Foundations of Multinational Financial Management Alan Shapiro John Wiley & Sons

1. Foundations of Multinational Financial Management Alan Shapiro John Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton

2. Introduction: Multinational Enterprise and Multinational Financial Management Chapter 1

3. PART I.THE RISE OF THE MULTINATIONALCORPORATION • I. The MNC • A. Definition • a company with production and distribution facilities in more than one country.

4. THE RISE OF THE MULTINATIONALCORPORATION • B. Traditional Economic Theory • 1. Classical Theory: • a. Smith, Ricardo • b. Comparative Advantage: • macroeconomic differences

5. THE RISE OF THE MULTINATIONALCORPORATION • 2. MNC supercedes theory: • a. mobility of factors • b. different costs/skills • between nations • c. prime transmitter of • competitive forces

6. THE RISE OF THE MULTINATIONALCORPORATION • C. EVOLUTION OF THE MNC • Reasons to Go Global: • 1. raw materials • 2. more markets • 3. minimize costs of production

7. THE RISE OF THE MULTINATIONALCORPORATION • 1. RAW MATERIAL SEEKERS • exploit markets in other countries • historically first to appear • modern-day counterparts • Anaconda Copper • Standard Oil

8. THE RISE OF THE MULTINATIONALCORPORATION • 2. MARKET SEEKERS • produce and sell in foreign markets • heavy foreign direct investors • representative firms: • IBM • Nestle • Levi Strauss

9. THE RISE OF THE MULTINATIONALCORPORATION • 3. COST MINIMIZERS • seek lower-cost production abroad • motive: to remain cost competitive • representative firms: • Texas Instruments • Atari • Zenith

10. THE RISE OF THE MULTINATIONALCORPORATION • D. THE MNC: A BEHAVIORAL VIEW • 1. State of mind: • committed to producing, • undertaking investment and marketing, and financing globally.

11. THE RISE OF THE MULTINATIONALCORPORATION • E. THE GLOBAL MANAGER • 1. Understands political and • economic differences; • 2. Searches for most cost- • effective suppliers; • 3. Evaluates changes on value of the firm.

12. PART II.MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE • I. THE MULTINATIONAL FINANCIAL SYSTEM • A. Main Objective of MNC: • Maximize shareholder wealth • B. Other Objectives Reflect Ability to Link: • Via Affiliate transfer mechanisms

13. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE • C. Mode of Transfer • Reflects freedom to select a variety of financial channels. • D. Timing Flexibility • Most MNC have some flexibility • in timing of fund flows.

14. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE • E. Value • The ability to avoid national taxes has led to controversy.

15. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE • II. FUNCTIONS OF FINANCIAL • MANAGEMENT • A. Two Basic Functions: • 1. Financing • 2. Investing

16. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE • B. Additional Factors Facing the MNC Executive • 1. Political risk • 2. Economic risk

17. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE • III. THEORETICAL FOUNDATIONS • A. Useful Concepts from Financial Economics: • 1. Arbitrage • 2. Market Efficiency • 3. Capital Asset Pricing

18. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE • B. Importance of Total Risk • 1. Adverse Impact • lower sales and higher costs • 2. Justifies hedging activities of • MNC • 3. Diversification reduces risk

19. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE • IV. THE GLOBAL FINANCIAL MARKET PLACE • A. Interlinked by Computers • B. Market Acts as A Global • Referendum Process - The Result: Currencies may rise or fall suddenly