Globalization and the Multinational Firm

1

• Globalization and the Multinational Firm
• (chapter 1)

2
Whats Special about International Finance?

• Why study international finance? Why not
  interstate finance?
• Multinational firms (MNC, MNE)
• A firm that incorporated in one country and has
  production and sales operations in other
  countries.
• There are more than 35,000 MNCs in the world.

3
Whats Special about International Finance?

• Foreign Exchange Risk
• - Foreign operations are conducted in foreign
  currencies.
• - When firms and individuals are engaged in
  cross-border transactions they are exposed to
  foreign exchange (FX) risk.
• - The foreign currency profits, costs, revenues
  in dollar terms depends on exchange rate
  movements.
• - FX risk affects the cost of capital and the
  capital structure of a MNC firm
• - Capital budgeting decisions are more complex in
  the international context

4
Whats Special about International Finance?

• Political Risk
• Sovereign governments have the right to regulate
  the movement of goods, capital, and people
  across their borders
• In general, financial managers and investors
  incorporate a political risk premium when foreign
  activities are being evaluated
• Ex ethnic strife in Indonesia expropriation in
  Russia, Africa and Central America changes in
  taxes and regulations

5
Objectives of a MNC

• Maximizing shareholders wealth long accepted as
  a goal in the Anglo-Saxon countries, but
  complications arise
• - The development of the stock market
• - Who are and where are the shareholders?
• Corporate governance issues are actually
  culturally determined norms
• In other countries shareholders are viewed as
  merely one among many stakeholders of the firm
  including Employees, Suppliers and Customers. The
  goal is to maximize corporate wealth

6
Reasons for the existence of MNC

• Traditional economic theory comparative
  advantage
• - the principal argument for international trade
  is based on the theory of comparative advantage
  trade enhance welfare if the countries
  specialize in the production of those goods that
  they can produce most efficiently and trade those
  goods among them
• Product differentiation
• Market Imperfections
• Legal restrictions on movement of goods, people,
  and money
• Transactions costs
• Discriminatory taxation

7
Learning outcomes

• Discuss how is international financial
  management different
• from domestic financial management
• What are MNC and what economic roles do they
  play.
• Discuss the FX and political risks
• Discuss the rationale for the existence of MNC
• Identify and discuss the main goals of a MNC