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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

THE RISE OF THE MULTINATIONAL CORPORATION E. THE GLOBAL MANAGER 1. 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 PRACTICE I. THE MULTINATIONAL FINANCIAL SYSTEM A. Main Objective of MNC: Maximize shareholder wealth B. Other Objectives Reflect Ability to Link: via affiliate transfer mechanisms

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

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

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

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

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

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