Presentation on theme: "The Multinational Corporation and Globalization"— Presentation transcript:
1 The Multinational Corporation and Globalization Chapter 13The Multinational Corporation and Globalization
2 Outline Globalization Opportunities of international expansion Risks faced by a multinational corporationExchange rates and exchange rate hedgingForeign direct investmentMultinational capital budgetingRepositioning of fundsMultinational transfer pricing
3 Learning ObjectivesUnderstand how supply and demand are affected in different countries around the worldDefine the exchange rate and identify several methods of hedgingUnderstand multinational capital budgeting and explain how it differs from capital budgeting of a domestic corporationShow how changing transfer prices can benefit a corporation
4 GlobalizationOne of the main reasons a company wants to operate globally is to take advantage of new growth opportunitiesExpand to serve new markets (e.g. food products)Take advantage of new suppliers (manufacturing and back office services)In looking at market opportunities, firms often look at international expansion.
5 GlobalizationMultinational corporations face the same opportunities and problems as a domestic corporation, but also face additional challenges:Fluctuations in currenciesDifferent rules and regulationsDifferent tax systemsTariffs and other restrictionsDifferent costs of productionDifferent cultures, languages, and business practices
6 Globalization The term ‘globalization’ Results in a closer integration of the countries of the world – especially the increased level of trade and movements of capital – brought on by lower costs of transportation and communication.
7 Risks Faced by MNCsMultinational corporation risk: risks that are present only because it transacts business across national bordersExchange rate risk: results from changes in exchange ratesThe multinational corporation faces all the categories of risk of domestic firms-but also additional risk due to international circumstances.
8 Risks Faced by MNCs Other risks faced by the MNC blockage of funds and capital controlsdifferences in cultural and religious philosophiesownership restrictionshuman resource restrictionsintellectual propertydiscriminationred tape and corruptioninternal and external warschanges in government
9 Exchange RatesExchange rate: price of one country’s currency in terms of another country’sMay be quoted in terms of the domestic or foreign currencye.g Є1/$ or $1/ Є0.714Hedging: various ways that companies can protect themselves from a potential loss from currency fluctuation
10 Exchange Rates Hedging techniques: Offsetting Transactions: export goods of the same amount to the same country from which it imported, in the same period of timeForward Market: permits a company to buy or sell currency at a specific rate at a specific time, customized to its needsFutures Market: similar to forwards, but on a standardized public exchange (set amounts, maturing on certain days)
11 Exchange Rates Hedging techniques: Currency Options: give the holder the right to buy or sell an amount of currency at a specified price during a certain period of timeCurrency Swaps: companies swap currencies when they expect a offsetting cash flow from other sources in their respective countries
12 Foreign Direct Investment Foreign direct investment (FDI): acquiring ownership rights in foreign fixed assets or existing firms, or establishing foreign subsidiaries with their own infrastructureThis has been especially evident in the automotive industry-foreign firms have located manufacturing facilities in the US, and US firms have located plants outside the US.
13 Foreign Direct Investment Reasons for FDIIncrease its earning and increase the value of the companyForeign country may impose import restrictionsTake advantage of economies of scale, as well as lower production and transportation costs
14 MNC Capital BudgetingSimilar process as for a domestic company, but must take into consideration several extra variablesintercompany fund flows: cash flows between parent to subsidiaryinflation rates: may differ in the country of the parent and of the subsidiaryexchange rates: exchange rate between the parent and subsidiary country will change during the project period
15 MNC Capital BudgetingTax differences: many types can differ between countriesIncome tax ratesTax on remittances to the parent’s countryDouble taxation on subsidiary profit and remittance to parent, offset by foreign tax credit
16 MNC Capital BudgetingCash flows: cash flows received and recorded by the parent may differ substantially from those in the subsidiary’s country
17 MNC Capital BudgetingCost of capital: difference in cost of capital for parent and subsidiaryFinal project valuation: differences are so significant that a project is acceptable in one country and not in the other
18 MNC Capital Budgeting Repositioning of Funds Examples: royalties and license fees can be used to channel funds to those areas of the company where they may be used most profitablydividend payments to the parenttax rates on distributed and undistributed earningstaxes levied on dividends transmitted to the parentre-invoicing centers
19 MNC Transfer PricingMultinational transfer pricing: prices for products or services that are transferred from the parent company to the subsidiary or among subsidiariesCan affect a transfer of funds by charging high or low pricesCan affect a company’s profitability
20 MNC Transfer PricingTax liability due to a change in transfer price DT = (Q · DP · te) – (Q · DP · tm) DT = change in total tax bill Q = quantity of products shipped by E (exporter) to M (importer) DP = change in the price of the product te = tax rate in the exporting country Tm = tax rate in the importing country
21 MNC Transfer PricingInternal Revenue Code section 482 gives IRS authority to ‘shift around income and expense figures to arrive at what the government considers a more equitable result’.IRS requires transfer pricing to be done on an ‘arm’s length’ relationship.Developing countries are becoming more active in the area of regulating transfer pricing
22 SummaryA multinational corporation must compete not just domestically but worldwide.The firm must consider the demand for their products, the cost of supplies, their productivity, and changes in technology.An MNC must consider economic factors, political factors, and social and cultural factors in their business decisions.Transfer pricing can be used to achieve higher profits, but governments are monitoring this activity more closely.