1. MULTINATIONAL FINANCIAL MANAGEMENT Alan C. Shapiro Sixth Edition POWER POINT LECTURES: J. F. GRECO, Ph.D. California State University, Fullerton

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

3. PART I. THE RISE OF THE MULTINATIONAL CORPORATION I. The MNC: Definition a company with production and distribution facilities in more than one country. a company with production and distribution facilities in more than one country.

4. THE RISE OF THE MULTINATIONAL CORPORATION B. Traditional Economic Theory 1. Classical Theory: a. Smith, Ricardo b. Comparative Advantage: macroeconomic differences

5. THE RISE OF THE MULTINATIONAL CORPORATION 2. MNC supercedes theory relating to: a. mobility of factors b. different costs/skills between nations

6. THE RISE OF THE MULTINATIONAL CORPORATION C. EVOLUTION OF THE MNC Reasons to Go Global: Reasons to Go Global: 1. raw materials 2. markets 3. minimize costs of production

7. THE RISE OF THE MULTINATIONAL CORPORATION n RAW MATERIAL SEEKERS exploit markets in other countries exploit markets in other countries historically first to appear historically first to appear modern-day counterparts modern-day counterparts 4Anaconda Copper 4Standard Oil

8. THE RISE OF THE MULTINATIONAL CORPORATION n MARKET SEEKERS produce and sell in foreign markets produce and sell in foreign markets heavy foreign-direct investors heavy foreign-direct investors representative firms: representative firms: 4IBM 4Nestle 4Levi Strauss

9. THE RISE OF THE MULTINATIONAL CORPORATION n COST MINIMIZERS seek lower-cost production abroad seek lower-cost production abroad motive: to remain cost competitive motive: to remain cost competitive representative firms: representative firms: 4Texas Instruments 4Atari 4Zenith

10. THE RISE OF THE MULTINATIONAL CORPORATION II. THE PROCESS OF OVERSEAS EXPANSION A. Exporting: preferred market entry strategy preferred market entry strategy 1. Advantages: low cost low risk learning opportunity

11. THE RISE OF THE MULTINATIONAL CORPORATION 2. Disadvantages inability to realize full sales potential 3. Use of: a. Foreign agents b. Sales subsidiaries c. Distribution system

12. THE RISE OF THE MULTINATIONAL CORPORATION B. OVERSEAS PRODUCTION greater commitment to the local market greater commitment to the local market 1. Advantages: a. Increased sales b. Supply stability c. Control d. Comprehensive service

13. THE RISE OF THE MULTINATIONAL CORPORATION 2. Question: create or acquire 3. Acquisition -allows speedy transfer of unused parent skills; -used more by small firms.

14. THE RISE OF THE MULTINATIONAL CORPORATION C. LICENSING -local firm agrees to produce for a fee. 1. Advantages: a. Minimum investment b. Faster market entry c. Less risk

15. THE RISE OF THE MULTINATIONAL CORPORATION 2. Disadvantages of licensing: a. Low cash flow b. Quality standards c. New competitor

16. THE RISE OF THE MULTINATIONAL CORPORATION D. THE MNC: A BEHAVIORAL VIEW 1. State of mind: committed to producing, undertaking investment andmarketing, and financing globally.

17. THE RISE OF THE MULTINATIONAL CORPORATION E. THE GLOBAL MANAGER 1. Understands political and economic differences; economic differences; 2. Searches for most cost- effective suppliers; effective suppliers; 3. Evaluates changes on value of the firm.

18. PART II. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE I. THE MULTINATIONAL FINANCIAL SYSTEM A. Main Objective of MNC: Maximize shareholder wealth Maximize shareholder wealth B. Other Objectives Reflect Ability to Link: via affiliate transfer mechanisms

19. THEORY AND PRACTICE C. Mode of Transfer: Reflects freedom to select a variety of financial channels. Reflects freedom to select a variety of financial channels. D. Timing Flexibility: Most MNC have some flexibility in timing of fund flows. Most MNC have some flexibility in timing of fund flows.

20. THEORY AND PRACTICE E. Value The ability to avoid national taxes has led to controversy. The ability to avoid national taxes has led to controversy.

21. THEORY AND PRACTICE II. FUNCTIONS OF FINANCIAL MANAGEMENT MANAGEMENT A. Two Basic Functions: 1. Financing 2. Investing

22. THEORY AND PRACTICE B. Additional Factors Facing the MNC Executive 1. Political risk 2. Economic risk

23. THEORY AND PRACTICE III. THEORETICAL FOUNDATIONS A. Useful Concepts from Financial Economics: 1. Arbitrage 2. Market Efficiency 3. Capital Asset Pricing

24. THEORY AND PRACTICE B. Importance of Total Risk 1. Adverse Impact lower sales and higher costs 2. Justifies hedging activities of MNC 3. Diversification reduces risk

25. THEORY AND PRACTICE IV. THE GLOBAL FINANCIAL MARKET PLACE A. Interlinkage by Computers B. Market Acts as A Global Referendum Process: Currencies may rise or fall