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Multinational Financial Management: An Overview
Pre-class Discussion
What is the appropriate definition of an MNC (Multinational Corporations)?
Why does an MNC expand internationally?
What are the risks of an MNC which expands internationally?
Why must purely domestic firms be concerned about the international environment?
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Objectives
This chapter provides a background on the goals of an MNC and the potential risks and returns from engaging in international business. The specific objectives are :
to identify the main goal of the MNC and conflicts with that goal;
to describe the key theories that justify international business;
to explain the common methods used to conduct international business.
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1、Goal of the MNC
The commonly accepted goal of an MNC is to maximize shareholder wealth.
We will focus on MNCs that are based in the United States and that wholly own their foreign subsidiaries.
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Conflicts with the MNC Goal
For corporations with shareholders who differ from their managers, a conflict of goal can exist -the agency problem.
Agency costs are normally larger for MNCs than for purely domestic firms.
* The scattering of distant subsidiaries.
* The different culture background of subsidiary managers.
* The sheer size of the MNC.
* Subsidiary value versus overall MNC value.
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Conflicts with the MNC Goal
The magnitude of agency costs can vary with the management style of the MNC.
( Exhibit & Exhibit )
* A centralized management style reduces agency costs.
* A decentralized style gives more control to those managers who are closer to the subsidiary’s operations and environment, yet may result in higher agency costs.
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Exhibit Centralized Multinational Financial Management
Cash Management at Subsidiary A
Financial Managers of Parent
Inventory and Accounts Receivables Management at Subsidiary A
Financing at Subsidiary A
Capital Expenditures at Subsidiary A
Capital Expenditures at Subsidiary B
Cash Management at Subsidiary B
Inventory and Accounts Receivables Management at Subsidiary B
Financing at Subsidiary B
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Exhibit Decentralized Multinational Financial Management
Cash Management at Subsidiary A
Financial Managers of Subsidiary A
Financial Managers of Subsidiary B
Cash Management at Subsidiary B
Inventory and Accounts Receivable Management at Subsidiary A
Inventory and Accounts Receivable Management at Subsidiary B
Financing at Subsidiary A
Capital Expenditures at Subsidiary A
Capital Expenditures at Subsidiary B
Financing at Subsidiary B
Conflicts with the MNC Goal
* Some MNCs attempt to strike a balance they allow subsidiary managers to make the key decisions for their respective operations, but the decisions are monitored by the parent’s management.
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Conflicts with the MNC Goal
Various forms of corporate control can reduce agency costs.
* Stock compensation for board members and executives.
* The threat of a hostile takeover.
* Monitoring and intervention by large shareholders.
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