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Overview of Multinational Overview of Multinational Financial Management and Financial Management and

the Multinational the Multinational CorporationCorporation

International Financial International Financial ManagementManagement

Dr. Andrea DeMaskeyDr. Andrea DeMaskey

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Learning ObjectivesLearning Objectives What is multinational financial management What is multinational financial management

and why do we need to study it?and why do we need to study it? What are the goals of multinational financial What are the goals of multinational financial

management?management? What are the key trends in the world What are the key trends in the world

economy?economy? What is a multinational corporation and what What is a multinational corporation and what

are the basic types?are the basic types? How does multinational financial How does multinational financial

management differ from domestic financial management differ from domestic financial management?management?

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What is so special about What is so special about International Finance?International Finance?

Foreign exchange and political riskForeign exchange and political risk

Market imperfectionsMarket imperfections

Expanded opportunity setExpanded opportunity set

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What is the Goal of What is the Goal of Multinational Financial Multinational Financial

Management?Management?

Corporate GoalsCorporate Goals– Shareholder Wealth MaximizationShareholder Wealth Maximization– Corporate Wealth MaximizationCorporate Wealth Maximization

Operational GoalsOperational Goals– Maximizing consolidated profits after taxesMaximizing consolidated profits after taxes– Minimizing the firm’s effective global tax Minimizing the firm’s effective global tax

burdenburden– Correct positioning of the firm’s income, Correct positioning of the firm’s income,

cash flows, and available fundscash flows, and available funds

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Goals of ManagementGoals of Management

Shareholder Wealth Shareholder Wealth MaximizationMaximization

(Anglo-American Model)(Anglo-American Model)

Corporate Wealth Corporate Wealth MaximizationMaximization

(Non-Anglo American (Non-Anglo American Model)Model)

Shareholders

Firm (Management)

Banks Employees

Shareholders

Firm (Management)Main Banks

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Conflict and Constraints Conflict and Constraints with the MNC’s Goalwith the MNC’s Goal

Agency problemAgency problem

Environmental constraintsEnvironmental constraints

Regulatory constraints Regulatory constraints

Ethical constraintsEthical constraints

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Globalization of the World Globalization of the World EconomyEconomy

Emergence of Globalized Financial Emergence of Globalized Financial MarketsMarkets

Trade Liberalization and Economic Trade Liberalization and Economic IntegrationIntegration

PrivatizationPrivatization

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Growth in International Growth in International TradeTrade

Consistently lower for the U.S.Consistently lower for the U.S.

Generally much larger for Canada Generally much larger for Canada and European countries.and European countries.

Has increased over time.Has increased over time.

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Growth in Foreign Direct Growth in Foreign Direct InvestmentInvestment

In the 1990s, annual growth rate of In the 1990s, annual growth rate of 10%, compared to 3.5% in 10%, compared to 3.5% in international trade.international trade.

In 1998, MNCs’ worldwide sales In 1998, MNCs’ worldwide sales reached $11 trillion, compared to reached $11 trillion, compared to about $7 trillion of world exports.about $7 trillion of world exports.

In 2000, FDI reached $1.27 trillion.In 2000, FDI reached $1.27 trillion.

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What are the What are the Characteristics of the Characteristics of the

MNC?MNC? Controls Subsidiaries in Several Controls Subsidiaries in Several

Host CountriesHost Countries Derives a Significant Proportion of Derives a Significant Proportion of

its Revenues from Foreign its Revenues from Foreign Subsidiary SalesSubsidiary Sales

Makes Financial Decisions that Makes Financial Decisions that Reflect its Multinational OrientationReflect its Multinational Orientation

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What is a MNC?What is a MNC?

The MNC is a firm engaged in The MNC is a firm engaged in producing and selling goods or producing and selling goods or services in more than one country.services in more than one country.

U.S Parent

British Affiliate

German Affiliate

Japanese Affiliate

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Why do Firms Why do Firms Internationalize?Internationalize?

Raw Material SeekersRaw Material Seekers

Market SeekersMarket Seekers

Cost MinimizersCost Minimizers

Knowledge SeekersKnowledge Seekers

Political Safety SeekersPolitical Safety Seekers

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What Are the Benefits to What Are the Benefits to MNCs?MNCs?

Economies of scaleEconomies of scale– CostsCosts– Purchasing powerPurchasing power– Know-howKnow-how

Access to underpriced labor services Access to underpriced labor services and special R&D capabilitiesand special R&D capabilities

Global presence will boost Global presence will boost profit profit marginsmargins and create and create shareholder valueshareholder value

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Basic Concepts for the Basic Concepts for the Study of International Study of International

FinanceFinance

ArbitrageArbitrage– Tax arbitrageTax arbitrage– Risk arbitrageRisk arbitrage

Market EfficiencyMarket Efficiency

Capital Asset PricingCapital Asset Pricing