Multinational Financial Management:

Topics: Investment, Net present value, Rate of return Pages: 7 (1511 words) Published: June 8, 2012
Multinational Financial Management: An Overview
* Identify the management goal and organizational structure of the Multinational Corporation (MNC). * Describe the key theories that justify international business * Explain the common methods used to conduct international business * Provide a model for valuing the MNC

The International Financial Environment

Managing the MNC
1. Managers are expected to make decisions that will maximize the stock price * A U.S. view, not shared universally.
2. Focus of this text: MNCs whose parents fully own foreign subsidiaries (parent is sole owner of subsidiary.) 3. Finance decisions, as always, are influenced by other business discipline functions: * Marketing

* Management
* Accounting and information systems

Agency Problems
The conflict of goals between managers and shareholders
* A fiduciary conflict under all circumstances, compounded for the MNC * Time and distance
* Cultural norms
* Language issues
* Ethical issues
* Take one for the team?
* Sins of omission and sins of commission!
Question: Should an MNC reduce its ethical standards to compete internationally?

Agency Costs
1. Definition: Cost of ensuring that managers maximize shareholder wealth 2. Costs are normally higher for MNCs than for purely domestic firms for several reasons: * Monitoring managers of distant subsidiaries in foreign countries is more difficult. * Foreign subsidiary managers raised in different cultures may not follow uniform goals. * Sheer size of larger MNCs can create large agency problems. * Some non-U.S. managers tend to downplay the short-term effects of decisions.

Control of Agency Problems
1. Parent control of agency problems
Parent should clearly communicate the goals for each subsidiary to ensure managers focus on maximizing the value of the parent company. 1. Corporate control of agency problems
Entire management of the MNC must be focused on “maximizing shareholder wealth”, if agreed mission. 1. Sarbanes-Oxley Act (SOX)
Ensures a more transparent process for managers to report on the productivity and financial condition of their firm.

SOX Methods to Improve Reporting
* Establishing a centralized database of information
* Ensuring that all data are reported consistently among subsidiaries * Implementing a system that automatically checks for unusual discrepancies relative to norms * Speeding the process by which all departments and subsidiaries have access to all the data they need * Making executives more accountable for financial statements

Control of Agency Problems
How the Internet Facilitates Management Control
…reporting across time zones via email (vs phone)
…common application platforms and formats (e.g. excel)
…enhanced cross-border trade and finance via 3rd parties (e.g. banks)

Management Structure of MNC
Centralize or Decentralize ?
Centralized: Allows managers of the parent to control foreign subsidiaries and therefore reduce the power of subsidiary managers

Decentralized: Gives more control to subsidiary managers who are closer to the subsidiary’s operation and environment

Management Structure of MNC
Agency costs…
…costs reduced by centralized “command and control”.
But at risk of decisions that are inconsistent with local markets …costs increased by decentralization which sharpens “the pointy end of the stick” The balance?

Why Firms Pursue International Business
Question: Why does an MNC expand internationally-what are the advantages? 1. Theory of Competitive Advantage: specialization increases production efficiency. * Differing inherent advantages

* Differing capabilities
Such as…
2. Imperfect Markets Theory: factors of production are somewhat immobile providing incentive to seek out foreign...
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