Introduction to international
Finance & MNC’s
CHAPTER 1
What is the meaning of international
finance
International finance is the branch of economics that studies
the dynamics of foreign exchange, Foreign direct investment
and how these affect international trade.
International finance can be broadly defined as the study of
the financial decision taken by a multinational
corporation(MNC) in the area of international business i.e
global corporate finance.
International finance is a section of financial economics that
deals with the monetary interactions that occur between two
or more countries.
2
The Multinational Corporation(MNC)
or Global Corporation
A multinational corporation is a company engaged in
producing and selling goods or services in more than one
country. Usually, it consists of a parent company located in
the home country and several foreign subsidiaries.
In simple way, An organization which have their operations
in more than one country. And have centralized head office
where they coordinate global management .
“Where in the world should we build our plants, sell our
products, raise capital, and hire personnel?” i.e. a global
perspective, rather than the perspective of the home country,
where the parent is located.
3
Examples multinational companies
4
Advantages and Disadvantages of MNC’s
ADVANTAGE’s OF MNC’s:
1. Cheaper Labor
One of the advantages of multinational corporations is the opportunity to
operate in countries where labor is not as expensive. Multinationals can
set up their offices in several countries where demand for their services
and products are high while cheaper labor is available.
2. Broader Market Base
By opening establishments or offices in several countries, multinationals
increase their chances of reaching out to customers on a global scale.
And the access to more customers gives them more opportunities to
develop and cater their products and services that will fit the needs of
potential customers.
5
Continue
3. Tax Cuts:
Multinationals can enjoy lower taxes in other countries for exports and
imports, an advantage that owners of international corporations can take
at any given day. And although not all countries can have lower tariffs,
there are those that give tax cuts to investors to attract more international
companies to do business in these countries.
4. Job Creation:
When international companies set up branches in other countries,
employees and members of the team are locals. That said, more people
are given employment opportunities especially in developing countries.
6
DISADVANTAGE’s OF MNC’s:
1. Potential Abuse of Workers:
Multinational companies often invest in developing countries where they
can take advantage of cheaper labor. Some multinational corporations
prefer to put up branches in these parts of the world where there are no
strict policies in labor and where people need jobs because these
multinationals can demand for cheaper labor and lesser healthcare
benefits.
2. Threat to Local Businesses:
Another disadvantage of multinationals in other countries is their ability
to dominate the marker. These giant corporations can dominate the
industries they are in because they have better products and they can
afford to even offer them at lower prices since they have the financial
resources to buy in bulk. This can eat up all the other small businesses
offering the same goods and services. Chances are, local businesses will
suffer and worse, close down.
7
continue
3. Loss of Jobs:
With more companies transferring offices and centering operations in
other countries, jobs for the people living in developed countries are
threatened. Take the case of multinationals that create offices in
developing countries for their technical operations and manufacturing.
The jobs given to the locals of the host country should be the jobs
enjoyed by the people where the head office is located
8
Summary
Main goal of MNC
9
The main goal of an MNC is to maximize shareholder wealth.
When managers are tempted to serve their own interests instead of those
of shareholders, an agency problem exists. MNCs tend to experience
greater agency problems than do domestic firms.
Proper incentives and communication from the parent may help to
ensure that subsidiary managers focus on serving the overall MNC.
Various forms of corporate control can reduce agency problems - stock
compensation, threat of hostile takeover, monitoring by large
shareholders.
Agency costs are normally larger for MNCs than for purely domestic
firms, but can vary with the management style of the MNC.
As MNC managers attempt to maximize their firm’s value, they may be
confronted with various environmental, regulatory, or ethical
constraints.
.
International business is justified by
three key theories
1. The theory of comparative advantage suggests that each
country should use its comparative advantage to
specialize in its production and rely on other countries
to meet other needs.
2. The imperfect markets theory suggests that because of
imperfect markets, factors of production are immobile,
which encourages countries to specialize based on the
resources they have.
3. The product cycle theory suggests that after firms are
established in their home countries, they commonly
expand their product specialization in foreign countries.
10
How firms engage in International
Business
There are several methods by which firms can
conduct international business.
1.
2.
3.
4.
5.
6.
International trade
Licensing
Franchising
Joint Ventures
Acquisitions of existing operations
Establishing new foreign subsidiaries
11
International Business Methods
1.International trade is a relatively conservative approach
involving exporting and/or importing.
The internet facilitates international trade by enabling firms
to advertise and manage orders through their websites.
2. Licensing : Licensing is an agreement that permits foreign
company to use industrial property (i.e. patents, trademarks
& copyrights), technical know-how & skills (i.e. feasibility
studies, manuals, technical advice), architectural &
engineering design or any combination of these in a foreign
market.
12
Licensing Example
For example :
http://smallbusiness.chron.com/license-sell-disneycharacters-products-21576.html
3. Franchising is basically a specialized form of licensing in
which the franchisor not only sells intangible property to the
franchisee, but also insists that the franchisee agree to abide by
strict rules as to how it does business
l
Franchising is used primarily by service firms
14
Franchising Example
For example :
International Business Methods
4. joint venture: A venture that is jointly owned and operated
by two or more firms. A firm may enter the foreign market by
engaging in a joint venture with firms that reside in those
markets. Allows two firms to apply their respective cooperative
advantages in a given project.
16
Example
Sony-Ericsson is a joint venture between Sony and the
Swedish company Ericsson. Ericsson is the Swedish
manufacturing company of the telecommunications
equipment while Sony is a mobile phone manufacturing
company. Ericsson used to get chips from Philips, but in
march 2000, a fire destroyed the production facility of
Philips. facing an acute shortage of chips, Ericsson was
prompted to form a joint venture with Sony. On February
16, 2012, Sony acquired Ericsson’s share in the venture and
renamed the company as Sony Mobile Communications.
Sony Mobile shifted its headquarters from Lund, Sweden to
Tokyo, Japan on January 7,2013.
17
Kellogg company joins with Willmar international limited.
Anticipating china’s rise to the top of the food and beverage
global market, Kellogg company entered into a joint venture
agreement with Willmar international limited for the purpose
of selling and distributing cereal and snack foods to
consumers in china. While Kellogg brings to the table an
extensive collection of globally renowned products as well
as their expertise in the industry, Willmar offers marketing
and sales infrastructure in china, including an extensive
distribution network and supply chain. Joining together
allows both companies to profit from a synergistic
relationship.
18
International Business Methods
5. Acquisitions of existing operations in foreign
countries allow firms to quickly gain control over
foreign operations as well as a share of the foreign
market. A merger is similar to an acquisition but
refers more strictly to combining all of the interests
of both companies into stronger single company.
19
Acquisition Example
20
21
DaimlerChrysler case
International Business Methods
6. Establishing New Foreign Subsidiaries: Firms can go into
the markets by establishing new operations in foreign
countries. “A partially or wholly owned company that is part
of a larger corporation with headquarters in another country.
Foreign subsidiary companies are incorporated under the
law’s of the country it is located.”
23
Summary of Methods
Any method of increasing international business that
requires a direct investment in foreign operations is referred
to as Foreign Direct Investment (FDI)
International trade and licensing usually not included
Foreign acquisition and establishment of new foreign
subsidiaries represent the largest portion of DFI.
Methods such as licensing and franchising involve little
capital investment but distribute some of the profits to other
parties. The acquisition of foreign firms and formation of
foreign subsidiaries require substantial capital investments
but offer the potential for large returns.
24
Exhibit 1.3 Cash Flow Diagrams for MNCs
25
25
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 1.3 Cash Flow Diagrams for MNCs
26
◼
The first diagram reflects an MNC that engages in
international trade. International cash flows result from
paying for imports or receiving cash flow from exports.
◼
The second diagram reflects an MNC that engages in some
international arrangements. Outflows include expenses
such as expenses incurred from transferring technology or
funding partial investment in a franchise or joint venture.
Inflows are receipts from fees.
◼
The third diagram reflects an MNC that engages in direct
foreign investment. Cash flows exist between the parent
company and the foreign subsidiary.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Uncertainty Surrounding MNC Cash Flows
1. Exposure to international economic conditions – If
economic conditions in a foreign country weaken, purchase
of products decline and MNC sales in that country may be
lower than expected.
2. Exposure to international political risk – A foreign
government may increase taxes or impose barriers on the
MNC’s subsidiary.
3. Exposure to exchange rate risk – If foreign currencies
related to the MNC subsidiary weaken against the U.S.
dollar, the MNC will receive a lower amount of dollar cash
flows than was expected.
27
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
How Uncertainty Affects the MNC’s cost of Capital
A higher level of uncertainty increases the return on
investment required by investors and the MNC’s
valuation decreases.
28
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Purchase answer to see full
attachment