INTERNATIONAL FINANCE

1 Dr. Nathan (Thanh Nguyen)

 Chapter 1
Multinational Financial
Management:
An Overview

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 LEARNING OUTCOMES

✓ To identify the main goal of the multinational

corporation (MNC) and conflicts with that
goal;
✓ To describe the key theories that justify
international business
✓ Risks of international business

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 MNC’S

International business

International Trade Joint Venture

Acquisition of
Licensing
existing operations
Franchising Establishing new
foreign subsidiaries

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 INTERNATIONAL TRADE
 Trading rather than investing abroad

 The conservative approach to international

business

 Used to penetrate markets (by exporting)

 Obtain supplies at low cost (by importing)

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 LICENSING

 Involves selling copyrights, patents,

trademarks etc, in exchange for fees
(royalties)

 A company is selling the right to produce

their goods.
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 FRANCHISING

 The franchisor provides sales, service,

strategy, support and possibly some initial
investment in exchange for periodic fees.

 Managed by local residents

 Allows firms to penetrate foreign markets

without major investment. 7
 JOINT VENTURES

Owned and operated by

two or more firms

Many firms penetrate foreign

markets by engaging in a joint
venture with firms that
reside in those markets

Applying their respective comparative

advantages in a given project 8
ACQUISITIONS OF EXISTING
OPERATIONS
Firms frequently acquire other
firms in foreign countries as a
means of penetrating foreign
markets.
Allow firms to have full control
over their foreign businesses and
to quickly obtain a large portion of
foreign market share.

The fastest way to grow. 9

 ESTABLISHING NEW FOREIGN SUBSIDIARIES

Feature Require a large investment

Tailored exactly to the firm’s needs

Need a lot of time

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QUESTION AND APPLICATIONS

Question17 Page 17

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OPERATIONAL OBJECTIVES OF MNCS

maximize
shareholder
wealth

Satisfy demand
of government ,
lenders ,
employees

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CORPORATE CONTROL OF AGENCY PROBLEMS.

Conflict between firm’s manager and

shareholders

Representative cost in multinational companies

is often larger than domestic companies

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CORPORATE CONTROL OF AGENCY PROBLEMS.
✓ Enron was, at one point, one of the
largest companies in the United States. THE ENRON SCANDAL
✓ Enron began losing money in 1997. The
company also started racking up a lot
of debt Jeffrey Skilling
✓ Fearing a drop in share prices, Enron's (CEO)
management team hid the losses by
misrepresenting them through tricky
accounting
✓ In 2001, share prices from over $90 to
under $1. The company ended up filing
for bankruptcy in December 2001 15
=> SEC inspected the company
RESTRICTIONS OBSTRUCT OBJECTIVES

Regulative
Restriction
- Tax 1
- Money
transaction
- Transfer
2 3
income abroad

1
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GOVERNANCE STRUCTURE OF A
MULTINATIONAL COMPANY

Centralize
multinational financial
Management

Decentralize
multinational financial
Management
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 CENTRALIZE GOVERNANCE

Manager of
mother company

Cash governance of Cash governance of

subsidiary A subsidiary B

Receivable and Receivable and

inventory subsidiary A inventory subsidiary
governance B governance

Expenditure
Finance in Expenditure in Finance in18
in
subsidiary A subsidiary B subsidiary B
subsidiary A
 DECENTRALIZE GOVERNANCE

Managers of Managers of
subsidiary A subsidiary B

Cash governance of Cash governance of

subsidiary A subsidiary B

Receivable and Receivable and

inventory subsidiary inventory subsidiary
A governance B governance

Finance in Expenditure Expenditure

Finance in
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subsidiary in in subsidiary
subsidiary B
A subsidiary A B
 THEORIES OF INTERNATIONAL BUSINESS

Why are firms motivated to expand

their business internationally?

Theory of Comparative Advantage

 Specialization by countries can increase

production efficiency.

Imperfect Markets Theory

 The markets for the various resources used in

production are “imperfect.”
THEORIES OF INTERNATIONAL BUSINESS

Why are firms motivated to expand

their business internationally?

Product Cycle Theory

 As a firm matures, it may recognize

additional opportunities outside its home
country.
PRODUCT CYCLE THEORY

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 RISKS OF INTERNATIONAL BUSINESS

❖ International Economic conditions: the

consumption in any country is influenced by
the income earned by consumers in that
country.
❖ International Political risk
❖ Exchange rate risk
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QUESTION AND APPLICATIONS

Question 22 Page 19

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