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Multinational Financial Management Alan Shapiro

7th Edition J.Wiley & Sons

Power Points byJoseph F. Greco, Ph.D.California State University, Fullerton

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CHAPTER 1

Introduction: Multinational Enterprise and Multinational Financial Management

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CHAPTER OVERVIEW:

I. The Rise of the Multinational Corporation

II. The Internationalization of Business and Finance

III. Multinational Financial Management: Theory and Practice

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PART 1 THE RISE OF THE MULTINATIONAL CORPORATION

I. The MNC: Definitiona company with production and distribution facilities in more than one country.

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THE RISE OF THE MULTINATIONAL CORPORATION

A. Forces Changing Global MarketsMassive deregulationCollapse of communismPrivatizations of state-owned industriesRevolution in information technologyWave of M&AEmergence of free market policiesRise of Big Emerging Markets (BEMs)

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THE RISE OF THE MULTINATIONAL CORPORATION

B. Prime Transmitter of Competitive Forces in the Global

Economy:The MNC emphases group performance

such asGlobal coordinated allocation of resources Market – entry strategyOwnership of foreign operationsProduction, marketing and financial activities

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THE RISE OF THE MULTINATIONAL CORPORATION

C. EVOLUTION OF THE MNCReasons to Go Global:

1. More raw materials2. New markets3. Minimize costs of

production

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THE RISE OF THE MULTINATIONAL CORPORATION

RAW MATERIAL SEEKERSexploit markets in other countries

historically first to appearmodern-day counterparts

British PetroleumExxon

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THE RISE OF THE MULTINATIONAL CORPORATION

MARKET SEEKERSproduce and sell in foreign marketsheavy foreign direct investorsrepresentative firms:

IBMMacDonald’sNestleLevi Strauss

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THE RISE OF THE MULTINATIONAL CORPORATION

COST MINIMIZERSseek lower-cost production abroad

motive: to remain cost competitiveTexas InstrumentsIntelSeagate Technology

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THE RISE OF THE MULTINATIONAL CORPORATION

D. THE MNC: A BEHAVIORAL VIEW1. State of mind:

committed to producing,undertaking investment

andmarketing, and financing globally.

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THE RISE OF THE MULTINATIONAL CORPORATION

E. THE GLOBAL MANAGER1. Understands political and economic differences;

2. Searches for most cost- effective suppliers;3. Evaluates changes on

value of the firm.

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Part II The Internationalization of Business and Finance

I. GlobalizationA. Political and Labor Union

Concerns

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The Internationalization of Business and Finance

B. Consequences of Global Competition

Acceleration of the global economy

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PART III. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE

I. THE MULTINATIONAL FINANCIAL SYSTEM

A. Main Objective of MNC: Maximize shareholder

wealthB. Other Objectives Reflect

Ability to Link:via affiliate transfer mechanisms

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THEORY AND PRACTICE

C. Mode of Transfer: Reflects freedom to select a

variety of financial channels.D. Timing Flexibility:

Most MNC have some flexibility in timing of fund flows.

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THEORY AND PRACTICE

E. ValueThe ability to avoid

national taxes has led to controversy.

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THEORY AND PRACTICE

II. FUNCTIONS OF FINANCIAL MANAGEMENT

A. Two Basic Functions:1. Financing2. Investing

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THEORY AND PRACTICE

B. Additional Factors Facing the MNC Executive

1. Political risk2. Economic risk

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THEORY AND PRACTICE

III. THEORETICAL FOUNDATIONSA. Useful Concepts from

Financial Economics:

1. Arbitrage2. Market Efficiency3. Capital Asset Pricing

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THEORY AND PRACTICE

B. Importance of Total Risk1. Adverse Impact

lower sales and higher costs

2. Justifies hedging activities of MNC

3. Diversification reduces risk

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THEORY AND PRACTICE

IV. THE GLOBAL FINANCIAL MARKET PLACEA. Inter-linkage by

ComputersB. Market Acts as A Global

Referendum Process:Currencies may rise or fall