Multinational Financial Management

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MULTINATIONAL FINANCIAL MANAGEMENTMULTINATIONAL FINANCIAL MANAGEMENT

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The Rise Of Multinational Corporation

As per theory of comparative advantage, developed by Adam Smith and David Ricardo, each nation should specialise in the production and export of those goods that it can produce with highest relative efficiency and import those goods that other nations can produce relatively more efficiently

As per theory of comparative advantage, developed by Adam Smith and David Ricardo, each nation should specialise in the production and export of those goods that it can produce with highest relative efficiency and import those goods that other nations can produce relatively more efficiently

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It assumes that goods and services can move internationally but factors of production, such as capital, labour, and land are relatively immobile

It also ignores the role of uncertainty, economies of scale, transportation and technology in international trade

It assumes that goods and services can move internationally but factors of production, such as capital, labour, and land are relatively immobile

It also ignores the role of uncertainty, economies of scale, transportation and technology in international trade

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During the 1980s and 1990s, fundamental forces have changed the global competitive environment:

Massive deregulation

The collapse of Communism

The sale of public sector – privatisation

During the 1980s and 1990s, fundamental forces have changed the global competitive environment:

Massive deregulation

The collapse of Communism

The sale of public sector – privatisation

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The revolution in information technologies

The rise in the markets for mergers and

takeovers

Free-market policies in Third World

nations

The revolution in information technologies

The rise in the markets for mergers and

takeovers

Free-market policies in Third World

nations

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In effect, the traditional world economy in which products are exported has been replaced by one in which value is added in several different countries

The prime transmitter of competitive forces in the global economy is the multinational corporation

In effect, the traditional world economy in which products are exported has been replaced by one in which value is added in several different countries

The prime transmitter of competitive forces in the global economy is the multinational corporation

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Internationalisation of business is facilitated by a combination of factors:

Falling regulatory barriers to overseas investment

Rapidly declining telecommunications and transport costs

Freer domestic and international capital markets

Internationalisation of business is facilitated by a combination of factors:

Falling regulatory barriers to overseas investment

Rapidly declining telecommunications and transport costs

Freer domestic and international capital markets

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A 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

A 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

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The Evolution Of Multinational Corporation

Raw Material Seekers:

- The earliest multinationals

- Their aim was to exploit the raw materials that

could be found overseas ( Cotton / Oil)

Raw Material Seekers:

- The earliest multinationals

- Their aim was to exploit the raw materials that

could be found overseas ( Cotton / Oil)

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Market Seekers:

-He is the archetype of the modern multinational

firm that goes overseas to produce and sell in

foreign markets ( IBM/Volkswagen/Unilever)

Market Seekers:

-He is the archetype of the modern multinational

firm that goes overseas to produce and sell in

foreign markets ( IBM/Volkswagen/Unilever)

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Cost Minimisers:

- A fairly recent category

- Seek out and invest in lower cost production

sites overseas to remain cost competitive both

at home and abroad

( GE/ Intel/American Express)

Cost Minimisers:

- A fairly recent category

- Seek out and invest in lower cost production

sites overseas to remain cost competitive both

at home and abroad

( GE/ Intel/American Express)

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The Challenges before an MNC

Multiplicity and complexities of the taxation system

Diversity of medium of financing

Political risk

Foreign exchange risk

Currency and institutional diversity

Diversity of physical environment

Ethical conflicts

Multiplicity and complexities of the taxation system


Political risk

Foreign exchange risk


Diversity of physical environment

Ethical conflicts

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The Opportunities before an MNC

Multiplicity of tax systems



Diversity of physical forces

Multiplicity of tax systems



Diversity of physical forces

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The Multinational Corporation

The essential element that distinguishes the true multinational is its commitment to seeking out, undertaking, and integrating manufacturing, marketing, R&D, and financing opportunities on a global, not domestic, basis

The essential element that distinguishes the true multinational is its commitment to seeking out, undertaking, and integrating manufacturing, marketing, R&D, and financing opportunities on a global, not domestic, basis

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Necessary compliments to the integration of

worldwide operations are:

flexibility, adaptability and speed – the ability to develop, make, and distribute products or services - enables companies to capture customers who demand constant innovation and rapid, flexible response

Necessary compliments to the integration of

worldwide operations are:

flexibility, adaptability and speed – the ability to develop, make, and distribute products or services - enables companies to capture customers who demand constant innovation and rapid, flexible response

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Focus – figuring out and building on what a company does best i.e. divesting unrelated business activities and concentrate on core business

Focus – figuring out and building on what a company does best i.e. divesting unrelated business activities and concentrate on core business

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The Global Manager

GE Chairman Jack Welch,

“ I’m not here to predict the world. I’m here to be sure I’ve got a company that is strong enough to respond to whatever happens.”

MNCs need a new breed of business person: the Global Manager

GE Chairman Jack Welch,

“ I’m not here to predict the world. I’m here to be sure I’ve got a company that is strong enough to respond to whatever happens.”

MNCs need a new breed of business person: the Global Manager

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The Global Manager

Global managers must know how to make the products, where the raw materials and parts come from, how they get there, the alternatives, where the funds come from, and what their changing relative values do to the bottom-line

Global managers must know how to make the products, where the raw materials and parts come from, how they get there, the alternatives, where the funds come from, and what their changing relative values do to the bottom-line

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The Global Manager

They must also understand the political and economic choices facing key nations and how those choices will affect the outcomes of their decisions

They must also understand the political and economic choices facing key nations and how those choices will affect the outcomes of their decisions

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Multinational Financial Management

The main objective of multinational financial management is to maximise shareholder wealth as measured by share price

The main objective of multinational financial management is to maximise shareholder wealth as measured by share price

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Financial management is traditionally separated into two functions:

1. Financing decision – generating funds at the lowest possible costs

2. Investment decision – allocation of funds in such a way that shareholder wealth is maximised

Financial management is traditionally separated into two functions:

1. Financing decision – generating funds at the lowest possible costs

2. Investment decision – allocation of funds in such a way that shareholder wealth is maximised

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The Global finance manager has to focus his attention to:

Capital market imperfections

Asymmetries in tax treatment

Sources of revenues and costs

The Global finance manager has to focus his attention to:

Capital market imperfections

Asymmetries in tax treatment

Sources of revenues and costs

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World’s Top 10 MNCs

Based on the companies' fiscal year ended on or before 31 March 2011 Rank Company Country Field

1 Wall Mart Stores USA Retail

2 Royal Dutch Shell Netherlands Petroleum

3 Exxon Mobil USA Petroleum

4 BP UK Petroleum

5 Sinopec China Petroleum

6 China National Petroleum China Petroleum

7 State Grid China Power

8 Toyota Motor Japan Automobiles

9 Japan Post Holdings Japan Diversified

10 Chevron USA Petroleum

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Top 10 countries with the most Global 500 companies, 2011

Rank Country Companies

1 USA 133

2 Japan 68

3 China 61

4 France 35

5 Germany 34

6 UK 30

7 Switzerland 15

8 South Korea 14

9 Netherlands 12

10 Canada 11


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GOOD LUCK TO YOUGOOD LUCK TO YOU

Multinational Financial Management

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