Chapter 1 Multinational Financial Management An Overview Lecture Outline Managing the MNC
Facing Agency Problems
Management Structure of an MNC Why Fimrs Pursue International Business
Theory of Comparative Advantage
Imperfect Markets Theory
Product Cycle Theory How Firms Engage in International Business
Acquisitions of Existing Operations
Establishing New Foreign Subsidiaries
Summary of Methods Valuation Model for an MNC
Valuing International Cash Flows
Uncertainty Surrounding an MNCs Cash Flows
Uncertainty of an MNCs Cost of Capital Organization of the Text Chapter Theme This chapter introduces the multinational corporation as having similar goals to the purely domestic corporation, but a wider variety of opportunities. With additional opportunities come potential increased returns and other forms of risk to consider. The potential benefits and risks are introduced. Topics to Stimulate Class Discussion 1.
What is the appropriate definition of an MNC 2.
Why does an MNC expand internationally 3.
What are the risks of an MNC which expands internationally 4.
Why do you think European countries attract U.S. firms 5.
Why must purely domestic firms be concerned about the international environment POINT/COUNTER-POINT Should an MNC Reduce Its Ethical Standards to Compete Internationally POINT Yes. When a U.S.-based MNC competes in some countries, it may encounter some business norms there that are not allowed in the U.S. For example, when competing for a government contract, firms might provide payoffs to the government officials who will make the decision. Yet, in the United States, a firm will sometimes take a client on an expensive golf outing or provide skybox tickets to events. This is no different than a payoff. If the payoffs are bigger in some foreign countries, the MNC can compete only by matching the payoffs provided by its competitors. COUNTER-POINT No. A U.S.-based MNC should maintain a standard code of ethics that applies to any country, even if it is at a disadvantage in a foreign country that allows activities that might be viewed as unethical. In this way, the MNC establishes more credibility worldwide. WHO IS CORRECT Use the Internet to learn more about this issue. Which argument do you support Offer your own opinion on this issue. ANSWER The issue is frequently discussed. It is easy to suggest that the MNC should maintain a standard code of ethics, but in reality, that means that it will not be able to compete in some cases. For example, even if it submits the lowest bid on a specific foreign government project, it will not receive the bid without a payoff to the foreign government officials. The issue is especially a concern for large projects that may generate substantial cash flows for the firm that is chosen to do the project. Ideally, the MNC can clearly demonstrate to whoever oversees the decision process that it deserves to be selected. If there is just one decision-maker with no oversight, an MNC can not ensure that the decision will be ethical. But if the decision-maker must be accountable to a department who oversees the decision, the MNC may be able to prompt the department to ensure that the process is ethical. Answers to End of Chapter Questions Agency Problems of MNCs. a. Explain the agency problem of MNCs.
ANSWER The agency problem reflects a conflict of interests between decision-making managers and the owners of the MNC. Agency costs occur in an effort to assure that managers act in the best interest of the owners. Why might agency costs be larger for an MNC than for a purely domestic firm
ANSWER The agency costs are normally larger for MNCs than purely domestic firms for the following reasons. First, MNCs incur larger agency costs in monitoring managers of distant foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not follow uniform goals....
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