What is a multinational corporation?

A corporation that operates in two or more countries.

MULTINATIONAL FINANCIAL MANAGEMENT

A multinational corporation is a company engaged in producing and selling goods or services in more than one country. It ordinary consists of a parent company located in home country and at least five or six foreign subsidiaries.

OBJECTIVE OF MNC The commonly accepted goal

of an MNC is to maximize shareholder wealth. Developing a goal is necessary because all decisions should contribute to its accomplishment.

1. Different currency denominations.

2. Economic and legal ramifications.

3. Language differences.

4. Cultural differences.

5. Role of governments.

6. Political risk.

Difference b/w domestic and multinational financial management

1. To seek new markets.

2. To seek raw materials.

3. To seek new technology.

4. To seek production efficiency.

5. To avoid political and regulatory hurdles.

6. To diversify.

Why do firms expand into other countries?

Constraints Interfering with the MNC's Goal

When financial managers of MNCs attempt

to maximize their firm's value, they are confronted with various constraints that can be classified as :

Environmental. Regulatory. Ethical in nature.

Environmental constraints :

Each country enforces its own environmental constraints. Some countries may enforce more of these restrictions on a subsidiary whose parent is based in a different country. Building codes, disposal of production, waste materials, and pollution controls are examples of restrictions that force subsidiaries to incur additional costs. Many European countries have recently imposed rougher antipollution laws as a result of severe pollution problems.

Regulatory constraints : Each country also enforces its own

regulatory constraints pertaining to taxes, currency convertibility rules, earnings remittance restrictions, and other regulations that can affect cash flows of a subsidiary established there.

Ethical Constraints : There is no consensus standard of business

conduct that applies to all countries. A business practice that is perceived unethical in one country may be totally ethical in another.

INTERNATIONAL MONETARY SYSTEM

International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states.

They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment.

To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected.

The systems can grow organically as the collective result of numerous individual agreements between international economic actors spread over several decades.

Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944

BRIEF HISTORY OF INTERNATIONAL MONETARY SYSTEM

Almost from the dawn of history gold has been used as a medium of exchange because of its desirable properties. It is durable, storable, portable , easily recognized, divisible and easily standardized.

The gold standard essentially involved a commitment by the participating countries to fix the prices in terms of their domestic currencies in terms of a specified amount of gold.

EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM

Bimetallism: Before 1875

Classical Gold Standard: 1875-1914

Interwar Period: 1915-1944

Bretton Woods System: 1945-1972

The Flexible Exchange Rate Regime: 1973-Present

BIMETALLISM: BEFORE 1875 A “double standard” in the sense that both gold and

silver were used as money.

Some countries were on the gold standard, some on the silver standard, some on both.

Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents.

Gresham’s Law implied that it would be the least valuable metal that would tend to circulate.

CLASSICAL GOLD STANDARD: 1875-1914 During this period in most major countries:

Gold alone was assured of unrestricted coinageThere was two-way convertibility between gold and

national currencies at a stable ratio.Gold could be freely exported or imported.

The exchange rate between two country’s currencies would be determined by their relative gold contents.

INTERWAR PERIOD: 1915-1944 Exchange rates fluctuated as countries widely

used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market.

Attempts were made to restore the gold standard, but participants lacked the political will to “follow the rules of the game”.

The result for international trade and investment was profoundly detrimental.

BRETTON WOODS SYSTEM: 1945-1972 Named for a 1944 meeting of 44 nations at

Bretton Woods, New Hampshire. The purpose was to design a postwar

international monetary system. The goal was exchange rate stability without

the gold standard. The result was the creation of the IMF and the

World Bank.

BRETTON WOODS SYSTEM: 1945-1972 Under the Bretton Woods system, the U.S.

dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U.S. dollar.

Each country was responsible for maintaining its exchange rate within ±1% of the adopted par value by buying or selling foreign reserves as necessary.

The Bretton Woods system was a dollar-based gold exchange standard.

THE FLEXIBLE EXCHANGE RATE REGIME: 1973-PRESENT. Flexible exchange rates were declared acceptable to

the IMF members.

Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities.

Gold was abandoned as an international reserve asset.

Non-oil-exporting countries and less-developed countries were given greater access to IMF funds.

DEVELOPMENT BANKS

Development banks are specialized financial institutions which perform the twin function of providing medium and long term finance to private entrepreneurs and of performing various promotional roles essential for economic development.

CHARACTERSTICS: Development banks do not accept deposits from public

as ordinary banks do. They are unique financial institution that perform the

special task of accelerating economic development. Development banks are engaged in promotional services

such as underwriting of new shares, arranging for foreign exchange loan , preparation of project reports.

OBJECTIVES OF DEVELOPMENT BANKS An agent of development.(sectors like

industry, agriculture and international trade.)

To accelerate the growth of economy. To allocate the resources. To foster rapid Industrialization. To develop entrepreneurial skills. To provide rural development. To provide finance.

FUNCTIONS OF DEVELOPMENT BANKS Entrepreneurial role : Development

banks undertake the role of entrepreneurial gap filling .They perform the task of discovering investment projects, promotion of industrial enterprise, provide technical and managerial assistance undertaking technical and economic research, conducting surveys.

Task of Financial Gap filling: Through purchase of debentures, bonds of a company.

Credit guarantee. Refinancing.

Underwriting Joint financing Commercial banking business

Need for development banks: Industrialization. Capital requirements. Promotional activities. Aid to small scale units.

DEVELOPMENT BANKING IN INDIAThe foreign rulers in India do not take

much interest in the industrial development of the country. They were interested to take raw materials to England and bring back finished goods to India. The government did not show any interest for setting up institutions needed for industrial financing .

The recommendations for setting up industrial financing institutions was made in 1931 by central banking enquiry committee.

1948 the first development bank i.e.. IFCI(INDUSTRIAL FINANCE CORPORATION OF INDIA).IFCI was assigned the role of a gap filler which implied that it was not expected to compete with the existing channels of industrial finance . It was expected to provide medium & long term credit to industrial concerns only when they could not raise sufficient finances .

1951 parliament passes state financial corporation act .Under this act state govt could establish financial corporations for their respective region . At present there are 18 State Financial Corporations (SFC’s)in India.

The IFCI AND SFC served only a limited purpose . There was a need for dynamic institutions which could operate as true development agencies . NIDC (National Industrial development Corporation) was established in 1954 with the objective of promoting industries which could not serve the ambitious role assigned to it .

1955 ICICI(Industry Credit Investment Corporation Of India) as a joint stock company. ICICI was supported by govt of India , World Bank, and other foreign institutions.

Another institution RCI Refinance corporation for industry was set up in 1958 by RBI,LIC and commercial banks . The purpose of RCI was to provide refinance to commercial banks and SFC’s against term loans granted by them to industrial concerns in private sector.

1964 IDBI Industry development bank of India was set up as an apex institution in the area of Industrial Finance ,RCI was merged with ICICI.

SIDC’s State Industrial development corporation were established in the

sixties to promote medium scale industrial units. At present there are 28 SID’C.

Other financial institutions were: UTI UNIT TRUST OF INDIA 1964. LIC LIFE INSURANCE CORPORATION OF INDIA 1956. GIC (GENERAL INSURANCE CORPORATION OF INDIA)

1973. EXIM BANK(EXPORT IMPORT BANK) 1982. NAMBARD 1982(NATIONAL BANK FOR AGRICULTURE

AND RURAL DEVELOPMENT) :It is responsible for short term , medium term and long term financing of agriculture and allied activities.The institutions like film finance corporation, handloom finance corporation, housing development finance corporation also provides financial and other facilities in various areas.

FINANCE FUNCTIONS IN A MULTINATIONAL FIRM

Acquistion of Funds. Investment of those funds.

International Flow of Funds: