Introduction
The Multinational Enterprise (MNE)
 A MNE is defined as one that has operating subsidiaries, branches or affiliates located in foreign countries.
 Subsidiary
 Affiliate
 Branch
International operations and Investing
 Firms conduct international operations in order to gain competitive advantage.
Sources of competitive advantage are:
 Product differentiation
 Production/distribution cost advantages
 First to market
 Financing cost savings
 Tax reduction
 Government subsidies
 International investing
Firms/individuals invest abroad in order to achieve:
 Higher returns
 Diversification
 Safe haven (from political risks)
International Financial Management
 There are significant differences between international and domestic financial management:
 Cultural issues
 Corporate governance issues
 Foreign exchange risks
 Political Risk
 Modification of domestic finance theories
 Modification of domestic financial instruments
The Goal of MNEs
 Maximization of shareholders’ wealth (shareholder value maximization or SWM) is the dominant goal of management
in the Anglo-American world. In the rest of the world, this perspective still holds true (although to a lesser extent in
some countries).
 A firm should maximize the return to shareholders, as measured by the sum of capital gains and dividends, for a
given level of risk.
 The stock market is efficient. Maximization of shareholders’ value is equivalent to maximization of stock price.
 Risk is defined as the added risk that a firm’s shares bring to a diversified portfolio.
 Shareholders can motivate management by using positive incentives and negative incentives:
 Positive incentives: use of stock options
 Negative incentives: the discipline of the capital markets (takeover); getting fired
 Long-term value maximization can conflict with short-term value maximization.
 Corporate Wealth Maximization: In contrast to the SWM model, continental European and Japanese markets are
characterized by a philosophy that a corporation’s objective should be to maximize corporate wealth (the CWM
model).
 A firm should treat shareholders on a par with other corporate interest groups (management, labor, the local
community, suppliers, creditors and even the government).
 Market efficiency does not matter as the firm’s financial goals are not exclusively shareholder-oriented.
 Long-term corporate value maximization.
 Management is tasked with meeting the demands of multiple stakeholders.