International Finance Ch.1

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1. Multinational Corporations(MNCs)
1) Definition: firms that engage in some form of international business. 2) The goals of MNCs: maximizing the value of the MNCs and shareholder wealth.

2. Agency problems
1) Agency problems: The conflict of goals between a firm’s managers and shareholders is often referred to as the agency problem. 2) Agency costs are normally larger than for purely domestic firms for several reasons (1) MNCs with subsidiaries scattered around the world may experience larger agency problems because monitoring managers of distant subsidiaries in foreign countries is more difficult. (2) Foreign subsidiary managers raised in different cultures may not follow uniform goals. (3) The sheer size of the larger MNCs can also create large agency problems. (4) Some non-U.S. managers tend to downplay the short-term effects of decisions. 3) The parent corporation of an MNC may be able to prevent agency problems with proper governance. (1) Communicating the goals for each subsidiary to ensure that all subsidiaries focus on maximizing the value of the MNC rather than their respective subsidiary values. (2) Overseeing the subsidiary decisions to check whether the subsidiary managers are satisfying the MNC’s goals. (3) Implanting compensation plans such as stocks that reward the subsidiary managers who satisfy the MNC’s goals. 4) The ways to reinforce corporate governance of MNCs.

(1) Establishing a centralized database of information
(2) Ensuring that all data are reported consistently among subsidiaries (3) Implementing a system that automatically checks data for unusual discrepancies relative to norms (4) Speeding the process by which all departments and all subsidiaries have access to the data that they need (5) Making executives more accountable for financial statements by personally verifying their accuracy 5) Management structure of an MNC

(1) Centralized management style
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