Unit 6 MNC

Multinational Corporations
Outline
• Globalization
• Opportunities of international expansion
• Risks faced by a multinational corporation
• Foreign direct investment
• Multinational capital budgeting
• Repositioning of funds
• Multinational transfer pricing
Learning Objectives
• Understand how supply and demand are affected in

different countries around the world
• Define the exchange rate and identify several
methods of hedging
• Understand multinational capital budgeting and
explain how it differs from capital budgeting of a
domestic corporation
• Show how changing transfer prices can benefit a
corporation
Globalization
• One of the main reasons a company wants to

operate globally is to take advantage of new
growth opportunities
– Expand to serve new markets (e.g. food products)
– Take advantage of new suppliers (manufacturing and
back office services)
Multinational Corporation
• An enterprise operating in several countries but

managed from one (home) country. Generally, any
company or group that derives a quarter of its
revenue from operations outside of its home
country is considered a multinational corporation.
Types
• A multinational, decentralized corporation with strong

home country presence,
• A global, centralized corporation that acquires cost
advantage through centralized production wherever
cheaper resources are available,
• An international company that builds on the parent
corporation's technology or R&D, or
• A transnational enterprise that combines the previous
three approaches.
Some MNC’s In India
Globalization
Multinational corporations face the same

opportunities and problems as a domestic corporation,
but also face additional challenges:
– Fluctuations in currencies
– Different rules and regulations
– Different tax systems
– Tariffs and other restrictions
– Different costs of production
– Different cultures, languages, and business practices
Globalization
The term ‘globalization’
– Results in a closer integration of the countries of the

world – especially the increased level of trade and
movements of capital – brought on by lower costs of
transportation and communication.
Risks Faced by MNCs
• Multinational corporation risk: risks that are

present only because it transacts business across
national borders
• Exchange rate risk: results from changes in

exchange rates
Risks Faced by MNCs
• Other risks faced by the MNC

– blockage of funds and capital controls
– differences in cultural and religious philosophies
– ownership restrictions
– human resource restrictions
– intellectual property
– discrimination
– red tape and corruption
– internal and external wars
– changes in government
Foreign Direct Investment
Foreign direct investment (FDI): acquiring ownership

rights in foreign fixed assets or existing firms, or
establishing foreign subsidiaries with their own
infrastructure
Foreign Direct Investment
• Reasons for FDI

– Increase its earning and increase the value of the
company
– Foreign country may impose import restrictions
– Take advantage of economies of scale, as well as lower

production and transportation costs
MNC Capital Budgeting
• Similar process as for a domestic company, but must take into

consideration several extra variables
• intercompany fund flows: cash flows between parent to
subsidiary
• inflation rates: may differ in the country of the parent
and of the subsidiary
• exchange rates: exchange rate between the parent and
subsidiary country will change during the project period
• Tax differences: many types can differ between

countries
– Income tax rates
– Tax on remittances to the parent’s country
– Double taxation on subsidiary profit and remittance to
parent, offset by foreign tax credit
Cash flows: cash flows received and recorded by the

parent may differ substantially from those in the
subsidiary’s country
Summary
• A multinational corporation must compete not just

domestically but worldwide.
• The firm must consider the demand for their products, the
cost of supplies, their productivity, and changes in technology.
• An MNC must consider economic factors, political factors, and
social and cultural factors in their business decisions.
• Transfer pricing can be used to achieve higher profits, but
governments are monitoring this activity more closely.
Activity
(Quiz)
Scarcity is a condition that exists when
A) there is a fixed supply of resources relative to the
demand for the product.
B) there is a large demand for a product.
C) resources are not able to meet the entire demand
for a product.
D) All of the above
Which of the following is not considered as a factor
of production?
A) money
B) machinery and equipment
C) land
D) unskilled labor

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Multinational Corporations

• Understand how supply and demand are affected in

• One of the main reasons a company wants to

• An enterprise operating in several countries but

• A multinational, decentralized corporation with strong

Multinational corporations face the same

The term ‘globalization’

– Results in a closer integration of the countries of the

• Multinational corporation risk: risks that are

• Exchange rate risk: results from changes in

• Other risks faced by the MNC

Foreign direct investment (FDI): acquiring ownership

• Reasons for FDI

– Foreign country may impose import restrictions

– Take advantage of economies of scale, as well as lower

• Similar process as for a domestic company, but must take into

• Tax differences: many types can differ between

Cash flows: cash flows received and recorded by the

• A multinational corporation must compete not just

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