Multinational Financial
Management
Alan Shapiro
7th Edition
J.Wiley & Sons
Power Points by
Joseph F. Greco and J.D. Han
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CHAPTER 1
Introduction:
Multinational Enterprise
and Multinational
Financial Management
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CHAPTER OVERVIEW:
1.1
1.2
1.3
The Rise of the Multinational
Corporation
The Internationalization of
Business and Finance
Multinational Financial Management:
Theory and Practice
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1.1 THE RISE OF THE
MULTINATIONAL CORPORATION
A. The MNC: Definition
a company with production and
distribution facilities in more than
one country.
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THE RISE OF THE MULTINATIONAL
CORPORATION
B. Forces Changing Global Markets such as
Massive deregulation
Collapse of communism
Privatizations of state-owned industries
Revolution in information technology
Wave of M&A
Emergence of free market policies
Rise of Big Emerging Markets (BEMs)
have Ushered in Global Competition
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THE RISE OF THE MULTINATIONAL
CORPORATION
Prime Transmitter of Competition in the
Global Economy is the MNC;
The MNC emphases group performance such
as global coordinated allocation of
resources by a single centralized
management
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THE RISE OF THE MULTINATIONAL
CORPORATION
C. EVOLUTION OF MNC as global
manager
Reasons to Go Global:
1. More raw materials
2. New markets
3. Minimize costs of
production
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THE RISE OF THE MULTINATIONAL
CORPORATION
RAW MATERIAL SEEKERS
exploit markets in other countries
historically first to appear
modern-day counterparts
British Petroleum
Exxon
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THE RISE OF THE MULTINATIONAL
CORPORATION
MARKET SEEKERS
produce and sell in foreign markets
heavy foreign direct investors
representative firms:
IBM
MacDonald’s
Nestle
Levi Strauss
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THE RISE OF THE MULTINATIONAL
CORPORATION
COST MINIMIZERS
seek lower-cost production abroad
motive: to remain cost competitive
Texas Instruments
Intel
Seagate Technology
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THE RISE OF THE MULTINATIONAL
CORPORATION
D. THE MNC: A BEHAVIORAL VIEW
Integration of worldwide operation, such
as globally producing,
financing, undertaking investment
and marketing requires
flexibility, adaptability, speed to changing
environment and risk,
as well as ‘focus’ on strength area(s).
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THE RISE OF THE MULTINATIONAL
CORPORATION
E. What does the Global Manager
do?
1. Understand political and
economic risk;
2. Search for most costeffective suppliers;
3. Evaluate changes on value
of the firm.
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1.3 MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND PRACTICE
A. THE MULTINATIONAL
FINANCIAL SYSTEM
Main Objective of MNC:
Maximize shareholder
wealth
Reduction of Risks facing MNC
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B. Challenges facing the MNC Executive
1. Political risk
expropriation
regulatory control
2. Economic risk
FOREX Risk
Inflation Risk
3. International Differences in Tax Rates
and Multiple Financial Markets
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THEORY AND PRACTICE
C. FUNCTIONS OF FINANCIAL MANAGEMENT
Two Basic Functions:
1. Financing: Minimizing
the Cost of Capital through
“Optimal Capital Structure”
2. Investing: Maximizing Return
“Capital Budgeting”
*3. Minimizing Risk: This is
uniquely important for MNC.
“International diversification”
“Hedging”.
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D. Instruments for Financial Management:
Useful Concepts from Financial Economics –
What is Financial Economics?
use of economic analysis to understand the basic workings of
financial markets, particularly to evaluate risks and to hedge
again them.
Cf. Accounting approach; Traditional Approach; Market
Fundamental Approach
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E.
Three Key Principles of Financial Economics
1. Arbitrage
2. (Financial) Market Efficiency
3. Capital Asset Pricing Model
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1.
Arbitrage
Capital Market Imperfection exists;
Structural/Informational Imperfect creates a room for
profitable Arbitrage.
*Arbitrage: multiple simultaneous transactions for a higher
return and a lower risk
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2.
Financial Market is ‘Information Efficient’ (Market Efficiency)
The financial market is efficient in processing and reflecting
relevant information;
Market Acts as A Global Referendum Process;
Attempt to increase the value of a firm by purely financial measures
or accounting manipulation are unlikely to succeed unless there are
capital market imperfection or asymmetries in tax regulations.
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3.
Capital Asset Pricing
-Total Market Risk = diversifiable risk + nondiversifiable risk;
-“There is no risk premium for diversifiable risk”
– Risk Managements or Hedging efforts are
important.
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