the MNC and not of their respective subsidiaries.  The parent can oversee the subsidiary decisions  The parent also can implement compensation plans that reward those managers who satisfy the MNC’s goals.  Corporate Control of Agency Problems Methods used by MNCs to improve internal control process 1. Establishing a centralized database of information 2. Ensuring that all data are reported consistently among subsidiaries 3. Implementing a system that automatically checks data for unusual discrepancies relative to norms 4. Speeding the process by which all departments and subsidiaries access needed data 5. Making executives more accountable for financial statements by personally verifying their accuracy Management Structure of an MNC – CENTRALIZED Management Style  Can reduce agency cost because it allows managers of the parent to control foreign subsidiaries and thus reduces the power of subsidiary managers – DECENTRALIZED Management Style  This may result in higher agency costs because subsidiary managers may make decisions that fail to maximize the value of the entire MNC. Theories behind MNCs pursuing International Business 1. Theory of Comparative Advantage 2. Imperfect Markets Theory 3. Product Cycle Theory  Theory of Comparative Advantage – A country that specialized in some products may not produce other products, so trade between countries is essential. – Comparative advantages allow firms to penetrate foreign markets – Specialization by countries can increase production efficiency  Imperfect Markets Theory – Markets for the various resources used in production are “imperfect,” MNCs often capitalized on a foreign country’s particular resources. – Imperfect markets provide an incentive for firms to seek out foreign opportunities.  Product Cycle Theory – Firms become established in the home market as a result of some perceived advantage over existing competitors, such as a need by the market for a least one more supplier of the product. – Foreign demand for the firm’s product will initially be accommodated by exporting, then produce the product in foreign markets, then develop strategies to prolong the foreign demand for the product. – As a firm matures, it may recognize additional opportunities outside its home country. Methods to Conduct International Business International Trade Licensing Franchising Joint ventures Acquisitions of existing operations Establishment of new foreign subsidiaries  International Trade Exporting and Importing  Exporting refers to selling goods and services from the home country to a foreign country, while importing refers to purchasing products from a foreign country and bringing them into the home country.  This approach entails minimal risk because the firm does not place any of its capital at risk.  In exporting and importing, international financial management is essential for managing currency exchange rates, hedging against currency fluctuations, and ensuring efficient payment and settlement processes. It involves managing the financial aspects of international transactions, such as invoicing, payment terms, and trade financing options Licensing It is an arrangement whereby one firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or other considerations. Revenues are generated from foreign countries without establishing any production plants in foreign countries, or transporting goods to foreign countries. Franchising Franchising involves a company (the franchisor) allowing another company (the franchisee) in a foreign country to use its business model, brand, and operating system in exchange for a fee. Since franchising by multinational corporations often requires direct investment in foreign operations, this is referred to as foreign direct investment (FDI). Licensing and Franchising International financial management is involved in licensing and franchising through the negotiation and management of financial agreements, such as royalty payments and licensing fees. It includes assessing the financial impact of licensing arrangements, managing foreign exchange risks, and ensuring compliance with financial regulations in different countries Joint Ventures A joint venture is a venture that is jointly owned and operated by two or more firms. This involves two or more companies from different countries forming a new company to pursue a specific business opportunity. The companies share ownership, control, and profits of the new company Joint Ventures In joint ventures, international financial management is crucial for managing financial agreements between the partnering companies. It involves negotiating and structuring financial contributions, profit-sharing arrangements, and managing financial risks. It also includes financial reporting and compliance with international accounting standards Acquisitions of Existing Operations Acquiring firms in foreign countries penetrate foreign markets. Such acquisition give firms full control over their foreign businesses and enable the MNC to quickly obtain a large portion of foreign market share. This represents direct foreign investment because MNCs directly invest in a foreign country by purchasing the operations of target companies. Establishing of New Foreign Subsidiaries This method requires a large direct foreign investment. Establishing a new subsidiaries may be preferred to foreign acquisitions because the operations can be tailored exactly to the firm’s needs. The firms will not reap any rewards from the investment until the subsidiary is built and a customer base established. Cross-border business dealings This includes export, production, licensing, contracting, manufacturing, foreign assembly, joint ventures, and other forms of international commerce. It also includes transactions driven by non-financial goals, such as the triple bottom line (social, environmental, philanthropic), corporate social responsibility, and political favor. Uncertainty Surrounding an MNC’s Cash Flows – Exposure to International Economic Conditions – Exposure to International Political Risk – Exposure to Exchange Rate Risk Legal Factors Cross-country businesses have to deal with the legal framework of two or more countries. This includes understanding and complying with different laws and regulations related to age, disability discrimination, wage rates, employment, environment, and more. Legal liabilities can vary between countries and may affect the working of multinational corporations (MNCs) Political Factors The different political considerations of the countries involved in global business can either facilitate or hinder business operations. Political stability, government policies, trade agreements, and regulations can significantly impact international business. Changes in tax rates, policies, and actions of the government, as well as political stability of the country, can affect operations Economic Factors Economic factors play a crucial role in international business. Factors such as target market size, cost involved, currency and exchange rates, inflation, and economic stability can directly influence the profitability of international businesses. Entrepreneurs should analyze these factors extensively before entering a foreign market. Technological Factors Technological advancements and innovation have a significant impact on international business. The integration of technology has made global business planning more successful. Electronic fund transfers and improved banking systems have facilitated the movement of funds across borders. Technology transfer and technological innovation are prime factors affecting international business. Social and Cultural Factors Social and cultural factors can influence international business operations. Understanding the local culture, customs, values, and preferences of the target market is crucial for successful operations. Cultural differences, language barriers, and social norms can impact communication, marketing strategies, and customer preferences. Market Factors Market factors such as competition, market demand, consumer behavior, and market saturation can affect international business operations. Analyzing the target market and understanding the competitive landscape is essential for making informed business decisions. Infrastructure and Logistics Infrastructure and logistics play a vital role in international business. Factors such as transportation networks, communication systems, availability of utilities, and supply chain management can impact the efficiency and effectiveness of operations. Risk Factors International business involves various risks that need to be considered. These include currency exchange rate fluctuations, political instability, legal disputes, cultural misunderstandings, intellectual property protection, and market volatility. Managing and mitigating these risks is crucial for successful international business operations