MULTINATIONAL FINANCIAL MANAGEMENTAlan C. ShapiroSixth EditionPOWER POINT LECTURES:J. F. GRECO, Ph.D.California State University, Fullerton

CHAPTER 1Introduction: Multinational Enterprise and Multinational Financial ManagementCHAPTER OVERVIEW:Part I. The Rise of the Multinational CorporationPart II. Multinational Financial Management: Theory and Practice

PART I.THE RISE OF THE MULTINATIONAL CORPORATION

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

THE RISE OF THE MULTINATIONAL CORPORATIONB. Traditional Economic Theory1. Classical Theory:a. Smith, Ricardob. Comparative Advantage:macroeconomic differences

THE RISE OF THE MULTINATIONAL CORPORATION2. MNC supercedes theory relating to:a. mobility of factorsb. different costs/skills between nations

THE RISE OF THE MULTINATIONAL CORPORATIONC. EVOLUTION OF THE MNCReasons to Go Global:1. raw materials2. markets3. minimize costs of production

THE RISE OF THE MULTINATIONAL CORPORATIONRAW MATERIAL SEEKERSexploit markets in other countrieshistorically first to appearmodern-day counterpartsAnaconda CopperStandard Oil

THE RISE OF THE MULTINATIONAL CORPORATIONMARKET SEEKERSproduce and sell in foreign marketsheavy foreign-direct investorsrepresentative firms:IBMNestleLevi Strauss

THE RISE OF THE MULTINATIONAL CORPORATIONCOST MINIMIZERSseek lower-cost production abroadmotive: to remain cost competitiverepresentative firms:Texas InstrumentsAtariZenith

THE RISE OF THE MULTINATIONAL CORPORATIONII. THE PROCESS OF OVERSEAS EXPANSIONA. Exporting:preferred market entry strategy1. Advantages:low costlow risklearning opportunity

THE RISE OF THE MULTINATIONAL CORPORATION2. Disadvantagesinability to realize fullsales potential3. Use of:a. Foreign agentsb. Sales subsidiariesc. Distribution system

THE RISE OF THE MULTINATIONAL CORPORATIONB. OVERSEAS PRODUCTION greater commitment to the local market1. Advantages:a. Increased salesb. Supply stabilityc. Controld. Comprehensive service

THE RISE OF THE MULTINATIONAL CORPORATION2. Question:create or acquire3. Acquisition-allows speedy transfer of unused parent skills;-used more by small firms.

THE RISE OF THE MULTINATIONAL CORPORATIONC. LICENSING-local firm agrees to produce for a fee.1. Advantages:a. Minimum investmentb. Faster market entryc. Less risk

THE RISE OF THE MULTINATIONAL CORPORATION2. Disadvantages of licensing:a. Low cash flowb. Quality standardsc. New competitor

THE RISE OF THE MULTINATIONAL CORPORATIOND. THE MNC: A BEHAVIORAL VIEW1. State of mind:committed to producing,undertaking investment andmarketing, and financing globally.

THE RISE OF THE MULTINATIONAL CORPORATIONE. THE GLOBAL MANAGER1. Understands political and economic differences;2. Searches for most cost- effective suppliers;3. Evaluates changes on value of the firm.

PART II.MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEI. THE MULTINATIONAL FINANCIAL SYSTEMA. Main Objective of MNC: Maximize shareholder wealthB. Other Objectives Reflect Ability to Link:via affiliate transfer mechanisms

THEORY AND PRACTICEC. 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.

THEORY AND PRACTICEE. Value The ability to avoid national taxes has led to controversy.

THEORY AND PRACTICEII. FUNCTIONS OF FINANCIAL MANAGEMENTA. Two Basic Functions:1. Financing2. Investing

THEORY AND PRACTICEB. Additional Factors Facing the MNC Executive1. Political risk2. Economic risk

THEORY AND PRACTICEIII. THEORETICAL FOUNDATIONSA. Useful Concepts from Financial Economics:1. Arbitrage2. Market Efficiency3. Capital Asset Pricing

THEORY AND PRACTICEB. Importance of Total Risk1. Adverse Impactlower sales and higher costs2. Justifies hedging activities of MNC3. Diversification reduces risk

THEORY AND PRACTICEIV. THE GLOBAL FINANCIAL MARKET PLACEA. Interlinkage by ComputersB. Market Acts as A GlobalReferendum Process:Currencies may rise or fall