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Multinational Financial Management. What is a multinational corporation?. A corporation that operates in two or more countries. Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries the corporation does business in.
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What is a multinational corporation? • A corporation that operates in two or more countries. • Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries the corporation does business in.
Why do firms expand into other countries? • To seek new markets. • To seek raw materials. • To seek new technology. • To seek production efficiency. • To avoid political and regulatory hurdles. • To diversify.
What factors distinguish multinational financial management from domestic financial management? • Different currency denominations. • Economic and legal ramifications. • Language differences. • Cultural differences. • Role of governments. • Political risk.
Terminology • Exchange rate:the number of units of a given currency that can be purchased for one unit of another currency. • Cross rates : exchange rate between any two currencies. are actually calculated on the basis of various currencies relative to the U.S. dollar. • Cross rate between Australian dollar and the Japanese yen. • Cross rate= (Yen / US Dollar) x (US Dollar / A. Dollar) = 111.11 x 0.650 = 72.22 Yen / A. Dollar • The inverse of this cross rate yields: 0.0138 A. Dollars / Yen
Risks faced by MNCs: • Exchange rate risk • Political risk
1.Exchange rate risk • The risk that the value of a cash flow in one currency translated to another currency will decline due to a change in exchange rates • Eg:M’sian Comp. Ordered 1000units of shirts from US on May 1,1997,the exchange rate at that time was US$1=RM2.50.The comp. Expected to pay US$100,000 for the good order.(RM250,000) • 3 mths later the exchange rate change to US$1=RM4.50.So total cost change to RM450,000.(profit will reduced)
2. Political risk • Probability that the value of MNC investment in another country will be reduced by actions taken by the country’s government. • Eg:Raising the corporate taxes charged on the MNC. This in return will reduce the amount of profits to be remitted back to the parent company.
International money and capital markets • Eurodollar markets • a source of dollars outside the U.S. • International bonds • Foreign bonds – sold by foreign borrower, but denominated in the currency of the country of issue. • Eurobonds – sold in country other than the one in whose currency the bonds are denominated.
Impact of multinational operations: • Cash management • Distances are greater. • Access to more markets for loans and for temporary investments. • Cash is often denominated in different currencies.
Cont’:Impact of multinational operations • Capital budgeting decisions • Foreign operations are taxed locally, and then funds repatriated may be subject to U.S. taxes. • Foreign projects are subject to political risk. • Funds repatriated must be converted to U.S. dollars, so exchange rate risk must be taken into account.
Cont’:Impact of multinational operations • Credit management • Credit is more important, because commerce to lesser-developed countries often relies on credit. • Credit for future payment may be subject to exchange rate risk. • Inventory management • Inventory decisions can be more complex, especially when inventory can be stored in locations in different countries. • Some factors to consider are shipping times, carrying costs, taxes, import duties, and exchange rates.
