MULTINATIONAL

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


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 RI SE OF THE MULTI NATI ONAL
CORPORATI ON
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