FM6- Multinational Financial Management
for unusual discrepancies relative to norms
 Defined as firms that engage in some form of
international business
 The managers conduct international financial
management, which involves international investing
and financing decisions that are intended to
maximize the value of the MNC.
 These companies must recognize how their foreign
competitors will be influenced by movements in
exchange rates, foreign interest rates, labor costs,
and inflations.
How business disciplines are used to manage the
MNC?
The methods:
1) MANAGEMENT
2) MARKETING
3) ACCOUNTING & INFORMATION
4) FINANCE
COMMON FINANCE DECISIONS
 Whether to discontinue operations in a
particular country
 Whether to pursue new business in particular
country
 Wheter to expand business in particular country
 How to finance expansion in particular country
Managing the MNC
 AGENCY PROBLEM
 AGENCY COST
Agency Problem
• Conflict of goals between a firm’s managers and
shareholders
• Managers of an MNC may make decisions that
conflict with the firm’s goal of maximizing shareholder
wealth.
• The parent should clearly communicate the goals for
each subsidiary to ensure that all of them focus on
maximizing the value of the MNC and not of their
respective subsidiaries.
• The parent can oversee the subsidiary decisions
• The parent also can implement compenstation plans
that reward those managers who satisfy the MNC goals
Agency cost – the cost of ensuring that managers
maximize shareholder wealth
• MNC’s with subsidiaries scattered around the world
may experience larger agency problems because
monitoring the managers of distant subsidiaries in
foreign countries is more difficult.
• Foreign subsidiary managers who are raised in
different cultures may not follow uniform goals.
• The sheer size of the larger MNCs can also create
significant agency problems, because it complicates the
monitoring of managers.
METHODS USED TO IMPROVE INTERNAL CONTROL
PROCESS
• Establishing a centralized database of information
• Ensuring that all data are reported consistently among
subsidiaries
• Implementing a system that automatically checks data
• Speeding the process by which all departments and
subsidiaries access needed data
• Making executives more accountable for financial
statements by personally verifying their accuracy
Management Structure
CENTRALIZED Management Style
Can reduce agency cost because it allows managers of
the parent to control foreign subsidiaries and thus
reduces the power of subsidiary managers
DECENTRALIZED Management Style
This may result in higher agency costs because
subsidiary managers may make decisions that fail to
maximize the value of the entire MNC
THEORIES BEHIND MNCS PURSUING INTERNATIONAL
BUSINESS
Theory of Comparative Advantage
A country that specialized in some products may not
produce other products, so trade between countries is
essential. Comparative advantages allow firms to
penetrate foreign market. Specialization by countries
can increase production efficiency.
Imperfect Markets Theory
Markets for the various resources used in production
are “imperfect,” MNCs often capitalized on a foreign
country’s particular resources. Imperfect markets
provide an incentive for firms to seek out foreign
opportunities.
Product Cycle Theory
Firms become established in the home market as a
result of some perceived advantage over existing
competitors, such as a need by the market for a least
one more supplier of the product.
Foreign demand for the firm’s product will initially be
accommodated by exporting, then produce the product
in foreign markets, then develop strategies to prolong
the foreign demand for the product.
As a firm matures, it may recognize additional
opportunities outside its home country.
Methods to Conduct International Business
INTERNATIONAL TRADE
EXPORTING AND IMPORTING- Exporting refers to
selling goods and services from the home country to a
foreign country, while importing refers to purchasing
products from a foreign country and bringing them into
the home country. This approach entails minimal risk
because the firm does not place any of its capital at risk.
LICENSING- It is an arrangement whereby one firm
provides its technology (copyrights, patents,
trademarks, or trade names) in exchange for fees or
other considerations. Revenues are generated from
foreign countries without establishing any production
plants in foreign countries, or transporting goods to
foreign countries.
FRANCHISING- Franchising involves a company (the
franchisor) allowing another company (the franchisee)
in a foreign country to use its business model, brand,
and operating system in exchange for a fee. Since
franchising by multinational corporations often requires
direct investment in foreign operations, this is referred
to as foreign direct investment (FDI)
JOINT VENTURES- A joint venture is a venture that is
jointly owned and operated by two or more firms. This
involves two or more companies from different
countries forming a new company to pursue a specific
business opportunity. The companies share ownership,
control, and profits of the new company
ACQUISITIONS OF EXISTING OPERATIONS- ACQUIRING
FIRMS IN FOREIGN COUNTRIES PENETRATE FOREIGN
MARKETS. SUCH ACQUISITION GIVE FIRMS FULL
CONTROL OVER THEIR FOREIGN BUSINESSES AND
ENABLE THE MNC TO QUICKLY OBTAIN A LARGE
PORTION OF FOREIGN MARKET SHARE.
CROSS-BOARDER BUSINESS DEALINGS- This includes
export, production, licensing, contracting,
manufacturing, foreign assembly, joint ventures, and
other forms of international commerce. It also includes
transactions driven by non-financial goals, such as the
triple bottom line (social, environmental, philanthropic),
corporate social responsibility, and political favor.
Uncertainty Surrounding an MNC’s Cash Flows
 Exposure to International Economic Conditions
 Exposure to International Political Risk
 Exposure to Exchange Rate Risk
LEGAL FACTORS- Cross-country businesses have to deal
with the legal framework of two or more countries. This
includes understanding and complying with different
laws and regulations related to age, disability
discrimination, wage rates, employment, environment,
and more. Legal liabilities can vary between countries
and may affect the working of multinational
corporations (MNCs)
TECHNOLOGICAL FACTORS- Technological
advancements and innovation have a significant impact
on international business. The integration of technology
has made global business planning more successful.
Electronic fund transfers and improved banking systems
have facilitated the movement of funds across borders.
Technology transfer and technological innovation are
prime factors affecting international business.
SOCIAL AND CULTURAL FACTORS- Social and cultural
factors can influence international business operations.
Understanding the local culture, customs, values, and
preferences of the target market is crucial for successful
operations. Cultural differences, language barriers, and
social norms can impact communication, marketing
strategies, and customer preferences.
MARKET FACTORS- Market factors such as competition,
market demand, consumer behavior, and market
saturation can affect international business operations.
Analyzing the target market and understanding the
competitive landscape is essential for making informed
business decisions.
INFRASTRUCTURE AND LOGISTICS- Infrastructure and
logistics play a vital role in international business.
Factors such as transportation networks,
communication systems, availability of utilities, and
supply chain management can impact the efficiency and
effectiveness of operations.
RISK FACTORS- International business involves various
risks that need to be considered. These include currency
exchange rate fluctuations, political instability, legal
disputes, cultural misunderstandings, intellectual
property protection, and market volatility. Managing
and mitigating these risks is crucial for successful
international business operations.

POLITICAL FACTROS- The different political

considerations of the countries involved in global
business can either facilitate or hinder business
operations. Political stability, government policies, trade
agreements, and regulations can significantly impact
international business. Changes in tax rates, policies,
and actions of the government, as well as political
stability of the country, can affect operations

ECONOMIC FACTORS- Economic factors play a crucial

role in international business. Factors such as target
market size, cost involved, currency and exchange rates,
inflation, and economic stability can directly influence
the profitability of international businesses.
Entrepreneurs should analyze these factors extensively
before entering a foreign market.