Financial Management In Multi National Context

The Rise Of Multinational Corporation

A Multinational corporation (MNC) is a company engaged in producing and selling goods or services in more than one country. It ordinarily consists of a parent company located in the home country and at least five or six subsidiaries, typically with a high degree of strategic interaction among the units. Based on the development of modern communications and transportation technologies, the rise of multinational corporation was unanticipated by the classical theory of international trade as first developed by Adam Smith and David Ricardo. According to this theory, which rests on the doctrine of comparative advantage, each nation should specialize in the production and export of those goods that it can produce with highest relative efficiency and import those goods that other nations can produce relatively more efficiently. Underlying this theory, the assumption that goods and services can move internationally but factors of production such as capital, labor and land are relatively immobile. But the growth of MNC can be understood by relaxing the traditional assumptions of classical trade theory which assumes that countries differ enough in terms of resource endowments and economic skills for those differences to be at the center of any analysis of corporate competitiveness.

Factors For The Rise Of Multi National Corporation

Search for raw materials Market seeking Cost minimization Knowledge seeking Keeping domestic customers Exploiting financial market Imperfections

Multi National Financial Management

The main objective of multinational financial management is to maximize shareholder wealth as measured by share price. This means making investment and financing decisions that add value to the firm. The focus on shareholders is main because they are the legal owners of the firm. Although other stakeholders in the company do have rights but are not equal with the shareholder rights. Shareholders provide the risk capital that cushions the claims of alternative stakeholders. Allowing alternative stakeholders coequal control over capital supplied by others is equivalent to allowing one group to risk another group’s capital. This undoubtedly would impair future equity formation and produce numerous other inefficiencies. This is because companies that build shareholder value also find it easier to attract equity capital. Equity capital is especially critical for companies that operate in a riskier environment and are seeking to grow.

Short Term Financing

Financing the working capital requirements of a multinational corporation’s foreign affiliates poses a complex decision problem. This complexity stems from the large number of financing options available to the subsidiary of an MNC. Subsidiaries have an access to funds from sister affiliates and the parent as well as from external sources.

Key Factors In Short Term Financing Strategy

Whether the difference in nominal interest rates among currencies are matched by anticipated changes in the exchange rate.

Exchange risk. Many firms borrow locally to provide an offsetting liability for their exposed local currency assets.

Risk aversion. The more averse the firm is, the higher the price it should be willing to pay to reduce its currency exposure.

Currency risk. The nominal interest differential equal the forward differential. Political risk. Local financing is not the minimum cost option, multinationals often will

still try to maximize their local borrowings if they believe that expropriation or exchange controls are serious possibilities.

Short Term Financing Objectives

Minimize expected cost. Reduces information requirements, allows borrowing options to be evaluated on an individual basis without considering the correlation between loan cash flows, operating cash flows and lends itself readily to break even analysis

Minimize risk without regard to cost. The objective is impractical and contrary to shareholder interests.

Trade off expected cost and systematic risk. It is consistent with shareholder preferences as described by the capital asset pricing model

Trade off expected cost and total risk. To implement this approach it is necessary to take into account the covariances between operating and financing cash flows.

Short Term Financing Options

The intercompany loan. Frequent means of affiliate financing is to have either the parent or sister affiliate provide loan may be limited in amount or duration by official exchange controls.

The local currency loan. May be from banks and also from non banking sources Commercial paper. Short term unsecured promissory note that is generally sold by large

corporations on a discount basis to institutional investors and to other corporations