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The document discusses key concepts relating to international business finance. It begins by outlining the goal of multinational corporations (MNCs) to maximize shareholder wealth, but notes various conflicts can arise such as agency problems between managers and shareholders. The document then examines different management styles for MNCs and how they can impact agency costs. It also explores theories justifying international business expansion and common methods used by firms to conduct international operations. The summary concludes by noting MNCs must manage foreign exchange, economic, and political risks associated with operating across borders.

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amanur rahman
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57 views

Enhanced 01

The document discusses key concepts relating to international business finance. It begins by outlining the goal of multinational corporations (MNCs) to maximize shareholder wealth, but notes various conflicts can arise such as agency problems between managers and shareholders. The document then examines different management styles for MNCs and how they can impact agency costs. It also explores theories justifying international business expansion and common methods used by firms to conduct international operations. The summary concludes by noting MNCs must manage foreign exchange, economic, and political risks associated with operating across borders.

Uploaded by

amanur rahman
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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INTERNATIONAL BUSINESS FINANCE

The International Financial Environment


Multinational Corporation (MNC)

Part I

Foreign Exchange Markets Dividend Remittance & Financing

Exporting & Importing Product Markets

Investing & Financing International Financial Markets

Subsidiaries

CHAPTER 1

Chapter Objectives
To identify the main goal of the
multinational corporation (MNC) and conflicts with that goal;

To describe the key theories that justify


international business; and

To explain the common methods used to


conduct international business.

Goal of the MNC


The commonly accepted goal of an MNC is
to maximize shareholder wealth.

We will focus on MNCs that are based in


the United States and that wholly own their foreign subsidiaries.

Conflicts Against the MNC Goal


For corporations with shareholders who
differ from their managers, a conflict of goals can exist - the agency problem.

Agency costs are normally larger for MNCs


than for purely domestic firms. The sheer size of the MNC. The scattering of distant subsidiaries. The culture of foreign managers. Subsidiary value versus overall MNC value.

Impact of Management Control


The magnitude of agency costs can vary
with the management style of the MNC.

A centralized management style reduces


agency costs. However, a decentralized style gives more control to those managers who are closer to the subsidiarys operations and environment.

Centralized Multinational Financial Management


for an MNC with two subsidiaries, A and B Cash Management at A Inventory and Accounts Receivable Management at A Financing at A Capital Expenditures at A Financial Managers of Parent Cash Management at B Inventory and Accounts Receivable Management at B Financing at B Capital Expenditures at B

Decentralized Multinational Financial Management


for an MNC with two subsidiaries, A and B Cash Management at A Inventory and Accounts Receivable Management at A Financing at A Capital Expenditures at A Financial Managers of A Financial Managers of B Cash Management at B Inventory and Accounts Receivable Management at B Financing at B Capital Expenditures at B

Impact of Management Control


Some MNCs attempt to strike a balance they allow subsidiary managers to make the key decisions for their respective operations, but the decisions are monitored by the parents management.

Impact of Management Control


Electronic networks make it easier for the
parent to monitor the actions and performance of foreign subsidiaries.

For example, corporate intranet or internet


email facilitates communication. Financial reports and other documents can be sent electronically too.

Impact of Corporate Control


Various forms of corporate control can
reduce agency costs. Stock compensation for board members and executives. The threat of a hostile takeover. Monitoring and intervention by large shareholders.

Constraints Interfering with the MNCs Goal


As MNC managers attempt to maximize
their firms value, they may be confronted with various constraints.

Environmental constraints. Regulatory constraints. Ethical constraints.

Theories of International Business


Why are firms motivated to expand their business internationally?

Theory of Comparative Advantage

Specialization by countries can increase production efficiency. The markets for the various resources used in production are imperfect.

Imperfect Markets Theory

Theories of International Business


Why are firms motivated to expand their business internationally?

Product Cycle Theory

As a firm matures, it may recognize additional opportunities outside its home country.

The International Product Life Cycle


Firm creates product to accommodate local demand. a. Firm differentiates product from competitors and/or expands product line in foreign country. Firm exports product to accommodate foreign demand. Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs.

or b. Firms foreign business declines as its competitive advantages are eliminated.

International Business Methods


There are several methods by which firms can conduct international business.

International trade is a relatively


conservative approach involving exporting and/or importing. The internet facilitates international trade by enabling firms to advertise and manage orders through their websites.

International Business Methods


Licensing allows a firm to provide its
technology in exchange for fees or some other benefits.

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.

International Business Methods


Firms may also penetrate foreign markets
by engaging in a joint venture (joint ownership and operation) with firms that reside in those markets.

Acquisitions of existing operations in


foreign countries allow firms to quickly gain control over foreign operations as well as a share of the foreign market.

International Business Methods


Firms can also penetrate foreign markets
by establishing new foreign subsidiaries.

In general, any method of conducting

business that requires a direct investment in foreign operations is referred to as a direct foreign investment (DFI). may depend on the characteristics of the MNC.

The optimal international business method

International Opportunities
Investment opportunities - The marginal
return on projects for an MNC is above that of a purely domestic firm because of the expanded opportunity set of possible projects from which to select.

Financing opportunities - An MNC is also


able to obtain capital funding at a lower cost due to its larger opportunity set of funding sources around the world.

International Opportunities
Cost-benefit Evaluation for Purely Domestic Firms versus MNCs
Investment Opportunities Purely Domestic Firm

Marginal Return on Projects Marginal Cost of Capital

MNC MNC Purely Domestic Firm

Financing Opportunities

Appropriate Size for Purely Domestic Firm

Appropriate Size for MNC

Asset Level of Firm

International Opportunities
Opportunities in Europe

The Single European Act of 1987. The removal of the Berlin Wall in 1989. The inception of the euro in 1999 Expansion of EU. The North American Free Trade Agreement (NAFTA) of 1993. The General Agreement on Tariffs and Trade (GATT) accord.

Opportunities in Latin America

International Opportunities
Opportunities in Asia

The reduction of investment restrictions by many Asian countries during the 1990s. Two rising Giants China and (possibly) India. The Asian economic crisis in 1997-1998.

Exposure to International Risk


International business usually increases an MNCs exposure to:

exchange rate movements

Exchange rate fluctuations affect cash flows and foreign demand. Economic conditions affect demand. Political actions affect cash flows.

foreign economies

political risk

Exposure to International Risk


U.S. Firms Cost of Obtaining 100,000
$165,000 $160,000 $155,000 $150,000 $145,000 $140,000 $135,000 $130,000 Jan Mar May Jul Sep Nov Jan Mar May

2000

2001

Overview of an MNCs Cash Flows


Profile A: MNCs focused on International Trade
Payments for products

U.S. Customers U.S. Businesses Foreign Importers Foreign Exporters

U.S.based MNC

Payments for supplies Payments for exports Payments for imports

Overview of an MNCs Cash Flows


Profile B: MNCs focused on International Trade and International Arrangements
Payments for products Payments for supplies

U.S. Customers U.S. Businesses Foreign Importers Foreign Exporters Foreign Firms

U.S.based MNC

Payments for exports Payments for imports Fees for services Costs of services

Overview of an MNCs Cash Flows


Profile C: MNCs focused on International Trade, International Arrangements, and Direct Foreign Investment
Payments for products Payments for supplies

U.S. Customers U.S. Businesses Foreign Importers Foreign Exporters Foreign Firms Foreign Subsidiaries

U.S.based MNC

Payments for exports Payments for imports Fees for services Costs of services Funds remitted Funds invested

Managing for Value


Like domestic projects, foreign projects
involve an investment decision and a financing decision.

When managers make multinational


finance decisions that maximize the overall present value of future cash flows, they maximize the firms value, and hence shareholder wealth.

Valuation Model for an MNC


Domestic Model
Value =
t =1 n

E ( CF$, t )

(1 + k )

E (CF$,t ) = expected cash flows to be received at the end of period t n = the number of periods into the future in which cash flows are received k = the required rate of return by investors

Valuation Model for an MNC


Valuing International Cash Flows
m E ( CFj , t ) E (ER j , t ) n j =1 Value = (1 + k ) t t =1

E (CFj,t ) = expected cash flows denominated in currency j to be received by the U.S. parent at the end of period t E (ERj,t ) = expected exchange rate at which currency j can be converted to dollars at the end of period t k = the weighted average cost of capital

Valuation Model for an MNC


An MNCs financial decisions include how
much business to conduct in each country and how much financing to obtain in each currency.

Its financial decisions determine its


exposure to the international environment.

Valuation Model for an MNC


Impact of New International Opportunities on an MNCs Value
Exposure to Foreign Economies

Exchange Rate Risk

m E ( CFj , t ) E (ER j , t ) n j =1 Value = (1 + k ) t t =1

Political Risk

How Chapters Relate to Valuation


Exchange Rate Behavior (Chapters 6-8) Background on International Financial Markets (Chapters 2-5) Long-Term Investment and Financing Decisions (Chapters 13-18) Short-Term Investment and Financing Decisions (Chapters 19-21) Exchange Rate Risk Management (Chapters 9-12)

Risk and Return of MNC

Value and Stock Price of MNC

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