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Globalization and the Multinational FirmGlobalization and the Multinational Firm(chapter 1)(chapter 1)

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What’s Special about “International” Finance?What’s Special about “International” Finance?

Why study international finance? Why not interstate finance?

Multinational firms (MNC, MNE) A firm that incorporated in one country and has production and

sales operations in other countries. There are more than 35,000 MNCs in the world.

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What’s Special about “International” Finance?What’s Special about “International” Finance?Foreign Exchange Risk- Foreign operations are conducted in foreign currencies.

- When firms and individuals are engaged in cross-border transactions they are exposed to foreign exchange (FX) risk.

- The foreign currency profits, costs, revenues in dollar terms depends on exchange rate movements.

- FX risk affects the cost of capital and the capital structure of a MNC firm

- Capital budgeting decisions are more complex in the international context

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What’s Special about “International” Finance?What’s Special about “International” Finance?

Political Risk-Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders

-In general, financial managers and investors incorporate a political risk premium when foreign activities are being evaluated

-Ex: ethnic strife in Indonesia; expropriation in Russia, Africa and Central America; changes in taxes and regulations

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Objectives of a MNCObjectives of a MNCMaximizing shareholders wealth: long accepted as a goal in the Anglo-Saxon countries, but complications arise

- - The development of the stock market

-- Who are and where are the shareholders? Corporate governance issues are actually culturally determined normsIn other countries shareholders are viewed as merely one among many “stakeholders” of the firm including Employees, Suppliers and Customers. The goal is to maximize corporate wealth

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Reasons for the existence of MNCReasons for the existence of MNC Traditional economic theory: comparative advantage- the principal argument for international trade is based on the theory of comparative

advantage: trade enhance welfare if the countries specialize in the production of those goods that they can produce most efficiently and trade those goods among them

Product differentiation

Market Imperfections:- Legal restrictions on movement of goods, people, and money- Transactions costs- Discriminatory taxation

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Learning outcomesLearning outcomes

• Discuss how is international financial management different from domestic financial management• What are MNC and what economic roles do they play.• Discuss the FX and political risks• Discuss the rationale for the existence of MNC • Identify and discuss the main goals of a MNC