International Financial Management

13th Edition
by Jeff Madura

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 1 Multinational Financial Management: An Overview
Chapter Objectives

• Identify the management goal and organizational

structure of the Multinational Corporation (MNC).
• Describe the key theories that justify international
business.
• Explain the common methods used to conduct
international business.
• Provide a model for valuing the MNC.

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 Managing the MNC (1 of 4)

Multinational corporations (MNCs)

“firms that engage in some form of international
business”

Managers are expected to make decisions that will

maximize the stock price.

Focus of this text: MNCs whose parents fully own

foreign subsidiaries (U.S. parent is sole owner of
subsidiary).

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 Managing the MNC (2 of 4)

How Business Disciplines Are Used to Manage the

MNC
• Common finance decisions include:
• Whether to discontinue operations in a particular country
• Whether to pursue new business in a particular country
• Whether to expand business in a particular country
• How to finance expansion in a particular country
• Finance decisions are influenced by other business discipline
functions:
• Marketing
• Management
• Accounting and information systems

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 Managing the MNC (3 of 4)

Agency Problems
• The conflict of goals between managers and shareholders
• Agency Costs
• Definition: Cost of ensuring that managers maximize shareholder
wealth.
• Costs are normally higher for MNCs than for purely domestic firms
for several reasons:
• Monitoring managers of distant subsidiaries in foreign countries
is more difficult.
• Foreign subsidiary managers raised in different cultures may
not follow uniform goals.
• Sheer size of larger MNCs can create large agency problems.

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 Managing the MNC (4 of 4)

Agency Problems (cont.)

• Parent control of agency problems
• Parent should clearly communicate the goals for each
subsidiary to ensure managers focus on maximizing the
value of the subsidiary.
• Corporate control of agency problems
• Entire management of the MNC must be focused on
maximizing shareholder wealth.
• Sarbanes-Oxley Act (SOX)
• Ensures a more transparent process for managers to report
on the productivity and financial condition of their firm.

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 Management Structure of MNC

Management Structure of MNC

• Centralized (See Exhibit 1.1a)
• Allows managers of the parent to control foreign subsidiaries
and therefore reduce the power of subsidiary managers.
• Decentralized (See Exhibit 1.1b)
• Gives more control to subsidiary managers who are closer to
the subsidiary’s operation and environment.
• How the Internet Facilitates Management Control
• Makes it easier for parent to monitor the actions and
performance of its foreign subsidiaries.

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 Exhibit 1.1a Management Styles of MNCs

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 Exhibit 1.1b Management Styles of MNCs

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 Why MNCs Pursue International Business

Theory of Competitive Advantage: Specialization increases

production efficiency.
• Comparative advantages allow firms to penetrate foreign markets
• Japan and the United States, have a technology advantage
• China and Malaysia, have an advantage in the cost of basic labor
Imperfect Markets Theory: Factors of production are somewhat
immobile, providing incentive to seek out foreign opportunities.
• There are costs and often restrictions related to the transfer of labor and
other resources used for production
• There also may be restrictions on transferring funds and other
resources among countries
Product Cycle Theory: As a firm matures, it recognizes
opportunities outside its domestic market. (Exhibit 1.2)

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 Exhibit 1.2 International Product Life Cycles

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 Methods to International Business (1 of 8)

International Trade
Licensing
Franchising
Joint Ventures
Acquisitions of Existing Operations
Establishment of New Foreign Subsidiaries

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 Methods to International Business (2 of 8)

International Trade
• Relatively conservative approach that can be used by
firms to:
• penetrate markets (by exporting).
• obtain supplies at a low cost (by importing).

• Minimal risk — no capital at risk

• How the Internet Facilitates International Trade
• The internet facilitates international trade by allowing firms
to advertise their products and accept orders on their
websites.

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 Methods to International Business (3 of 8)

Licensing
• Obligates a firm to provide its technology (copyrights,
patents, trademarks, or trade names) in exchange for
fees or some other specified benefits.
• Allows firms to use their technology in foreign markets
without a major investment and without transportation
costs that result from exporting.
• Major disadvantage: difficult to ensure quality control in
foreign production process

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 Methods to International Business (4 of 8)

Franchising
• Obligates firm to provide a specialized sales or service
strategy, support assistance, and possibly an initial
investment in the franchise in exchange for periodic fees.
• Allows penetration into foreign markets without a major
investment in foreign countries.
Joint Ventures
• 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.
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 Methods to International Business (5 of 8)

Acquisitions of Existing Operations

• Acquisitions of firms in foreign countries allows firms to
have full control over their foreign businesses and to
quickly obtain a large portion of foreign market share.
• Subject to the risk of large losses because of larger
investment.
• Liquidation may be difficult if the foreign subsidiary
performs poorly.

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 Methods to International Business (6 of 8)

Establishment of New Foreign Subsidiaries

• Firms can penetrate markets by establishing new
operations in foreign countries.
• Requires a large investment.
• Acquiring new as opposed to buying existing allows
operations to be tailored exactly to the firms needs.
• May require smaller investment than buying existing firm.

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 Exhibit 1.3 Cash Flow Diagrams for MNCs

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