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- Maximize SHAREHOLDER wealth (quantified by stock price and dividends) - Financial managers throughout the MNC have a single goal of maximizing the value of the the entire MNC (global firm)

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Goal of the MNC

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- Try to maximize STAKEHOLDER wealth - Stakeholder: shareholders AND employees, customers, suppliers, and society - Hard to quantify

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Foreign MNC's

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When a corporation's shareholders differ from its managers, a conflict of goals can exist (does not exist in sole proprietorship or partnerships) - Compensation is based on earnings

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Agency Problem

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- Difficulty in monitoring distant managers - Different cultures of foreign managers - The sheer size of the larger MNCs - The tendency to downplay short-term effects (could hurt you in the long run)

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Agency Costs for MNCs

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1) Agency Problem 2) Subsidiary managers may be tempted to make decisions that maximize the values of their respective subsidiaries

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Conflicts with the MNC Goal

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- Reduces agency costs - Allows managers of the parent to control foreign subsidiaries and thus reduces the power of subsidiary managers - Advantage: less costly - Disadvantage: the parent's managers may make poor decisions for the subsidiary if they are less informed than the subsidiary's managers about its setting and financial characteristics

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Centralized Management System

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- Gives more control to those managers who are closer to the subsidiary's operations and environment - Advantage: More expertise in that area/culture --> can help customers faster -Disadvantage: Higher agency costs because subsidiary managers may make decisions that fail to maximize the value of the entire MNC - Advances in technology has reduced the need for decentralized management (internet, Skype, email, etc. make it possible to communicate faster)

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Decentralized Management System

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Various forms of Corporate Control can reduce agency costs: - stock options - hostile takeover threat - investor monitoring ("activist investors")

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Impact of Corporate Control

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1. Environmental constraints - cultural, economic, political 2. Regulatory constraints 3. Ethical Constraints - corruption - Investors assigned a higher value to firms that exhibit high corporate governance and are likely to obey ethical constraints (Nordic countries are least corrupt)

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Constraints of MNC's goal

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1. Theory of Comparative Advantage 2. Imperfect Markets Theory 3. Product Cycle Theory

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Theories of International Business

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Specialization by countries can increase production efficiency (specialize in one product) - allows firms to penetrate foreign markets - ex: Brazil --> coffee

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Theory of Comparative Advantage

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The markets for the various resources used in production are "imperfect" - like an oligopoly - high profit margins - few competitors - factors of production are somewhat immobile (perfect market = pure competition)

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Imperfect Markets Theory

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As a firm matures, it may recognize additional opportunities outside its home country - use price-skimming strategy (start with high price in intro, then reduce as you get more competition) - ex: VCR *See graph in notes*

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Product Cycle Theory

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1. Firm creates product to accommodate local demand 2. Firm exports product to accommodate foreign demand 3. Firm establishes foreign subsidiary to establish precedence in foreign country and possibly to reduce costs 4a. Firm differentiates product from competitors and/or expands product line in foreign country OR 4b. Firm's foreign business declines as its competitive advantages are eliminated

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International Product Life Cycle

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1) International Trade 2) Licensing 3) Franchising 4) Joint Venture 5) Acquisitions of existing operations 6) Establishing new foreign subsidiaries

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International Business Methods

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involves exporting and/or importing - least risky

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International Trade

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Allows a firm to provide its technology in exchange for fees or some other benefits - It might make more sense to produce the product locally instead of incurring large transportation costs, so sell the license to produce the product instead - Risk: product failure because of alteration of practice - how well do you know your partner?

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Licensing

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Obligates a firm to provide a specialized sales or service strategy, support assistance, and possibly an initial investment, in exchange for periodic fees - Should all be alike - Ex: McDonald's - Risk of ruined reputation if partner does not follow instructions

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Franchising

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Firms may also penetrate foreign markets by engaging in joint ownership and operation with firms that reside in those markets - Partner is a foreign country - Advantages: 1. Local knowledge 2. Share the risk

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Joint Venture

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Allows firms to quickly gain control over foreign operations as well as a share of the foreign market - ex: Coca-Cola in India acquired Parles

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Acquisitions of existing operations

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any method of conducting business that requires a direct investment in foreign operations

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Foreign Direct Investment (FDI)

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The marginal returns on MNC projects are above those of purely domestic firms since MNCs have expanded opportunity sets of possible projects from which to select - looks beyond domestic economies

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Investment Opportunities

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MNCs can obtain capital funding at a lower cost due to their larger opportunity set of funding sources around the world - can seek out lowest interest rates instead of being stuck with domestic rates

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Financing Opportunities

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Free movement of labor, capital, and goods - act like a single market (28 countries acting like 1) - kind of like US

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Single European Act of 1987

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Brazil, Argentina, Uruguay Paraguay, Venezuela

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MERCOSUR

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International business usually increases an MNCs exposure to: 1. Exchange rate movements 2. Foreign economic risk - different economic environments 3. Political risk - different rules of law

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Exposure to International Risk

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- Want to reduce tariffs on a world wide basis (global basis) - MFN - treat everyone as the "Most Favored Nation" - Doha round: Could not reach agreement; need to bring down subsidies

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Multi-Lateral Trade Agreements

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Reduce tariffs only within a certain group of countries

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Regional Trade Agreements (Bi-lateral)

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- Helps become self-sufficient in food production - Europe now has a surplus --> dump into international markets --> drives prices down --> now African countries cannot produce... need to import

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Common Agricultural Policy (CAP)

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An MNC can control its degree of exposure to exchange rate risks, economic conditions, and political conditions with its financial management

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Financial Management

Chapter 1 – Multinational Financial Management (An Overview) – Flashcards

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