Unit 1 an Overview of MBF

8/12/2019 Unit 1 an Overview of MBF

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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


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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


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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


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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.


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Top 5 in Europe

1. BP

2. Royal Dutch/Shell Group

3. Daimler Chrysler4. Total

5. AXA


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Top 5 in Asia

1. Toyota Motor

2. Nippon Telegraph & Telephone

3. Hitachi4. Matsushita Electric Industrial

5. Honda Motor


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INDIAN FORTUNEMNEs

TCS

WIPRO

INFOSYS

SATYAM COMPUTERS

HCL TECHNOLOGY


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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


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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


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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


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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.


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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.


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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.


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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.


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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


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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.


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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.


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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.


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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.


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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.


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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.


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Unit 1 an Overview of MBF

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