Introduction to Financial Management

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Introduction to Financial Management
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What is a Multinational Corporation?

• A firm with investment and/or financial
  obligations in more than one country
• Physical plant and equipment in more than one
  country
• Customers and receivables in more than one
  country
• Suppliers and payables in more than one country

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Why Do MNCs Exist?

• Easy (and true) answer To increase the set of
  opportunities available to the firm.
• But this is really part of a bigger question
  Why form firms at all?
• A question to be dealt with more systematically
  latter this semester, but the essential answer is
  that
• a) Economic progress requires organization but
• b) Organization consumes real resources to
  overcome certain problems (e.g., communication
  and motivation) and thus
• c) Firms seem to be a very efficient way of
  dealing with these problems

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What special problems might arise when organizing
economic activity across national boundaries
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Cultural Differences

• Language
• Religion (e.g., holidays, usury)
• Work ethic and habits
• Attitudes towards men, women and children
• Attitudes towards race and class

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Political Differences

• Taxation
• Labor, environmental and other regulations
• Enforcement of property rights
• Rules governing importing and exporting
• Contract law
• Rules governing information, accounting and
  reporting

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Economic Differences

• Natural (resources and geography)
• Political-economy (e.g., market economies v
  centrally planned)
• Currency, banking and finance

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International finance and corporate finance are
concernced with the same basic things.

• Conventional corporate finance begins with the
  assumption that the objective of the firm is to
  maximize the value of the firm defined as the
  present value of cash flows
• ?CFt(1r)-t
• where CFt cash flow at time t and r is the
  discount rate

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Globalization of the World Economy Recent Trends
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Emergence of globalized financial markets as a
consequence of deregulation and technology

• Financial Innovations, such as
• Currency futures and options
• Multi-currency bonds
• Cross-border stock listings
• International mutual funds

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Economic Integration

• Over the past 50 years, international trade
  increased about twice as fast as world GDP.
• There has been a sea change in the attitudes of
  many of the worlds governments who have
  abandoned mercantilist views and embraced free
  trade as the surest route to prosperity for their
  citizenry.

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Trade Liberalization

• The General Agreement on Tariffs and Trade (GATT)
  a multilateral agreement among member countries
  has reduced many barriers to trade.
• The World Trade Organization has the power to
  enforce the rules of international trade.
• The North American Free Trade Agreement (NAFTA)
  calls for phasing out impediments to trade
  between Canada, Mexico and the United States over
  a 15-year period.

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Privatization

• The selling off state-run enterprises to
  investors is also known as Denationalization.
• Often seen in socialist economies in transition
  to market economies.
• By most estimates this increases the efficiency
  of the enterprise.
• Often spurs a tremendous increase in cross-border
  investment.