International Finance Lecture Notes 1-14

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Lecture 1 – Multinational Financial Management: An Overview

Review goals of multinational corporations (MNCs) and conflicts with those goals.

Describe the key theories that justify international business.

To explain the common methods used to conduct international business.

Multinational Corporations

Goal of the MNC – maximize shareholder wealth

Conflicts against this goal

Agency problems – managers act in their own interest to the detriment of the shareholders.

Expansion

Unnecessary perks

Fear of job loss

Philosophy of foreign managers

Subsidiary vs. parent performance

Multinational Corporations

Goal of the MNC – (continued)

Conflicts against this goal

Agency costs – costs incurred as a result of an agency problem. Typically higher for MNCs.

Wealth lost

Monitoring costs

Multinational Corporations

Constraints against shareholder wealth – shareholder wealth is being maximized subject to limiting factors.

Environmental constraints – each country has a different set of environmental rules.

Regulatory constraints – each country has its own set of taxes, currency convertibility rules, and other regulations.

Ethical constraints – ethical practices vary across countries.

International Business Theories

Comparative Advantage Theory – Country specialization can increase overall production efficiency.

Imperfect Markets Theory – factors of production are immobile

Product Cycle Theory – firms become established in their home country and expand overseas when a product matures.

Increasing Globalization, the rise of the MNC, and U.S. Dominance

Evidence

International trade has grown for most countries since 1970s.

The level of direct foreign investment has also been rising dramatically.

Increasing Globalization, the rise of the MNC, and U.S. Dominance

Reasons – political, technological, regulatory, and economic forces radically changed the environment.

Free trade agreements – reductions in tariffs and other barriers.

Increasing standardization of products and services.

Movements toward free enterprise and the collapse of communism.

Increasing Globalization, the rise of the MNC, and U.S. Dominance

Reasons – (continued)

Privatization of state-owned businesses.

Improved information technologies and communication.

Rise in the market for corporate control.

Increasing Globalization, the rise of the MNC, and U.S. Dominance

Detractors

Political and Labor Union Concerns

Lost jobs

Lower wages

Lower environmental and labor standards

International Business Methods

International Trade – importing and exporting.

Licensing – allow a foreign firm to manufacture the company’s products in return for royalties.

Franchising – provide specialized strategy and possible initial investment for percent of profit or purchase agreements.

International Business Methods

Joint Ventures – owned by two or more firms.

Overseas Production – more investment and higher returns.

Acquisitions

Establish subsidiary

International Risk

Exposure to Exchange Rate Movements

Exposure to Foreign Economies

Exposure to Political Risk

Lecture 2 – International Financial Markets

Review the history of the exchange rate systems

Examine the benefits and drawback to different exchange rate systems...
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