Multinational Financial Management: An Overview

buttermilkbouncyΔιαχείριση

10 Νοε 2013 (πριν από 3 χρόνια και 11 μήνες)

78 εμφανίσεις

1

Chapter 1

Multinational Financial Management:

An Overview


Specific Objectives




Identify the main goal of the MNC and conflicts with that goal



Describe the key theories that justify international business



Explain the common methods used to conduct internat
ional business


Outline


Goals of the MNC



Maximize shareholder wealth



Problems encountered in meeting goals:

1) Agency problems larger for MNCs than purely domestic firms because:



a) monitoring more difficult because of geographic distance



b) different

cultures



c) MNC size



d) subsidiary managers may maximize the value of their subsidiary but not of the


MNC as a whole

2) Centralized vs. decentralized management

a) centralized reduces agency costs because it gives parent more


control
; downside is that local managers may be better


informed

b) decentralized management increases agency costs but may


result in better decisions



c) Internet may facilitate monitoring of foreign subsidiaries


3) Corporate control used to red
uce agency problems

a)

executive compensation with stock

b)

threat of hostile takeover

c)

monitoring by large shareholders



Constraints encountered in meeting goals

1) Environmental
-

other countries may be tougher (e.g., pollution


controls)

2) Regulatory
-

e
.g., currency convertibility, remittance of profits, etc.

3) Ethical
-

e.g., bribes may be more acceptable in other countries


Theories of International Business



Theory of Comparative Advantage



countries specialize in the production of goods they can produ
ce with relative efficiency
and trade for other products



Imperfect Markets Theory



factors of production (labor and other resources) are immobile.



Firms can capitalize on imperfect markets by exploiting foreign opportunities.



Product Cycle Theory



firm intr
oduces product in home market, then exports it, then establishes a subsidiary, then
differentiates the product (see Exhibit 1.3 on p. 10)

2



Chapter 1

International Business Methods



International Trade



export and import



low risk



Internet facilitates advertising and sal
es



Licensing



obligates firm to provide its technology in exchange for fees or other benefits (e.g., AT&T
and Nynex Corp had licensing to build and operate India’s telephone system)



no major investment required



difficult to ensure quality control



Internet f
acilitates brand name advertising



Franchising



obligates firm to provide a specialized sales or service strategy, support assistance and
possibly an initial investment in exchange for periodic fees



Joint Ventures



a venture that is jointly owned and operated

by two or more firms



allow firms to apply comparative advantage (e.g., General Mills and Nestle)



Acquisitions of Existing Operations



acquire a firm in a foreign country to penetrate foreign markets



advantage: full control over foreign business



disadvantag
e: risky because of large investment and uncertainty



some firms make partial acquisitions, but these do not allow full control even though they
are less risky



Establishing New Foreign Subsidiaries



establish new operations in foreign country to penetrate ma
rket



advantage: can tailor exactly to firm’s needs



disadvantage: must establish customer base, unfamiliarity with local customs



Methods requiring a direct investment are referred to as direct foreign investment (DFI)



includes franchising, joint ventures, a
cquisitions, and foreign subsidiaries


International Opportunities



Opportunities



higher growth potential



larger investment opportunity set



lower borrowing costs due to more funding sources



result in lower cost of capital and higher returns for projects



l
imitations:



no feasible foreign opportunities



foreign projects may be riskier than domestic ones



Opportunities in Europe



Single European Act (1987)



removal of Berlin Wall



inception of the euro



Opportunities in Latin America



NAFTA



GATT



removal of investment

restrictions



Opportunities in Asia



large population base

Multinational Financial Ma
nagement: An Overview

3

Exposure to International Risk



less exposure to domestic economy



exchange rate risk



need to convert currencies



exposure to foreign economies



political risk



actions taken by the government that affe
ct cash flows (e.g., expropriations, buy
-
outs,
etc.)


Key Terms Matching


In the following exercise, place a letter from the right column with the correct number in the left
column.


Key Term

Definition

1.

Agency Problem____

a.

any method of increasing internat
ional business that
requires a direct investment in foreign operations, including
foreign acquisitions, the establishment of foreign
subsidiaries, franchising, and joint ventures

2.

Comparative
Advantage____

b.

the existence of a conflict of goals in a corpora
tion (where
the shareholders differ from the managers)

3.

Country Risk____

c.

conditions under which factors of production are immobile

4.

Direct Foreign Investment
(DFI)____

d.

the process by which a firm provides a specialized sales or
service strategy, support
assistance, and possibly an initial
investment in the franchise in exchange for periodic fees

5.

Franchising____

e.

political actions taken by the host government or the public
that affect an MNC’s cash flows



Imperfect Markets____

f.

firms become established in

the home market as a result of
some perceived advantage they have over existing
competitors. Foreign demands is first met by exporting.
Subsequently, the firm may establish subsidiaries in the
foreign country and/or differentiate its products so that the
product remains competitive

7.

Joint Venture____

g.

the potentially adverse impact of a country’s environment
on the MNC’s cash flows



Licensing____

h.

a venture that is jointly owned and operated by two or more
firms

9.

Political Risk____

i.

the process by which na
tional governments sell state owned
operations to corporations and other investors

10.

Privatization____

j.

the process by which a firm provides its technology
(copyrights, patents, trademarks, or trade names) in
exchange for fees or some other specified benef
its

11.

Product Cycle Theory____

k.

an advantage a country possesses in the manufacture of
goods


Answers to Key Terms Matching


1.

b

2.

k

3.

g

4.

a

4



Chapter 1

5.

d

6.

c

7.

h

8.

j

9.

e

10.

i

11.

f


Definitional Problems


1.

As for a purely domestic firm, the goal of a multinational corporation (MNC) is the

______________________________________.


2.

One of the most prevalent factors conflicting with the realization of the goal of an MNC is the
existence of _________________.


3.

Among the constraints interfering with the realization of the goal of an MNC are
____
___________, _______________, and ______________ constraints.


4.

A _______________ management style trades off reduced agency costs with potentially poor
decisions by parent company managers.


5.

A _______________ management style trades potentially good decisi
ons by subsidiary
managers with increased agency costs.


6.

The _____________ states that countries tend to use their advantages to specialize in the
production of goods that can be produced with relative efficiency, while trading for other
goods.


7.

The ______
_______ states that factors of production are somewhat immobile, allowing firms
to capitalize on a foreign country’s resources.


8.

The _____________ states that firms first become established in their home country and then
penetrate foreign markets via geogr
aphic and/or product differentiation.


9.

The least risky method of conducting international business is probably
____________________.


10.

A venture jointly owned and operated by a domestic and a foreign firm is referred to as a
__________________.


11.

The two pri
mary methods of conducting international business that constitute foreign direct
investment are ___________________ and ______________________.


12.

Due to an increased opportunity set, the marginal return on projects for an MNC is generally
___________ than t
hat of a purely domestic firm. Analogously, due to a larger opportunity
set of funding sources, the cost of capital for an MNC is generally ______________ than that
of a purely domestic firm.


13.

If MNCs have more projects to select from and a lower cost of c
apital than purely domestic
firms, their size should be ______________ than that of a purely domestic firm.


Multinational Financial Ma
nagement: An Overview

5

14.

By expanding internationally, a firm may be less exposed to fluctuations in the home country
economy. Nevertheless, MNCs occur additional risks in
the form of ______________,
________________, and ______________.


Answers to Definitional Problems


1.

maximization of shareholder wealth

2.

agency problems

3.

environmental; regulatory; ethical

4.

centralized

5.

decentralized

6.

Theory of Comparative Advantage

7.

Imperfect
Markets Theory

8.

Product Cycle Theory

9.

international trade (importing and
exporting)

10.

joint venture

11.

the acquisition of existing operations;
the establishment of new foreign
subsidiaries

12.

higher; lower

13.

greater

14.

exchange rate risk; exposure to foreign
economic con
ditions; political risk

True/False Problems


1.

The goal of a multinational corporation (MNC) is the maximization of shareholder wealth.


2.

If a firm were composed of only one owner who was also the sole manager, the agency
problem would not be completely elim
inated.


3.

If managers of foreign subsidiaries make decisions that maximize the values of their
respective subsidiaries, they automatically maximize the value of the entire corporation.


4.

A centralized management style, where major decisions about a foreign s
ubsidiary are made
by the parent company, results in an automatic increase in agency costs.


5.

A decentralized management style, where subsidiary managers make the relevant decisions
regarding their subsidiary, may result in better decision making, as subsid
iary managers are
generally better informed about their subsidiary’s operations.


6.

Although MNCs may be confronted with additional pollution controls (an environmental
constraint), these are irrelevant, as the MNC is fully reimbursed by the U.S. government
for
any additional costs upon remittance of proper receipts.


7.

A given country’s government, if it chooses to, may prevent the remittance of earnings by a
subsidiary to the parent company.


8.

In some countries, bribes are commonplace. If a U.S.
-
based MNC deci
des to adhere to a strict
code of ethics and not pay bribes, its subsidiary may be at a competitive disadvantage in the
foreign country.


9.

The Theory of Comparative Advantage begins by assuming that a given firm first becomes
established in its home country

and may subsequently penetrate foreign markets via
geographic or product differentiation.


6



Chapter 1

10.

Under the Imperfect Markets Theory, it is assumed that factors of production are entirely
mobile, so that firms can capitalize on a foreign country’s resources.


11.

Un
der the Theory of Comparative Advantage, trade between countries results from the
nonproduction of certain goods in a given country due to inefficiency.


12.

Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.


13.

Franchising o
bligates a firm to provide its technology (such as copyrights, patents,
trademarks, or trade names) in exchange for fees or some other specified benefits.


14.

In a joint venture, one firm is obligated to provide another firm with a specialized sales or
servic
e strategy in exchange for periodic fees.


15.

Licensing allows firms to use their technology in foreign markets without a major investment
in foreign countries.


16.

While allowing for the highest degree of control of foreign business, the acquisition of
existing

operations in a foreign country and/or the establishment of foreign subsidiaries also
entail the highest degree of risk when compared to the other methods of conducting
international business.


17.

International trade is the most common form of direct foreign

investment (DFI).


18.

Purely domestic firms face a larger opportunity set than MNCs and their projects provide a
lower marginal return than projects faced by MNCs.


19.

Due to the larger opportunity set of funding sources around the world from which an MNC
can c
hoose, an MNC may be able to obtain capital at a lower cost than a purely domestic
firm.


20.

The Single European Act of 1987 made regulations more uniform among European countries.
However, the cost of achieving this goal resulted in the imposition of additio
nal taxes on
goods traded between these countries.


21.

The North American Free Trade Agreement (NAFTA) of 1993 eliminated trade barriers
between the United States and Mexico.


22.

Although MNCs may need to convert currencies occasionally, they do not face any exc
hange
rate risk, as exchange rates are stable over time.


23.

A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some
foreign competition.


24.

Although the exposure of MNCs to fluctuations in the home country’s economy is le
ss than
that of a purely domestic firm, it is more highly exposed to economic fluctuations of the
foreign country in which it operates.

Multinational Financial Ma
nagement: An Overview

7


Answers to True/False Problems


1.

T

2.

F

3.

F

4.

F

5.

T

6.

F

7.

T

8.

T

9.

F

10.

F

11.

T

12.

T

13.

F

14.

F

15.

T

16.

T

17.

F

18.

F

19.

T

20.

F

21.

T

22.

F

23.

T

24.

T


Multiple Choice Problems


1.

The goal

of a multinational corporation (MNC) is

a.

The minimization of taxes remitted from foreign subsidiaries.

b.

The establishment of subsidiaries in any country where operations would provide a return
over and above the cost of capital, even if better projects are
available domestically.

c.

The maximization of shareholder wealth.

d.

The maximization of social benefits resulting from actions such as the employment of foreign
managers.


2.

Agency costs faced by multinational corporations (MNCs) may be larger than those faced b
y
purely domestic firms because

a.

Monitoring of managers located in foreign countries is more difficult.

b.

Foreign subsidiary managers raised in different cultures may not follow uniform goals.

c.

MNCs are relatively large.

d.

a and b only

e.

all of the above


3.

Which of

the following is correct regarding the monitoring of foreign subsidiary managers?

a.

A centralized management style results in increased agency costs but better decision making
by subsidiary managers.

b.

A decentralized management style results in increased age
ncy costs but poor decision making
by subsidiary managers.

c.

It is generally easier for an MNC to monitor the decisions made by subsidiary managers than
it is for a purely domestic firm.

d.

Some MNCs allow subsidiary managers to make the key decisions about the
ir respective
operations, but the decisions may be monitored by the parent’s management.

e.

Since an MNC’s foreign subsidiaries are separate legal entities, the monitoring of subsidiary
managers is inconsequential.


8



Chapter 1

4.

Which of the following is not mentioned i
n the text as a constraint interfering with an MNC’s
goal?

a.

Legal constraints

b.

Environmental constraints

c.

Regulatory constraints

d.

Ethical constraints

e.

All of the above are mentioned in the text as constraints interfering with an MNC’s goal


5.

Which of the followi
ng is not mentioned in the text as a theory of international business?

a.

Theory of Comparative Advantage

b.

Imperfect Markets Theory

c.

Product Cycle Theory

d.

Globalization of Business Theory

e.

All of the above are mentioned in the text as theories of international bu
siness


6.

Which of the following events would confirm the Theory of Comparative Advantage?

a.

A U.S. firm manufacturing computers imports the needed components from Taiwan.

b.

A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs.

c.

A U.S.

firm manufacturing computers establishes a plant in Germany in order to reduce
transportation costs and to retain its advantage over its German competitors.

d.

All of the above

e.

None of the above


7.

Which of the following events would confirm the Imperfect Mar
kets Theory?

a.

A U.S. firm manufacturing computers imports the needed components from Taiwan.

b.

A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs.

c.

A U.S. firm manufacturing computers establishes a plant in Germany in order to red
uce
transportation costs and to retain its advantage over its German competitors.

d.

All of the above

e.

None of the above


8.

Which of the following events would confirm the Product Cycle Theory?

a.

A U.S. firm manufacturing computers imports the needed components f
rom Taiwan.

b.

A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs.

c.

A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce
transportation costs and to retain its advantage over its German competitors
.

d.

All of the above

e.

None of the above


9.

The most risky method(s) by which firms conduct international business is (are):

a.

Franchising

b.

The acquisitions of existing operations

c.

The establishment of new subsidiaries

d.

b and c only

e.

All of the above


Multinational Financial Ma
nagement: An Overview

9

10.

The least risk
y method by which firms conduct international business is:

a.

Franchising

b.

The acquisitions of existing operations

c.

International Trade

d.

The establishment of new subsidiaries

e.

Licensing


11.

Which of the following does not constitute a form of direct foreign investme
nt?

a.

Franchising

b.

International trade

c.

Joint ventures

d.

Acquisitions of existing operations

e.

Establishment of new foreign subsidiaries


12.

Which of the following is not mentioned in the text as a reason for the increased globalization
of business?

a.

An increase in GN
P of virtually all countries in recent years.

b.

An increase in international trade.

c.

Growth in direct foreign investment in recent years.

d.

Increased privatization in recent years.

e.

An increased standardization of products and services across countries in recent

years.


13.

Which of the following is true regarding MNCs?

a.

MNCs generally face a smaller opportunity set than purely domestic firms because it is more
costly to establish subsidiaries in foreign countries.

b.

MNCs generally face a larger opportunity set than pur
ely domestic firms due to possible cost
advantages and/or revenue opportunities.

c.

MNCs may be able to obtain financing at a lower cost than purely domestic firms.

d.

a and c only

e.

b and c only


14.

Which of the following is true regarding MNCs?

a.

The marginal return
on projects faced by MNCs is always lower than the return on projects
faced by purely domestic firms.

b.

The cost of capital faced by MNCs is always larger than that faced by purely domestic firms.

c.

The cost of capital faced by MNCs is always smaller than that

faced by purely domestic
firms.

d.

Although MNCs may have an advantage relative to purely domestic firms in terms of funding
sources, its cost of capital may be higher than that of a purely domestic firm because foreign
projects are riskier than domestic pro
jects.

e.

There are always feasible foreign projects for an MNC.


15.

Which of the following is not a provision or result of the Single European Act of 1987?

a.

Increased regulatory uniformity among European countries

b.

The phasing in of a common currency for all Euro
pean countries by 1992

c.

The removal of many taxes on goods traded between European countries

d.

Firms’ ability to achieve economies of scale

e.

All of the above


10



Chapter 1

16.

Which of the following is not mentioned in the text as an additional risk resulting from
internatio
nal business?

a.

Exchange rate fluctuations

b.

Political risk

c.

Financial risk

d.

Country risk

e.

Exposure to foreign economies


17.

Many U.S. firms view ___________ as the country with the highest growth potential.

a.

China

b.

Japan

c.

Germany

d.

Mexico

e.

Korea


18.

Which of the following i
s not an example of how an MNC can be affected by exchange rate
movements?

a.

Due to exchange rate fluctuations, the number of units of a firm’s home currency needed to
purchase foreign supplies can change even if suppliers have not adjusted their prices.

b.

Wh
en the home currency strengthens, products denominated in that currency become more
expensive to foreign customers, which may reduce foreign demand for the MNC’s products.

c.

When the home currency weakens, products denominated in that currency become cheaper

to
foreign customers, which may increase foreign demand for the MNC’s products.

d.

Remitted earnings from the foreign subsidiary of a U.S.
-
based MNC may increase due to a
stronger home currency.

e.

Remitted earnings from the foreign subsidiary of a U.S.
-
based M
NC may increase due to a
weaker home currency.


19.

Licensing obligates a firm to provide _____________, while franchising obligates a firm to
provide _______________.

a.

A specialized sales or service strategy; its technology

b.

Its technology; a specialized sales
or service strategy

c.

Its technology; its technology

d.

A specialized sales or service strategy; a specialized sales or service strategy

e.

Its technology; an initial investment


20.

In general, MNCs may be expected to have a ___________ marginal return on projects th
an
purely domestic firms and a ____________ cost of capital.

a.

Higher; higher

b.

Lower; lower

c.

Lower; higher

d.

Higher; lower

e.

None of the above


21.

Which of the following is not a way in which agency problems can be reduced through
corporate control?

a.

Executive compens
ation

b.

Threat of hostile takeover

c.

Acquisition of a foreign subsidiary

d.

Monitoring by large shareholders

e.

None of the above

Multinational Financial Ma
nagement: An Overview

11


Answers to Multiple Choice Problems


1.

c

2.

e

3.

d

4.

a

5.

d

6.

a

7.

b

8.

c

9.

d

10.

c

11.

b

12.

a

13.

e

14.

d

15.

b

16.

c

17.

a

18.

d

19.

b

20.

d

21.

c