Lecture 1 1

Introduction Introduction

Multinational Financial Management

Value of Multinationality

The Goal of Multinational Financial Management

Corporate Governance Across Countries

Lecture 1 2

Multinational Financial Management

• Cross-Border Business Activities– International

– Multinational

– Transnational

• Multinational firm– operating facility abroad, or

– joint venture with foreign companies, or

– controlling interest in a foreign company etc.

• Financial management conducted in more than one cultural, social, economic, or political environment.

• Multidisciplinary across the fields of business.• finance, marketing, management, production, distribution, purchasing, logistics,

accounting, and taxation

Lecture 1 3

Multinational Financial Management

Interdisciplinary within the field of finance.

• the corporation’s investment and financing decisions

• conducted in international markets– foreign exchange and Eurocurrency markets

– international capital (debt & equity) markets

– international portfolio investment

– international markets for real assets

Multinational financial activities

- Traditional financial management functions

- capital budgeting (investment decisions)

- additional issues: multiple currencies, political risk etc.

- capital structure (financing) decisions

- working capital management

- Exchange Risk and Country Risk Management

Lecture 1 4

The Value of Multinationality

MNCs derive additional value (over domestic firms) through:

- expanded set of investment opportunities, and

- expanded financing set (reducing the cost of capital)

The DCF approach to Valuation

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Lecture 1 5

The Value of Multinationality cont’d

Multinational investment policy– higher returns from existing investments

– new investment opportunities

Multinational financial policy– possibility of reduced capital costs through access to international markets

– possibility of higher cash flows through arbitrage across international markets or national economic systems

Lecture 1 6

The Value of Multinationality cont’d

MNC’s investment opportunity set

Domestic firm’s investmentopportunity set

Domestic firm’s marginalcost of capital

Domestic firm Capital budget

%

Multinational Investment Opportunities

Lecture 1 7

The Value of Multinationality cont’d

MNC’s marginalcost of capital

Domestic firm’s investmentopportunity set

Domestic firm’s marginalcost of capital

Domestic firm Capital budget

%

Multinational Financing Opportunities

Lecture 1 8

The Value of Multinationality cont’d

MNC’s investment opportunity set

MNC’s marginalcost of capital

Domestic firm’s investmentopportunity set

Domestic firm’s marginalcost of capital

Domestic firm MNCCapital budget

%

Lecture 1 9

The Challenges of Multinationality

Risk versus risk exposure– Risk exists whenever actual outcomes can differ from expectations.

– A company has a risk exposure when its value can change with unexpected changes in business conditions

Multinational corporations are exposed to a variety of new “country risks”– Foreign exchange and other financial risks

– Political risks

– Cultural risks

Lecture 1 10

Cultural risks

Cultural risks affect all areas of international business

– Differences in language

– Differences in business conventions

– Differences in marketing

– Differences in distribution

– Differences in personnel management

– Differences in legal, accounting, and tax

– Differences in financial markets

– Differences in corporate governance

Lecture 1 11

The Goal of Multinational Financial Management

Shareholder Wealth Maximization (SWM)

- possible goals

- significance of SWM criterion

clear and simple

unanimity

- Agency Problems

Methods of mitigating Agency costs

- Incentive schemes

- Monitoring - auditors, lenders, analysts, large shareholders

- The Market for Corporate control (threat of takeover)

Alternative Model: Emphasis on Stakeholders

Lecture 1 12

The Goal of Multinational Financial Management

Operating expenses

Financial expenses

Government (debt) (taxes)

Other Equity(e.g. potential litigation)

VRevenues = VExpenses + VGovt + VOther + VDebt + VEquity

Lecture 1 13

Corporate governance

Corporate control -- the power to make investment and financing decisions.

- Separation of Ownership from Control

Corporate governance -- the way in which major stakeholders exert control over modern corporations (e.g. the role of the Board of Directors, shareholder voting, proxy fights, etc. and the actions taken by shareholders to influence corporate decisions).

– Determined by a country’s laws, legal institutions and conventions

Corporate Governance across countries

- The Anglo-American system

- market based , dispersed equity ownership, independent management

- Continental Europe - Germany

- bank based,concentrated ownership (banks), principal owners monitoring management

- The Japanese Keiretsu system

- bank based, concentrated ownership (keiretsu members),