Learning Objectives

Defining Multinationalisation/ Internationalisation/Globalisation Defining MNE, MNC and TNC Complexities and issues in managing financial function in a multinational firm Identify the main goal of the MNC and conflicts with that goal Describe the key theories that justify international business Explain the common methods used to conduct international business

Multinationalisation/Internationalisation/Globalisatio n of Business
Doing or planning to expand business globally Giving up the distinction between the domestic market and foreign market and developing a global outlook of the business Locating the production and other physical facilities on a consideration of the global business dynamics, irrespective of national considerations Basing product development and production planning on the global market considerations Global sourcing of factors of production i.e., raw materials, components, machinery, technology, finance etc., are obtained from the best source anywhere in the world Global orientation of organisational structure and

Country/Bloc

The Worlds 500 Largest MNEs

Number of MNEs in 2005

171 155 100 12 11 9 7 16 5 4 10

United States European Union Japan Canada Switzerland South Korea Australia China India Brazil Other

Total
Source:Adapted from Fortune, The Fortune Global 500, July 25 2005

500

The Worlds Most Profitable MNEs

Rank Co.s Name Home Country
1 2 3 4 5 Exxon Mobil Shell Group Citigroup GE BP United States Netherlands United States United States UK

Profit (Bn$)
25.3 18.2 17.0 16.8 15.3

Source: Adapted from Fortune, Fortune Global 500, July 13, 2005.

Top 5 in Europe
1. BP 2. Royal Dutch/Shell Group 3. Daimler Chrysler 4. Total 5. AXA

Top 5 in Asia
1. Toyota Motor 2. Nippon Telegraph & Telephone 3. Hitachi 4. Matsushita Electric Industrial 5. Honda Motor

INDIAN FORTUNE MNEs

TCS WIPRO INFOSYS SATYAM COMPUTERS HCL TECHNOLOGY

Forbes 2000 Region Wise

821 544 527 32 30 26 20 1 1 1 1 9 North America RIM Pacific Western Europe South Asia Eastern Europe South America Africa Middle East

The world's largest non-financial TNCs: percentage share of foreign affiliates in each region, by home economy, 2002
Region No of TNC s in the Eco nom y Eur ope an Uni on Oth er Wes tern Eur ope North Amer ica Sout h Ame rica Lati n Ame rica Total

Home Eco.

US

27

52.6

4.41

7.39

6.34

5.95

76.7

France

14

61.1

3.88

10.04

4.35

1.32

80.67

Germany

13

58.5

4.55

10.97

3.40

2.53

80.01

UK

12

45.7

2.93

26.32

2.91

2.31

80.24

Japan

35.3

1.50

25.98

5.56

3.66

72.09

The world's largest non-financial TNCs: percentage share of foreign affiliates in each region, by home economy, 2002

Region

Home Eco.

No of TNC s in the Econ omy

Euro pean Unio n

Othe r Wst ern Euro pe

North Ameri ca

Sou th Am eric a
5.3

Lat in Am eri ca

Total

Netherlands

36.8

2.17

34.7

2.0

81.1

Italy

66.6

5.24

6.56

10.1

4.2

92.7

Spain

40.3

0.85

15.21

32.4

9.7

98.5

Finland

51

4.40

4.49

4.40

1.7

66.0

Ireland

67.1

7.71

22.11

0.41

97.3

Sweden

59.5

2.86

14.59

6.67

4.8

81.7

An Overview of Multinational Financial Management

Some MNEs such as Dow Chemical, Exxon, American Brands, and Colgate Palmolive, Commonly generate more than half of their sales in foreign countries Coca Cola is distributing its products in over 200 countries and using 40 different currencies Westinghouse Electric corporation operates in 16 foreign countries with annual international revenue exceeding $2 billion. Honeywell has 42 subsidiaries and several other joint-venture projects scattered around the world Eastman Kodak has subsidiaries in 32 foreign countries. Rockwell International Corp. operates in 26 foreign countries

MNC Defined
The multinational corporation (MNC) is a company engaged in producing and selling goods or services in more than one country. It ordinarily consists of a parent company located in the home country and at least five or six foreign subsidiaries, typically with a high degree of strategic interaction among the units.

MNE vs. TNC

A multinational enterprise (MNE) is defined as one that has operating subsidiaries, branches or affiliates located in at least five or six foreign countries. The ownership of some MNEs is so dispersed internationally that they are known as transnational corporations. The transnationals are usually managed from a global perspective rather than from the perspective of any single country.

How Transnationals are TNCs?

From the operations perspective, key dimensions include the intensity or relative importance of a TNCs foreign operations, as measured by various variables: the geographical spread of its operations, the modalities of foreign operations and the degree of integration of the production process across locations. From the stakeholders perspective, key dimensions include the composition of managers or board members, the nationality composition of shareholders by nationality, the international mobility and international experience of managers and the composition of the labour force by nationality.

How Transnationals are TNCs?

From
the perspective of the spatial organization of management, key dimensions include: the extent and spread of the location of regional headquarters in host countries and the legal nationality (ies) of a TNC. Given the range of perspectives and dimensions that can be considered for each, the degree of transnationality of a TNC cannot be fully captured by a single synthetic measure it requires a variety of indicators. Some of these can be expressed as indices calculated or estimated on the basis of empirical data; others may consist of empirical data not expressed as indices; and still others may be expressed in qualitative rather than quantitative form.

Complexities and Issues in Managing Financial Function in a Multinational Firm

1. Culture, history, and institutions
2. Corporate governance 3. Foreign exchange risk

Each foreign country is unique and not always understood by MNE management
Foreign countries regulations and institutional practices are uniquely different MNEs are exposed to exchange rate fluctuations

4. Political risk MNEs face political risks because of their foreign subsidiaries 5.Modification MNEs utilize modified financial instruments of financial such as options, futures, swaps, and letters of instruments credit

Goals of MNC
The three primary financial objectives are: 1. Maximization of consolidated after-tax income 2. Minimization of the firms effective global tax burden 3. Correct positioning of the firms income, cash flows, and available funds.

Constraints Interfering with the MNCs Goals

When financial managers of MNCs attempt to maximize their firms value, they are confronted with various constraints that can be classified as under: Environmental Constraints. Building codes, disposal of production waste materials, and pollution controls are examples of the restrictions that force subsidiaries to incur additional cots Regulatory Mechanisms. Each country also enforces its own regulatory constraints pertaining to taxes, currency convertibility rules, earning remittance restrictions, and other regulations that can affect cash flows of subsidiary established there. Ethical Constraints. There is no consensus standard of business conduct that applies to all countries. A business practice that is perceived to be unethical in one country may be totally ethical in another. Bribes to govts. in order to receive special tax breaks or othe5r favours are one example.

Theories of International Business

Theory of Comparative Advantage. It refers to growing realization that specialization by countries can increase production efficiency. Since these advantages cannot be easily transported, countries tend use their advantages to specialize in production of goods that can be produced with relative efficiency. Imperfect Market Theory. Even with comparative advantages, the volume of international business would be limited if all resources could be easily transferred among countries.The real world suffers from imperfect market conditions where factors of production are immobile. These are costs and often restrictions related to the transfer of labour and other resources used for production. There may also be restrictions on funds and other resources transferred among countries. Because markets for the various resources used in production are imperfect. Firms often capitalize on a foreign country resources. Product Cycle Theory.

International Business Methods

International Trade. Many large U.S.-based MNCs, including Boeing, Dupont, GE, and IBM generate more than $4 billion in annual sales from exporting Licensing obligates a firm to provide technology (copyrights, patents, trade-marks or trade names) in exchange for fees or some other specified benefits. Franchising obligates a firm to provide a specialized sales or service strategy, support assistance and possibly an initial investment in exchange for periodic fees. For example McDonalds, Pizza Hut, Subway sandwiches, Micro Age Computers, and dairy Queen have franchises that are owned and managed by local residents in many foreign countries.

International Business Methods

Joint ventures is a venture that is jointly owned and operated by two or more firms. For example, General Mills Inc. joined in a venture with Nestle SA, so that the cereals produced by General Mills can be sold thru the overseas sales distribution network established by Nestle. Acquisitions of Existing Operations Establishing New Foreign Subsidiaries Countertrade is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments.

Forms of Countertrade
Barter. MMTC and a Yugoslavian company dealt a Countertrade which involved import of 50,000 tones of rails of the value of about $ 38 billion by the MMTC and the purchase by Yugoslavian co. of iron ore concentrates and pellets of the same value. Counterpurchase. Under the Counterpurchase agreement the seller receives full payment in cash but agrees to spend an equivalent amount of money in that country within a specified period.
Classic example of this kind of agreement was Pepsi Colas trade with USSR. Pepsi got paid in Rubbles for the sale of its concentrates in the USSR but spent this amount for purchase of Russian Products like Vodka and wine.

Forms of Countertrade
Compensation Deal. Under this arrangement, the seller receives a part of the payment in cash and the rest in products. Buy Back. Under the buyback agreement, the supplier of plant, equipment or technology agrees to purchase goods manufactured with that equipment, or technology. Under buy back full payment may be made in kind or a part may be made in kind and the balance in cash.