Multinational Finance Function
MNEs need access to capital
• Finance is integral to firm’s operating strategies
• Concern with access to capital in local and global
markets
Finance and Treasury Functions in the Internalization
Process
Chief Financial Officer (CFO)—vice president of
finance
• Responsible for controllership and treasury
functions
• Acquires financial resources
• Allocates financial resources
• Manages cash flows
Location of Treasury Function in the
Corporate Organizational Structure
Board of Directors
Chairman and CEO
President and COO
VP, Sales/Marketing
Cash Manager
VP, Finance
VP, Operations
Controller
Treasurer
Credit Manager
Global Finance
Exposure
Management
Budget
Planning
VP, R&D
Capital
Expenditure
Bid Support
Financial
Planning
Process Foreign
Currency
Acquiring
Financial Resources
Borrowing Funds
Back-to-Back
Loans
Eurobonds
Foreign
Bonds
Acquiring
Financial Resources
Issuing Equity
American
Depository
Receipts
Venture
Capital
Stock
Market
Internal Sources of Funds
Funds—working capital
Sources of funds—MNEs have more complex
arrangements due to the number of subsidiaries and
the diverse environments in which they operate
• Loans
• Dividends
• Intercompany receivables and payables
• Investments through equity capital
Internal Sources of Funds (cont.)
Global cash management
• Generates and invests cash through dealings with
financial institutions
• Assesses a company’s cash needs using budgets
and forecasts
• Involves decisions about the degree of centralization
of cash
Internal Sources of Funds (cont.)
Multilateral netting—company establishes one center to handle all
internal cash, funds, and financial transactions
• Advantages include:
– optimizing the use of excess cash
– reducing interest expenses and maximizing interest
yields
– reducing costly foreign exchange, swap transactions, and
intercompany transfers
– minimizing administrative paperwork
– centralizing and speeding information
Foreign-Exchange Risk Management
Translation exposure
• Combined effect of the exchange-rate change is
either a net gain or loss
– does not represent an actual cash flow effect
Transaction exposure
Economic exposure (operating exposure)—potential for
change in expected cash flows that arise from:
Exposure-Management Strategy
Defining and measuring exposure
• MNE must forecast the degree of exposure in each
major currency in which it operates
Reporting system—substantial participation from foreign
operations combined with central control
• Foreign input important to ensure forecasting
effectiveness
• Central control of exposure protects resources more
efficiently
• MNEs should devise uniform reporting system for its
subsidiaries
• Time periods of reports vary
• Final reporting should be at corporate level
Exposure-Management Strategy (cont.)
Centralized policy—top management should determine
hedging policy
Formulating hedging strategies—safest position has exposed
assets equal to exposed liabilities
• Operational strategies—involve adjusting the flow of
money and resources to reduce foreign-exchange risk
Exposure-Management Strategy (cont.)
Formulating hedging strategies (cont.)
• Contractual arrangements
– forward contract—establishes a fixed
exchange rate for future transactions
– foreign-currency option
Capital Budgeting Decision in an International
Context
Parent company needs to compare the net present value
or internal rate of return of a foreign project with that of
its other projects and with that of others available
Unique aspects of capital budgeting for foreign projects
• Parent cash flows must be distinguished from project
cash flows
• Remittance of funds to the parent affected by differing
tax systems, and legal and political constraints on
movement of funds
• Differing rates of inflation must be anticipated
• Parent must consider possible changes in exchange
rates
• Must evaluate political risk in foreign market