Overview of Multinational
Financial Management and the
Multinational Corporation
1
Learning Objectives
2
 What is multinational financial management and
why do we need to study it?
 What are the goals of multinational financial
management?
 What are the key trends in the world economy?
 What is a multinational corporation and what are
the basic types?
 How does multinational financial management
differ from domestic financial management?
What factors distinguish multinational
financial management from domestic
financial management?
What is so special about International Finance?
3
 Foreign exchange and political risk
1.
 Market imperfections
2.
 Expanded opportunity set
3.
4.
5.
6.
An Overview of Multinational Financial
Management
Different currency denominations.
Economic and legal ramifications.
Language differences.
Cultural differences.
Role of governments.
Political risk
1
Goals of Management
What is the Goal of Multinational Financial
5
Management?
 Corporate Goals
 Shareholder Wealth Maximization
 Corporate Wealth Maximization
 Operational Goals
 Maximizing consolidated profits after taxes
 Minimizing the firm’s effective global tax burden
 Correct positioning of the firm’s income, cash flows, and
available funds
6
Corporate Wealth Maximization
(Non-Anglo American Model)
Shareholder Wealth Maximization
(Anglo-American Model)
Shareholders
Shareholders
Firm
(Management)
Banks
Main Banks
Firm
(Management)
Employees
Conflict and Constraints with the MNC’s Goal
Globalization of the World Economy
7
8
 Agency problem
 Environmental constraints
 Regulatory constraints
 Ethical constraints
An Overview of Multinational Financial
Management
 Emergence of Globalized Financial Markets
 Trade Liberalization and Economic Integration
 Privatization
2
Growth in International Trade
Growth in Foreign Direct Investment
9
10
 Consistently lower for the U.S.
 In the 1990s, annual growth rate of 10%, compared
 Generally much larger for Canada and European
 In 1998, MNCs’ worldwide sales reached $11 trillion,
to 3.5% in international trade.
countries.
compared to about $7 trillion of world exports.
 In 2000, FDI reached $1.27 trillion.
 Has increased over time.
What are the Characteristics of the MNC?
What is a MNC?
11
12
 Controls Subsidiaries in Several Host Countries
 Derives a Significant Proportion of its Revenues from
Foreign Subsidiary Sales
 Makes Financial Decisions that Reflect its
Multinational Orientation
 The MNC is a firm engaged in producing and
selling goods or services in more than one
country.
U.S Parent
British
Affiliate
An Overview of Multinational Financial
Management
German
Affiliate
Japanese
Affiliate
3
Why do Firms Internationalize?
13
What Are the Benefits to MNCs?
14
 Economies of scale
 Costs
 Purchasing power
 Know-how
 Raw Material Seekers
 Market Seekers
 Cost Minimizers
 Access to underpriced labor services and special
 Knowledge Seekers
R&D capabilities
 Political Safety Seekers
Global presence will boost profit margins and
create shareholder value
Basic Concepts for the Study of International
Finance
15
 Arbitrage


Tax arbitrage
Risk arbitrage
 Market Efficiency
 Capital Asset Pricing
An Overview of Multinational Financial
Management
4