What Are the Six Key Differences Between Multinational and Domestic Financial Management?

Multinational corporations operate in two or more countries while domestic companies restrict their operations to a single country. The reasons companies expand to other countries vary. Some companies do it to seek new markets, others to find resources, yet others to reduce costs. All multinational companies learn to handle the special challenges of multinational financial management. Eugene F. Brigham and Phillip R. Davies suggest, in their advanced corporate finance textbook Intermediate Financial Management, there are six main differences that set apart multinational financial management from domestic financial management. 1. Different Economic and Legal Structure
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Companies that expand to other countries must take to heart the medieval saying: when in Rome do as the Romans. Different countries have different legal structures, financial methods and customs, and a multinational corporation must learn how to adapt to these differences. For instance, a company in the United States might use the Securities Exchange Commission generally accepted accounting principles, GAAP, but may have to change to the international financial reporting standards when it has subsidiaries in other countries. Different Currency Denominations

Multinational corporations must do business with different currencies depending on where their subsidiaries are located. This involves dealing with the cost and inconvenience of exchanging currencies when transferring funds between countries. Different Languages

Multinational companies must generally deal with several languages through their everyday operations. For instance, a company with a

subsidiary in Spain may have to carry out business in Spanish, Catalan, Galician or in the Basque language depending on where in Spain its offices are located. This generates extra costs and paperwork because you have to translate company policies, forms and even telephone conversations to two or more languages. Cultural Differences
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Successful multinational companies must be flexible enough to adapt to local culture and preferences. The cultural differences may vary how a product is marketed; for instance, changing a slogan that is unsavory or ineffective when translated, or by changing the product itself. For example, McDonald's will vary its menu to adapt to differences in the local palate: in Italy McDonald's serves pasta and in Nicaragua rice and beans. Role of Governments

Not all governments deal with multinational companies in the same way. Some place burdensome tariffs on foreign corporations, while others welcome them with open arms and provide financial incentives in exchange for the new jobs the corporation generates. Governments also vary in their respective levels of corruption, efficiency and bureaucracy. Political Risk

Multinational corporations must also assess the stability of a country's government before it decides to do business in it -- especially if the corporation must pay expensive licenses and "incentives" to oil the gears of bureaucracy. Countries where valuable natural resources are controlled by the government and licensed to foreign companies are a source of both great opportunity and risk to multinationals. For instance, while a license to extract raw materials at a low price is priceless for a multinational looking for a reliable line of supply, a change in government could mean financial ruin for a subsidiary with economic agreements with the previous administration.

Financial Management Differences Among the few differences between financial management of a multinational company (MNC) and domestic company (DC) is that the MNC has got operations around the world. This means they have to deal with an international group of customers, shareholders and suppliers. What this means is that they are exposed to exchange rate changes, issues about raising capital internationally, and also different accounting standards of reporting. In my opinion, the most important difference between an MNC and DC is the exchange rate. The MNC have to take consideration into exchange rate fluctuations, as it affects their sales and investment decisions ( exchange rate changes will change their revenue from customers and also make investment decisions difficult, as they have to constantly convert back to their home country and see if the return is higher or if the investment is worth it ). It also affects the way they report their financial statements, which is balance sheet or profit and loss. The MNC faces more difficulty in reporting this, as they have various standards to follow. ( for example, how should they report the profit or loss for the year, in a foreign currency or home currency. Either way, it tells us different things about the MNC, as they can be making money in the home currency, but losing money in the foreign currency ). Generally speaking, the financial management for an MNC has to deal with the larger external influence affecting the company, and a large part of books for Multinational Financial Management or International Financial Management, deal with exchange rates. Hope this helps.

International finance is different from domestic finance in many aspects and first and the most significant of them is foreign currency exposure. There are other aspects such as the different political, cultural, legal, economical, and taxation

environment. International financial management involves into a lot of currency derivatives whereas such derivatives are very less used in domestic financial management. The term International Finance has not come from Mars. It is similar to the domestic finance in many of the aspects. If we talk on a macro level, the most important difference between international finance and domestic finance is of foreign currency or to be more precise the exchange rates. In domestic financial management, we aim at minimizing the cost of capital while raising funds and try optimizing the returns from investments to create wealth for shareholders. We do not do any different in international finance. So, the objective of financial management remains same for both domestic and international finance i.e. wealth maximization of shareholders. Still, the analytics of international finance is different from domestic finance. Following are the major differences: Exposure to Foreign Exchange: The most significant difference is of foreign currency exposure. Currency exposure impacts almost all the areas of an international business starting from your purchase from suppliers, selling to customers, investing in plant and machinery, fund raising etc. Wherever you need money, currency exposure will come into play and as we know it well that there is no business transaction without money. Macro Business Environment: An international business is exposed to altogether a different economic and political environment. All trade policies are different in different countries. Financial manager has to critically analyze the policies to make out the feasibility and profitability of their business propositions. One country may have business friendly policies and other may not. Legal and Tax Environment: The other important aspect to look at is the legal and tax front of a country. Tax impacts directly to your product costs or net profits i.e. the bottom line for which the whole story is written. International finance manager will look at the taxation structure to find out whether the business which is feasible in his home country is workable in the foreign country or not.

Different group of Stakeholders: It is not only the money which along matters, there are other things which carry greater importance viz. the group of suppliers, customers, lenders, shareholders etc. Why these group of people matter? It is because they carry altogether a different culture, a different set of values and most importantly the language also may be different. When you are dealing with those stakeholders, you have no clue about their likes and dislikes. A business is driven by these stakeholders and keeping them happy is all you need. Foreign Exchange Derivatives: Since, it is inevitable to expose to the risk of foreign exchange in a multinational business. Knowledge of forwards, futures, options and swaps is invariably required. A financial manager has to be strong enough to calculate the cost impact of hedging the risk with the help of different derivative instruments while taking any financial decisions. Different Standards of Reporting: If the business has presence in say US and India, the books of accounts need to be maintained in US GAAP and IGAAP. It is not surprising to know that the booking of assets has a different treatment in one country compared to other. Managing the reporting task is another big difference. The financial manager or his team needs to be familiar with accounting standards of different countries. Capital Management: In an MNC, the financial managers have ample options of raising the capital. More number of options creates more challenge with respect to selection of right source of capital to ensure the lowest possible cost of capital. There may be such more points of difference between international and domestic financial management. Mentioned above are list of major differences. We need to consider each of them before taking any decision involving multinational financial environment.