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P1 1 Intro-Mnc

1) The document discusses the objectives, conflicts, and methods of conducting international business for multinational companies (MNCs). 2) It outlines some key theories that explain MNC behavior, including comparative advantage and the product cycle theory. 3) The document also analyzes how international expansion increases exposure to exchange rate movements, foreign economies, and political risk for MNCs. It provides a valuation model to account for these international risks.

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Mario Kabosu
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11 views23 pages

P1 1 Intro-Mnc

1) The document discusses the objectives, conflicts, and methods of conducting international business for multinational companies (MNCs). 2) It outlines some key theories that explain MNC behavior, including comparative advantage and the product cycle theory. 3) The document also analyzes how international expansion increases exposure to exchange rate movements, foreign economies, and political risk for MNCs. It provides a valuation model to account for these international risks.

Uploaded by

Mario Kabosu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Amsterdam

Hamburg
Brussels Dusseldorf
London
Frankfurt

Toronto Paris Zurich


Basel
Madrid Rome
Chicago
San Vienna
New Tokyo
Francisco York
Hong Kong

Mexico Bombay
City

Singapure
Sydney

Rio de Janiero
Melburne
São Paulo

Gesti Memarista, S.E., M.SM., CSA


International Company (MNC)

Foreign Exchange Markets

Dividends &Expenditure
Export Investation &Financing
& Import

Product Market Subsidiary Financial Market


Company International
1
• Identify the main objectives of the MNC and the
conflicts
• Explaining theories in international business
• Explain the methods of conducting
international business.
• Maximizing shareholder wealth
• If the shareholder is different from the manager:
– The agency problem arises.
• Agency costs are higher for MNCs than for
domestic firms, because:
– MNC size.
– Deployment of company branches.
– Foreign manager culture.
– Branch value with parent value.
• Agency costs vary according to the MNC's
management style.
– Centralized management style: Lowering agency
costs.
– However, the decentralized style: makes it easier for
managers to control branch operations because of
the proximity and familiarity of the environment
Cash Financial Cash
Management Managers Management
at A of Parent at B

Inventory and Inventory and


Accounts Accounts
Receivable Receivable
Management at A Management at B

Financing at A Financing at B

Capital Expenditures Capital Expenditures


at A at B
Cash Financial Financial Cash
Management Managers Managers Management
at A of A of B at B

Inventory and Inventory and


Accounts Accounts
Receivable Receivable
Management at A Management at B

Financing at A Financing at B

Capital Expenditures Capital Expenditures


at A at B
• Barriers to managers in maximizing company
value:
– Environmental constraints.
– Regulatory constraints.
– Ethical constraints.
Why are MNCs motivated in global
expansion?
1) Theory of Comparative Advantage
❖ Specialization by countries can increase production efficiency.
2) Imperfect Markets Theory
❖ The markets for the various resources used in production are “imperfect.”
3) Product Cycle Theory
❖ As a firm matures, it may recognize additional opportunities outside its home
country.
 Firm creates  Firm exports
product to product to  Firm
accommodate accommodate establishes
local demand. foreign demand. foreign
subsidiary
to establish
presence in
a. Firm or foreign
differentiates b. Firm’s country
product from foreign and
competitors business possibly to
and/or expands declines as its reduce
product line in competitive costs.
foreign country. advantages are
eliminated.
• International trade
– It is the most conservative approach by carrying out exports
• Licensing
– A company can provide technology to get fees or other benefits
• Franchising
– It requires companies to provide a specific sales or service
strategy, management support, and possibly an initial investment
in the hope of earning a fee periodically.
• Joint venture
– (cooperation in ownership or operation) with companies that are
already in the market;
• Acquisitions of existing operations
– purchase of part or all of the company's existing shares;
• Establishing new foreign
– subsidiariesDirect Foreign Investment (DFI): companies make
direct investments abroad
Foreign Sales as a % of Total Sales
Foreign Assets as a % of Total Assets

70% 66%
62% 58%
60% 50%
46% 47%
50% 40%
40% 33%
30% 26%
20% 12%
10%
0%
Campbell's Dow IBM Motorola Nike
Soup Chemical
• Investment Opportunities
– Marginal returns for multinational projects are higher
than for domestic projects due to the abundance of
opportunities.
• Funding Opportunity
– An MNC is also able to obtain capital funding at a
lower cost due to its larger opportunity set of funding
sources around the world.
• For example: Opportunities in Asia
• Easing of Investment Requirements in Many Asian
Countries during the 1990s.
• Growth potential in China.
• Economic Crisis in Asia 1997-1998.
Cost-benefit Evaluation for
Purely Domestic Firms versus MNCs

Purely
Investment
Domestic
Opportunities MNC
Marginal Firm
Return on
Projects MNC
Purely
Marginal Domestic
Cost of Firm
Capital
Financing Appropriate
Opportunities Size for Purely Appropriate
Domestic Firm Size for MNC

X Y Asset Level
of Firm
International business usually increases an
MNC’s exposure to:
 exchange rate movements
– Exchange rate fluctuations affect cash flows and foreign
demand.
 foreign economies
– Economic conditions affect demand.
 political risk
– Political actions affect cash flows.
Exposure Resiko Internasional

International Business increases MNC


exposure because:

 exchange rate movements


– Exchange rate fluctuations affect cash flows and foreign
demand.
 foreign economies
– Economic conditions affect demand.
 political risk
– Political actions affect cash flows.
• Domestic Model

n
E (CF$, t )
Value = 
t =1 (1 + k )
t

E (CF$,t ) = expected cash flows to be received at


the end of period t
n = the number of periods into the future
in which cash flows are received
k = the required rate of return by
investors
Impact of International Opportunity on the Value of an MNC

Exposure to
Foreign Economies Exchange Rate Risk

m 
n 
E (CFj , t ) E (ER j , t )
 j =1 
Value =   
t =1  (1 + k ) t

 

Political Risk
• Calculation of the value of international cash flows

m 
n 
E (CFj , t ) E (ER j , t )
 j =1 
Value =   
t =1  (1 + k ) t

 
E (CFj,t ) = expected cash flows denominated in currency j
to be received by the U.S. parent at the end of
period t
E (ERj,t ) = expected exchange rate at which currency j can
be converted to dollars at the end of period t
k = the weighted average cost of capital of the U.S.
parent company
The relationship between material and
Valuation
Exchange Rate
Behavior Exchange Rate
Risk Management

Background
on Long-Term
International Investment and
Financial Risk and Value and
Financing Return of Stock Price
Markets Decisions MNC of MNC

Short-Term
Investment and
Financing
Decisions

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