MULTINATIONAL FINANCE chp1

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C H A P T E R 1

MULTINATIONAL FINANCE

By : Siddhartha Arya



WH AT IS AN MNC

A corporation that has its facilities and other assets in at least

one country other than its home country. Such companies have

offices and/or factories in different countries and usually have a

centralized head office where they co-ordinate global

management.

The INTERNATIONAL LABOUR ORGANIZATION (ILO)

has defined an MNC as a corporation that has its management

headquarters in one country, known as the home country, and

operates in several other countries, known as host countries.

Very large multinationals have budgets that exceed those of

many small countries.



R ISE OF MNC¶s

The Dutch East India Company was the first multinational

corporation in the world and the first company to issue stock. It

was also arguably the world's first mega corporation, possessing

quasi-governmental powers, including the ability to wage war,

negotiate treaties, coin money, and establish colonies.

Today nearly all major multinationals are either American,

Japanese or Western European, such as Nike, Coca-Cola, Wal-

Mart, AOL, Toshiba, Honda and BMW



MNC¶s STAGES OF EVOLUTION

1.Export stage

2. Foreign Production Stage

DFI versus Licensing

Once the firm chooses foreign production as a method of deliveringgoods to foreign markets, it must decide whether to establish a

foreign production subsidiary or license the technology to a foreign

firm.

Licensing

Licensing is usually first experience

-because it is easy

-it does not require any capital expenditure

-it is not risky



Direct Investment

It requires the decision of top management because it is a critical

step. It is risky as plants are established in several countries and

licensing is switched from independent producers to its

subsidiaries.

3. Multinational Stage

The company becomes a multinational enterprise when it begins

to plan, organize and coordinate production, marketing, R&D,financing, and staffing. For each of these operations, the firm must

find the best location.



ENTRY MODES FOR MNC¶S

1. LICENSING

2. FRANCHISING

3. MANAGEMENT CONTRACT

4. TURN KEY PROJECTS

5. JOINT VENTURES

6. STRATEGIC ALLIANCES

7. MERGERS & ACQUSITIONS



LICENSING

Licence may be granted by a party ("licensor") to another party

("licensee") as an element of an agreement between those

parties. A shorthand definition of a licence is "an authorization

(by the licensor) to use the licensed material (by the licensee)."



M & A

The phrase mergers and acquisitions (abbreviated M&A) refers to

the aspect of corporate strategy, corporate finance

and management dealing with the buying, selling and combining

of different companies that can aid, finance, or help a growing

company in a given industry grow rapidly without having to

create another business entity.



MANAGEMENT CONTARCT

A management contract is an arrangement under which operational

control of an enterprise is vested by contract in a separate enterprise

which performs the necessary managerial functions in return for a fee.

A management contract can involve a wide range of functions, such as

technical operation of a production facility, management of personnel,

accounting, marketing services and training.

.



FR ANCHISING

Franchising is the practice of using another firm's

successful business model.

For the franchisor, the franchise is an alternative to building

'chain stores' to distribute goods and avoid investment and

liability over a chain. The franchisor's success is the success of

the franchisees. The franchisee is said to have a greater incentive

than a direct employee because he or she has a direct stake in the business.



TUR NKE Y PR OJECTS

In a Turnkey business transaction different entities are

responsible for setting up a plant or a part of it. A complex project

involving infrastructure facility, a chemical plant, a packing line

or a refinery demands expertise which is not available with a

single firm.



JOINT VENTUR ES

In a JV, parties agree to develop, for a finite time, a new entity and

new assets by contributing equity . They both exercise control

over the enterprise and consequently share revenues, expenses and

assets.



STR ATEGIC ALLIANCES

A Strategic Alliance is a formal relationship between two or more

parties to pursue a set of agreed upon goals or to meet a critical

business need while remaining independent organizations.

Partners may provide the strategic alliance with resources such as

products, distribution channels, manufacturing capability, project

funding, capital equipment, knowledge, expertise, or intellectual

property.



BENEFITS FOR MNC¶s

New MNCs do not pop up randomly in foreign nations. It is the

result of conscious planning by corporate managers. Investment

flows from regions of low anticipated profits to those of high

returns.

REASONS FOR FDI

1. Growth motive - A company may have reached a plateau

satisfying domestic demand2. Protection in the importing countries

3 Diversification

4. To seek raw materials



Foreign direct investment is one way to expand bypassing protective instruments in the importing country.

e.g. European Community: imposed common external tariff

against outsiders. US companies circumvented these barriers by

setting up subsidiaries.

Japanese corporations located auto assembly plants in the US, to

bypass VERs.



5. Market competition

The most certain method of preventing actual or potentialcompetition is to acquire foreign businesses.

e.g. GM purchased Monarch (GM Canada) and Opel (GM

Germany). It did not buy Toyota, Datsun (Nissan) and Volkswagen.They later became competitors.

6. Cost reduction

Labor costs tend to differ among nations. MNCs can hold downcosts by locating part of all their productive facilities abroad.

e.g. United Fruit has established banana-producing facilities in

Honduras due to cheap foreign labor.



R ISKS FOR MNC¶s

1. POLITICAL RISK :

For multinational companies, political risk refers to the risk that a

host country will make political decisions that will prove to haveadverse effects on the multinational's profits and/or goals.

Adverse political actions can range from very detrimental, such as

widespread destruction due to revolution, to those of a more

financial nature, such as the creation of laws that prevent the

movement of capital.



2. FINANCIAL RISK :

Financial risks for multinational companies refers to foreign

exchange risk, inflation risk , interest rate risk etc.

3.THREAT FROM COMPETITORS

4. REGULATORY COMPLIANCE

5. REPLICATION OF STRUCTURAL FRAMEWORK (BY THE

MNC IN HOST COUNTRY)



BENEFITS FOR HOST COUNTRY

1. There is usually huge capital investment in major economicactivities

2. The country enjoys varieties of products, services and facilities,

brought to their door steps

3. There is creation of more jobs for the populace4. The nation's pool of skills are best utilized and put to use

effectively and efficiently

5. There is advancement in technology as these companies bring in

state-of-the-art-technology for their businesses

6. Friendliness between and among nations in trade i.e. itstrengthens international relation

9. The balance of payments of nations in trade are improved on

10. Better management practices



GR EENFIELD MER GER & ACQUISITION

A form of foreign direct investment where a parent company starts

a new venture in a foreign country by constructing new operational

facilities from the ground up. In addition to building new facilities,

most parent companies also create new long-term jobs in the

foreign country by hiring new employees.

Developing countries often offer prospective companies tax-

breaks, subsidies and other types of incentives to set up green field

investments. Governments often see that losing corporate taxrevenue is a small price to pay if jobs are created and knowledge

and technology is gained to boost the country's human capital.



OBJECTIVES OF MULTINATIONAL

FINANCIAL MANAGEMENT

1. MANAGEMENT OF DIFFERENT CURRENCY

DENOMINATIONS

2. ECONOMIS AND LEGAL RAMIFICATIONS

3. LANGUAGE DIFFERNCES

4. CULTURAL DIFFERENCES

5. ROLE OF GOVERNMENTS

6. POLITICAL RISK



QUESTIONS ????

TH ANK Y OU

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