Post on 03-Jun-2018
8/12/2019 Unit 1 an Overview of MBF
1/23
Learning Objectives
Defining Multinationalisation/
Internationalisation/Globalisation
Defining MNE, MNC and TNC Complexities and issues in managing financial
function in a multinational firm
Identify the main goal of the MNC and conflicts
with that goal Describe the key theories that justify international
business
Explain the common methods used to conductinternational business
8/12/2019 Unit 1 an Overview of MBF
2/23
Multinationalisation/Internationalisation/Globalisatio
n of Business
Doing or planning to expand business globally
Giving up the distinction between the domestic market andforeign market and developing a global outlook of the
business Locating the production and other physical facilities on a
consideration of the global business dynamics, irrespectiveof national considerations
Basing product development and production planning onthe global market considerations
Global sourcing of factors of production i.e., raw materials,components, machinery, technology, finance etc., areobtained from the best source anywhere in the world
Global orientation of organisational structure and
8/12/2019 Unit 1 an Overview of MBF
3/23
Country/Bloc Number of MNEs in 2005
United States 171European Union 155Japan 100
Canada 12 Switzerland 11
South Korea 9Australia 7China 16
India 5Brazil 4 Other 10
Total 500
Source:Adapted from Fortune,TheFortune Global 500,July 25 2005
The Worlds 500 Largest MNEs
8/12/2019 Unit 1 an Overview of MBF
4/23
The Worlds Most Profitable MNEs
Rank Co.s Name Home Country Profit (Bn$)
1 Exxon Mobil United States 25.3
2 Shell Group Netherlands 18.2
3 Citigroup United States 17.0
4 GE United States 16.8
5 BP UK 15.3
Source: Adapted from Fortune, FortuneGlobal 500, July 13, 2005.
8/12/2019 Unit 1 an Overview of MBF
5/23
Top 5 in Europe
1. BP
2. Royal Dutch/Shell Group
3. Daimler Chrysler4. Total
5. AXA
8/12/2019 Unit 1 an Overview of MBF
6/23
Top 5 in Asia
1. Toyota Motor
2. Nippon Telegraph & Telephone
3. Hitachi4. Matsushita Electric Industrial
5. Honda Motor
8/12/2019 Unit 1 an Overview of MBF
7/23
INDIAN FORTUNEMNEs
TCS
WIPRO
INFOSYS
SATYAM COMPUTERS
HCL TECHNOLOGY
8/12/2019 Unit 1 an Overview of MBF
8/23
Forbes 2000 Region Wise
9
2026
30
32
527
544
821
1111111
North America
RIM Pacific
Western Europe
South Asia
Eastern Europe
South America
Africa
Middle East
8/12/2019 Unit 1 an Overview of MBF
9/23
8/12/2019 Unit 1 an Overview of MBF
10/23
The world's largest non-financial TNCs: percentage shareof foreign affiliates in each region, by home economy, 2002
Region
Home Eco.
NoofTNCs intheEconomy
EuropeanUnion
OtherWsternEurope
NorthAmerica
SouthAmerica
LatinAmerica
Total
Netherlands 5 36.8 2.17 34.7 5.3 2.0 81.1
Italy 3 66.6 5.24 6.56 10.1 4.2 92.7
Spain 3 40.3 0.85 15.21 32.4 9.7 98.5
Finland 2 51 4.40 4.49 4.40 1.7 66.0
Ireland 1 67.1 7.71 22.11 0.41 - 97.3
Sweden 1 59.5 2.86 14.59 6.67 4.8 81.7
8/12/2019 Unit 1 an Overview of MBF
11/23
An Overview of Multinational Financial
Management
Some MNEs such as Dow Chemical, Exxon, American Brands, and
Colgate Palmolive, Commonly generate more than half of their sales in
foreign countries Coca Cola is distributing its products in over 200 countries and using
40 different currencies
Westinghouse Electric corporation operates in 16 foreign countries
with annual international revenue exceeding $2 billion.
Honeywell has 42 subsidiaries and several other joint-venture projectsscattered around the world
Eastman Kodak has subsidiaries in 32 foreign countries.
Rockwell International Corp. operates in 26 foreign countries
8/12/2019 Unit 1 an Overview of MBF
12/23
MNC Defined
The multinational corporation (MNC) is a
company engaged in producing and selling
goods or services in more than one country.It ordinarily consists of a parent company
located in the home country and at least five
or six foreign subsidiaries, typically with ahigh degree of strategic interaction among
the units.
8/12/2019 Unit 1 an Overview of MBF
13/23
MNE vs. TNC
A multinational enterprise (MNE) is defined asone that has operating subsidiaries, branches oraffiliates located in at least five or six foreigncountries.
The ownership of some MNEs is so dispersedinternationally that they are known astransnational corporations.
The transnationals are usually managed from aglobal perspective rather than from the perspectiveof any single country.
8/12/2019 Unit 1 an Overview of MBF
14/23
How Transnationals are TNCs?
From the operations perspective, keydimensions include the intensity or relativeimportance of a TNCs foreign operations, asmeasured by various variables: thegeographical spread of its operations, the
modalities of foreign operations and thedegree of integration of the productionprocess across locations.
From the stakeholders perspective, keydimensions include the composition ofmanagers or board members, the nationalitycomposition of shareholders by nationality, theinternational mobility and internationalexperience of managers and the compositionof the labour force by nationality.
8/12/2019 Unit 1 an Overview of MBF
15/23
How Transnationals are TNCs?
From the perspective of the spatialorganization of management, key dimensionsinclude: the extent and spread of the locationof regional headquarters in host countries andthe legal nationality (ies) of a TNC.
Given the range of perspectives and dimensionsthat can be considered for each, the degree oftransnationality of a TNC cannot be fullycaptured by a single synthetic measure itrequires a variety of indicators. Some of thesecan be expressed as indices calculated orestimated on the basis of empirical data;others may consist of empirical data notexpressed as indices; and still others may be
expressed in qualitative rather thanquantitative form.
8/12/2019 Unit 1 an Overview of MBF
16/23
Complexities and Issues in Managing Financial
Function in a Multinational Firm
1. Culture,
history, and
institutions
Each foreign country is unique and not
always understood by MNE management
2. Corporate
governance
Foreign countries regulations and
institutional practices are uniquely different
3. Foreign
exchange risk
MNEs are exposed to exchange rate
fluctuations
4. Political risk MNEs face political risks because of their
foreign subsidiaries
5.Modification
of financial
instruments
MNEs utilize modified financial instruments
such as options, futures, swaps, and letters of
credit
8/12/2019 Unit 1 an Overview of MBF
17/23
Goals of MNC
The three primary financial objectives are:
1. Maximization of consolidated after-tax
income
2. Minimization of the firms effective
global tax burden
3. Correct positioning of the firms income,
cash flows, and available funds.
8/12/2019 Unit 1 an Overview of MBF
18/23
Constraints Interfering with the MNCs Goals
When financial managers of MNCs attempt to maximize their firmsvalue, they
are confronted with various constraints that can be classified as under:
Environmental Constraints. Building codes, disposal of production waste
materials, and pollution controls are examples of the restrictions that force
subsidiaries to incur additional cots
Regulatory Mechanisms. Each country also enforces its own regulatory
constraints pertaining to taxes, currency convertibility rules, earning
remittance restrictions, and other regulations that can affect cash flows of
subsidiary established there.
Ethical Constraints. There is no consensus standard of business conduct thatapplies to all countries. A business practice that is perceived to be unethical in
one country may be totally ethical in another. Bribes to govts. in order to
receive special tax breaks or othe5r favours are one example.
8/12/2019 Unit 1 an Overview of MBF
19/23
Theories of International Business
Theory of Comparative Advantage.It refers to growing realizationthat specialization by countries can increase production efficiency.Since these advantages cannot be easily transported, countries tend usetheir advantages to specialize in production of goods that can be
produced with relative efficiency. Imperfect Market Theory.Even with comparative advantages, the
volume of international business would be limited if all resourcescould be easily transferred among countries.The real world suffersfrom imperfect market conditions where factors of production areimmobile. These are costs and often restrictions related to the transferof labour and other resources used for production. There may also berestrictions on funds and other resources transferred among countries.Because markets for the various resources used in production areimperfect. Firms often capitalize on a foreign country resources.
Product Cycle Theory.
8/12/2019 Unit 1 an Overview of MBF
20/23
International Business Methods
International Trade. Many large U.S.-based MNCs,including Boeing, Dupont, GE, and IBM generate morethan $4 billion in annual sales from exporting
Licensingobligates a firm to provide technology(copyrights, patents, trade-marks or trade names) inexchange for fees or some other specified benefits.
Franchisingobligates a firm to provide a specialized salesor service strategy, support assistance and possibly aninitial investment in exchange for periodic fees. Forexample McDonalds, Pizza Hut, Subway sandwiches,Micro Age Computers, and dairy Queen have franchisesthat are owned and managed by local residents in manyforeign countries.
8/12/2019 Unit 1 an Overview of MBF
21/23
International Business Methods
Joint venturesis a venture that is jointly owned andoperated by two or more firms. For example, General MillsInc. joined in a venture with Nestle SA, so that the cereals
produced by General Mills can be sold thru the overseassales distribution network established by Nestle.
Acquisitions of Existing Operations
Establishing New Foreign Subsidiaries
Countertrade is a form of international trade in whichcertain export and import transactions are directly linkedwith each other and in which import of goods are paid for
by export of goods, instead of money payments.
8/12/2019 Unit 1 an Overview of MBF
22/23
Forms of Countertrade
Barter. MMTC and a Yugoslavian company dealt aCountertrade which involved import of 50,000 tones ofrails of the value of about $ 38 billion by the MMTC and
the purchase by Yugoslavian co. of iron ore concentratesand pellets of the same value.
Counterpurchase. Under the Counterpurchase agreementthe seller receives full payment in cash but agrees to spendan equivalent amount of money in that country within a
specified period.Classic example of this kind of agreement was Pepsi Colas trade withUSSR. Pepsi got paid in Rubbles for the sale of its concentrates in theUSSR but spent this amount for purchase of Russian Products likeVodka and wine.
8/12/2019 Unit 1 an Overview of MBF
23/23