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Multinational Financial Management Alan Shapiro 7 th Edition J. Wiley & Sons Power Points Multinational Financial Management Alan Shapiro 7 th Edition J. Wiley & Sons Power Points by Joseph F. Greco and J. D. Han 1

CHAPTER 1 Introduction: Multinational Enterprise and Multinational Financial Management 2 CHAPTER 1 Introduction: Multinational Enterprise and Multinational Financial Management 2

CHAPTER OVERVIEW: 1. 1 1. 2 1. 3 The Rise of the Multinational Corporation CHAPTER OVERVIEW: 1. 1 1. 2 1. 3 The Rise of the Multinational Corporation The Internationalization of Business and Finance Multinational Financial Management: Theory and Practice 3

1. 1 THE RISE OF THE MULTINATIONAL CORPORATION A. The MNC: Definition a company 1. 1 THE RISE OF THE MULTINATIONAL CORPORATION A. The MNC: Definition a company with production and distribution facilities in more than one country. 4

THE RISE OF THE MULTINATIONAL CORPORATION B. Forces Changing Global Markets such as Massive THE RISE OF THE MULTINATIONAL CORPORATION B. Forces Changing Global Markets such as Massive deregulation Collapse of communism Privatizations of state-owned industries Revolution in information technology Wave of M&A Emergence of free market policies Rise of Big Emerging Markets (BEMs) have Ushered in Global Competition 5

THE RISE OF THE MULTINATIONAL CORPORATION Prime Transmitter of Competition in the Global Economy THE RISE OF THE MULTINATIONAL CORPORATION Prime Transmitter of Competition in the Global Economy is the MNC; The MNC emphases group performance such as global coordinated allocation of resources by a single centralized management 6

THE RISE OF THE MULTINATIONAL CORPORATION C. EVOLUTION OF MNC as global manager Reasons THE RISE OF THE MULTINATIONAL CORPORATION C. EVOLUTION OF MNC as global manager Reasons to Go Global: 1. More raw materials 2. New markets 3. Minimize costs of production 7

THE RISE OF THE MULTINATIONAL CORPORATION RAW MATERIAL SEEKERS exploit markets in other countries THE RISE OF THE MULTINATIONAL CORPORATION RAW MATERIAL SEEKERS exploit markets in other countries historically first to appear modern-day counterparts British Petroleum Exxon 8

THE RISE OF THE MULTINATIONAL CORPORATION MARKET SEEKERS produce and sell in foreign markets THE RISE OF THE MULTINATIONAL CORPORATION MARKET SEEKERS produce and sell in foreign markets heavy foreign direct investors representative firms: IBM Mac. Donald’s Nestle Levi Strauss 9

THE RISE OF THE MULTINATIONAL CORPORATION COST MINIMIZERS seek lower-cost production abroad motive: to THE RISE OF THE MULTINATIONAL CORPORATION COST MINIMIZERS seek lower-cost production abroad motive: to remain cost competitive Texas Instruments Intel Seagate Technology 10

THE RISE OF THE MULTINATIONAL CORPORATION D. THE MNC: A BEHAVIORAL VIEW Integration of THE RISE OF THE MULTINATIONAL CORPORATION D. THE MNC: A BEHAVIORAL VIEW Integration of worldwide operation, such as globally producing, financing, undertaking investment and marketing requires flexibility, adaptability, speed to changing environment and risk, as well as ‘focus’ on strength area(s). 11

THE RISE OF THE MULTINATIONAL CORPORATION E. What does the Global Manager do? 1. THE RISE OF THE MULTINATIONAL CORPORATION E. What does the Global Manager do? 1. Understand political and economic risk; 2. Search for most costeffective suppliers; 3. Evaluate changes on value of the firm. 12

1. 3 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE A. THE MULTINATIONAL FINANCIAL SYSTEM Main 1. 3 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE A. THE MULTINATIONAL FINANCIAL SYSTEM Main Objective of MNC: Maximize shareholder wealth Reduction of Risks facing MNC 13

B. Challenges facing the MNC Executive 1. Political risk expropriation regulatory control 2. Economic B. Challenges facing the MNC Executive 1. Political risk expropriation regulatory control 2. Economic risk FOREX Risk Inflation Risk 3. International Differences in Tax Rates and Multiple Financial Markets 14

THEORY AND PRACTICE C. FUNCTIONS OF FINANCIAL MANAGEMENT Two Basic Functions: 1. Financing: Minimizing THEORY AND PRACTICE C. FUNCTIONS OF FINANCIAL MANAGEMENT Two Basic Functions: 1. Financing: Minimizing the Cost of Capital through “Optimal Capital Structure” 2. Investing: Maximizing Return “Capital Budgeting” *3. Minimizing Risk: This is uniquely important for MNC. “International diversification” “Hedging”. 15

D. Instruments for Financial Management: Useful Concepts from Financial Economics – What is Financial D. Instruments for Financial Management: Useful Concepts from Financial Economics – What is Financial Economics? use of economic analysis to understand the basic workings of financial markets, particularly to evaluate risks and to hedge again them. Cf. Accounting approach; Traditional Approach; Market Fundamental Approach 16

E. Three Key Principles of Financial Economics 1. Arbitrage 2. (Financial) Market Efficiency 3. E. Three Key Principles of Financial Economics 1. Arbitrage 2. (Financial) Market Efficiency 3. Capital Asset Pricing Model 17

1. Arbitrage Capital Market Imperfection exists; Structural/Informational Imperfect creates a room for profitable Arbitrage. 1. Arbitrage Capital Market Imperfection exists; Structural/Informational Imperfect creates a room for profitable Arbitrage. *Arbitrage: multiple simultaneous transactions for a higher return and a lower risk 18

2. Financial Market is ‘Information Efficient’ (Market Efficiency) The financial market is efficient in 2. Financial Market is ‘Information Efficient’ (Market Efficiency) The financial market is efficient in processing and reflecting relevant information; Market Acts as A Global Referendum Process; Attempt to increase the value of a firm by purely financial measures or accounting manipulation are unlikely to succeed unless there are capital market imperfection or asymmetries in tax regulations. 19

3. Capital Asset Pricing -Total Market Risk = diversifiable risk + nondiversifiable risk; -“There 3. Capital Asset Pricing -Total Market Risk = diversifiable risk + nondiversifiable risk; -“There is no risk premium for diversifiable risk” – Risk Managements or Hedging efforts are important. 20