Chapter 1
v v
Multinational Financial Management: An Overview v v v v
Lecture Outline v
Managing the MNC v v
How Business Disciplines Are Used to Manage the MNC
v v v v v v v v
Agency Problems
v v
Management Structure of an MNC v v v v
Why Firms Pursue International Business
v v v v
Theory of Comparative Advantage
v v v v
vImperfect Markets Theory v v
Product Cycle Theoryv v
Methods to Conduct International Business
v v v v
International Trade v
vLicensing
vFranchising
Joint Ventures
v
Acquisitions of Existing Operations v v v
vEstablishing New Foreign Subsidiaries v v v
vSummary of Methods v v
Valuation Model for an MNC
v v v v
Domestic Valuation Model
v v v
Multinational Valuation Model
v v v
Uncertainty Surrounding an MNC’s Cash Flows
v v v v v
How Uncertainty Affects the MNC’s Cost of
v v v v v v v
Capital
v
Organization of the Text v v v
© v2021 vCengage vLearning. vAll vRights vReserved. vMay vnot vbe vcopied, vscanned, vor vduplicated, vin vwhole vor vin vpart, vexcept vfor vuse
vas v permitted vin va vlicense vdistributed vwith va vcertain vproduct vor vservice vor votherwise von va vpassword-protected vwebsite vfor
vclassroom vuse.
, Multinational Financial Management: An Overview 2 v v v v v v
Chapter Theme v
This chapter introduces the multinational corporation as having similar goals to the purely domestic
v v v v v v v v v v v v v
corporation, but a wider variety of opportunities. With additional opportunities come potential increased
v v v v v v v v v v v v v
returns and other forms of risk to consider. The potential benefits and risks are introduced.
v v v v v v v v v v v v v v v
Topics to Stimulate Class Discussion
v v v v
1. What is the appropriate definition of an MNC?
v v v v v v v
2. Why does an MNC expand internationally?
v v v v v
3. What are the risks of an MNC which expands internationally?
v v v v v v v v v
4. Why must purely domestic firms be concerned about the international environment?
v v v v v v v v v v
POINT/COUNTER-POINT:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
v v v v v v v v v
POINT: Yes. When a U.S.-based MNC competes in some countries, it may encounter some business
v v v v v v v v v v v v v v
norms there that are not allowed in the U.S. For example, when competing for a government contract,
v v v v v v v v v v v v v v v v v
firms might provide payoffs to the government officials who will make the decision. Yet, in the United
v v v v v v v v v v v v v v v v v
States, a firm will sometimes take a client on an expensive golf outing or provide skybox tickets to
v v v v v v v v v v v v v v v v v v
events. This is no different than a payoff. If the payoffs are bigger in some foreign countries, the MNC
v v v v v v v v v v v v v v v v v v v
can compete only by matching the payoffs provided by its competitors.
v v v v v v v v v v v
COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code of ethics that applies to v v v v v v v v v v v v v v
any country, even if it is at a disadvantage in a foreign country that allows activities that might be
v v v v v v v v v v v v v v v v v v v
viewed as unethical. In this way, the MNC establishes more credibility worldwide.
v v v v v v v v v v v v
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
v v v v v v v v v v v v v v v v
Offer your own opinion on this issue.
v v v v v v v
ANSWER: The issue is frequently discussed. It is easy to suggest that the MNC should maintain a
v v v v v v v v v v v v v v v v
standard code of ethics, but in reality, that means that it will not be able to compete in some cases. For
v v v v v v v v v v v v v v v v v v v v v
example, even if it submits the lowest bid on a specific foreign government project, it will not receive
v v v v v v v v v v v v v v v v v v
the bid without a payoff to the foreign government officials. The issue is especially a concern for large
v v v v v v v v v v v v v v v v v v
projects that may generate substantial cash flows for the firm that is chosen to do the project. Ideally,
v v v v v v v v v v v v v v v v v v
the MNC can clearly demonstrate to whoever oversees the decision process that it deserves to be
v v v v v v v v v v v v v v v v
selected. If there is just one decision-maker with no oversight, an MNC can not ensure that the decision
v v v v v v v v v v v v v v v v v v
will be ethical. But if the decision-maker must be accountable to a department who oversees the
v v v v v v v v v v v v v v v v
decision, the MNC may be able to prompt the department to ensure that the process is ethical.
v v v v v v v v v v v v v v v v v
© v2021 vCengage vLearning. vAll vRights vReserved. vMay vnot vbe vcopied, vscanned, vor vduplicated, vin vwhole vor vin vpart, vexcept vfor vuse
vas v permitted vin va vlicense vdistributed vwith va vcertain vproduct vor vservice vor votherwise von va vpassword-protected vwebsite vfor
vclassroom vuse.
, Multinational Financial Management: An Overview 3 v v v v v v
Answers to End of Chapter Questions
v v v v v
1. Agency Problems of MNCs. v v v
a. Explain the agency problem of MNCs. v v v v v
ANSWER: The agency problem reflects a conflict of interests between decision-making managers
v v v v v v v v v v v
and the owners of the MNC. Agency costs occur in an effort to assure that managers act in the
v v v v v v v v v v v v v v v v v v v
best interest of the owners.
v v v v v
b. Why might agency costs be larger for an MNC than for a purely domestic firm?
v v v v v v v v v v v v v v
ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the
v v v v v v v v v v v v v v
following reasons. First, MNCs incur larger agency costs in monitoring managers of distant
v v v v v v v v v v v v v
foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not
v v v v v v v v v v v v
follow uniform goals, and some managers may focus on satisfying respective employees. Third,
v v v v v v v v v v v v v
the sheer size of the larger MNCs would also create large agency problems.
v v v v v v v v v v v v v
2. Comparative Advantage. v
a. Explain how the theory of comparative advantage relates to the need for international business.
v v v v v v v v v v v v v
ANSWER: The theory of comparative advantage implies that countries should specialize in
v v v v v v v v v v v
production, thereby relying on other countries for some products. Consequently, there is a need for
v v v v v v v v v v v v v v v
international business.
v v
b. Explain how the product cycle theory relates to the growth of an MNC.
v v v v v v v v v v v v
ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt to
v v v v v v v v v v v v v v v v
capitalize on its perceived advantages in markets other than where it was initially established.
v v v v v v v v v v v v v v
3. Imperfect Markets. v
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
v v v v v v v v v v v v v
in foreign markets.
v v v
ANSWER: Because of imperfect markets, resources cannot be easily and freely retrieved by
v v v v v v v v v v v v
the MNC. Consequently, the MNC must sometimes go to the resources rather than retrieve
v v v v v v v v v v v v v v
resources (such as land, labor, etc.).
v v v v v v
b. If perfect markets existed, would wages, prices, and interest rates among countries be
v v v v v v v v v v v v
more similar or less similar than under conditions of imperfect markets? Why?
v v v v v v v v v v v v
ANSWER: If perfect markets existed, resources would be more mobile and could therefore be
v v v v v v v v v v v v v
transferred to those countries more willing to pay a high price for them. As this occurred,
v v v v v v v v v v v v v v v v
shortages of resources in any particular country would be alleviated and the costs of such resources
v v v v v v v v v v v v v v v v
would be similar across countries.
v v v v v
4. International Opportunities. v
© v2021 vCengage vLearning. vAll vRights vReserved. vMay vnot vbe vcopied, vscanned, vor vduplicated, vin vwhole vor vin vpart, vexcept vfor vuse
vas v permitted vin va vlicense vdistributed vwith va vcertain vproduct vor vservice vor votherwise von va vpassword-protected vwebsite vfor
vclassroom vuse.
, Multinational Financial Management: An Overview 4 v v v v v v
a. Do you think that either the acquisition of a foreign firm or licensing will result in greater
v v v v v v v v v v v v v v v v
growth for an MNC? Which alternative is likely to have more risk?
v v v v v v v v v v v v
ANSWER: An acquisition will typically result in greater growth, but it is riskier because it normally
v v v v v v v v v v v v v v v
requires a larger investment and the decision can not be easily reversed once the acquisition is made.
v v v v v v v v v v v v v v v v v
b. Describe a scenario in which the size of a corporation is not affected by access to
v v v v v v v v v v v v v v v
international opportunities.
v v
ANSWER: Some firms may avoid opportunities because they lack knowledge about foreign markets
v v v v v v v v v v v v
or expect that the risks are excessive. Thus, the size of these firms is not affected by the
v v v v v v v v v v v v v v v v v v
opportunities.
v
c. Explain why MNCs such as Coca Cola and PepsiCo still have numerous opportunities
v v v v v v v v v v v v
for international expansion.
v v v
ANSWER: Coca Cola and PepsiCo still have new international opportunities because countries are at
v v v v v v v v v v v v v
various stages of development. Some countries have just recently opened their borders to MNCs.
v v v v v v v v v v v v v v
Many of these countries do not offer sufficient food or drink products to their consumers.
v v v v v v v v v v v v v v
5. International Opportunities Due to the Internet. v v v v v
a. What factors cause some firms to become more internationalized than others?
v v v v v v v v v v
ANSWER: The operating characteristics of the firm (what it produces or sells) and the risk perception
v v v v v v v v v v v v v v v
vof international business will influence the degree to which a firm becomes internationalized.
v v v v v v v v v v v v
vSeveral other factors such as access to capital could also be relevant here. Firms that are labor-
v v v v v v v v v v v v v v v v
intensive could more easily capitalize on low-wage countries while firms that rely on technological
v v v v v v v v v v v v v
vadvances could not. v v
b. Why might the Internet have resulted in more international business.
v v v v v v v v v
ANSWER: The Internet allows for easy and low-cost communication between countries, so that
v v v v v v v v v v v v
vfirms could now develop contacts with potential customers overseas by having a website. Many
v v v v v v v v v v v v v
firms use their website to identify the products that they sell, along with the prices for each product.
v v v v v v v v v v v v v v v v v v
vThis allows them to easily advertise their products to potential importers anywhere in the world
v v v v v v v v v v v v v v
without mailing brochures to various countries. In addition, they can add to their product line and
v v v v v v v v v v v v v v v v
change prices by simply revising their website, so importers are kept abreast of the exporter’s
v v v v v v v v v v v v v v v
product information by monitoring the exporter’s website periodically. Firms can also use their
v v v v v v v v v v v v v
websites to accept orders online. Some firms with an international reputation use their brand name
v v v v v v v v v v v v v v v
to advertise products over the internet. They may use manufacturers in some foreign countries to
v v v v v v v v v v v v v v v
produce some of their products subject to their specification
v v v v v v v v v
6. Impact of Exchange Rate Movements. Plak Co. of Chicago has several European subsidiaries
v v v v v v v v v v v v
that remit earnings to it each year. Explain how appreciation of the euro (the currency used in
v v v v v v v v v v v v v v v v v
many European countries) would affect Plak's valuation.
v v v v v v v
ANSWER: Plak’s valuation should increase because the appreciation of the euro will increase the
v v v v v v v v v v v v v
dollar value of the cash flows remitted by the European subsidiaries.
v v v v v v v v v v v
© v2021 vCengage vLearning. vAll vRights vReserved. vMay vnot vbe vcopied, vscanned, vor vduplicated, vin vwhole vor vin vpart, vexcept vfor vuse
vas v permitted vin va vlicense vdistributed vwith va vcertain vproduct vor vservice vor votherwise von va vpassword-protected vwebsite vfor
vclassroom vuse.
v v
Multinational Financial Management: An Overview v v v v
Lecture Outline v
Managing the MNC v v
How Business Disciplines Are Used to Manage the MNC
v v v v v v v v
Agency Problems
v v
Management Structure of an MNC v v v v
Why Firms Pursue International Business
v v v v
Theory of Comparative Advantage
v v v v
vImperfect Markets Theory v v
Product Cycle Theoryv v
Methods to Conduct International Business
v v v v
International Trade v
vLicensing
vFranchising
Joint Ventures
v
Acquisitions of Existing Operations v v v
vEstablishing New Foreign Subsidiaries v v v
vSummary of Methods v v
Valuation Model for an MNC
v v v v
Domestic Valuation Model
v v v
Multinational Valuation Model
v v v
Uncertainty Surrounding an MNC’s Cash Flows
v v v v v
How Uncertainty Affects the MNC’s Cost of
v v v v v v v
Capital
v
Organization of the Text v v v
© v2021 vCengage vLearning. vAll vRights vReserved. vMay vnot vbe vcopied, vscanned, vor vduplicated, vin vwhole vor vin vpart, vexcept vfor vuse
vas v permitted vin va vlicense vdistributed vwith va vcertain vproduct vor vservice vor votherwise von va vpassword-protected vwebsite vfor
vclassroom vuse.
, Multinational Financial Management: An Overview 2 v v v v v v
Chapter Theme v
This chapter introduces the multinational corporation as having similar goals to the purely domestic
v v v v v v v v v v v v v
corporation, but a wider variety of opportunities. With additional opportunities come potential increased
v v v v v v v v v v v v v
returns and other forms of risk to consider. The potential benefits and risks are introduced.
v v v v v v v v v v v v v v v
Topics to Stimulate Class Discussion
v v v v
1. What is the appropriate definition of an MNC?
v v v v v v v
2. Why does an MNC expand internationally?
v v v v v
3. What are the risks of an MNC which expands internationally?
v v v v v v v v v
4. Why must purely domestic firms be concerned about the international environment?
v v v v v v v v v v
POINT/COUNTER-POINT:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
v v v v v v v v v
POINT: Yes. When a U.S.-based MNC competes in some countries, it may encounter some business
v v v v v v v v v v v v v v
norms there that are not allowed in the U.S. For example, when competing for a government contract,
v v v v v v v v v v v v v v v v v
firms might provide payoffs to the government officials who will make the decision. Yet, in the United
v v v v v v v v v v v v v v v v v
States, a firm will sometimes take a client on an expensive golf outing or provide skybox tickets to
v v v v v v v v v v v v v v v v v v
events. This is no different than a payoff. If the payoffs are bigger in some foreign countries, the MNC
v v v v v v v v v v v v v v v v v v v
can compete only by matching the payoffs provided by its competitors.
v v v v v v v v v v v
COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code of ethics that applies to v v v v v v v v v v v v v v
any country, even if it is at a disadvantage in a foreign country that allows activities that might be
v v v v v v v v v v v v v v v v v v v
viewed as unethical. In this way, the MNC establishes more credibility worldwide.
v v v v v v v v v v v v
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
v v v v v v v v v v v v v v v v
Offer your own opinion on this issue.
v v v v v v v
ANSWER: The issue is frequently discussed. It is easy to suggest that the MNC should maintain a
v v v v v v v v v v v v v v v v
standard code of ethics, but in reality, that means that it will not be able to compete in some cases. For
v v v v v v v v v v v v v v v v v v v v v
example, even if it submits the lowest bid on a specific foreign government project, it will not receive
v v v v v v v v v v v v v v v v v v
the bid without a payoff to the foreign government officials. The issue is especially a concern for large
v v v v v v v v v v v v v v v v v v
projects that may generate substantial cash flows for the firm that is chosen to do the project. Ideally,
v v v v v v v v v v v v v v v v v v
the MNC can clearly demonstrate to whoever oversees the decision process that it deserves to be
v v v v v v v v v v v v v v v v
selected. If there is just one decision-maker with no oversight, an MNC can not ensure that the decision
v v v v v v v v v v v v v v v v v v
will be ethical. But if the decision-maker must be accountable to a department who oversees the
v v v v v v v v v v v v v v v v
decision, the MNC may be able to prompt the department to ensure that the process is ethical.
v v v v v v v v v v v v v v v v v
© v2021 vCengage vLearning. vAll vRights vReserved. vMay vnot vbe vcopied, vscanned, vor vduplicated, vin vwhole vor vin vpart, vexcept vfor vuse
vas v permitted vin va vlicense vdistributed vwith va vcertain vproduct vor vservice vor votherwise von va vpassword-protected vwebsite vfor
vclassroom vuse.
, Multinational Financial Management: An Overview 3 v v v v v v
Answers to End of Chapter Questions
v v v v v
1. Agency Problems of MNCs. v v v
a. Explain the agency problem of MNCs. v v v v v
ANSWER: The agency problem reflects a conflict of interests between decision-making managers
v v v v v v v v v v v
and the owners of the MNC. Agency costs occur in an effort to assure that managers act in the
v v v v v v v v v v v v v v v v v v v
best interest of the owners.
v v v v v
b. Why might agency costs be larger for an MNC than for a purely domestic firm?
v v v v v v v v v v v v v v
ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the
v v v v v v v v v v v v v v
following reasons. First, MNCs incur larger agency costs in monitoring managers of distant
v v v v v v v v v v v v v
foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not
v v v v v v v v v v v v
follow uniform goals, and some managers may focus on satisfying respective employees. Third,
v v v v v v v v v v v v v
the sheer size of the larger MNCs would also create large agency problems.
v v v v v v v v v v v v v
2. Comparative Advantage. v
a. Explain how the theory of comparative advantage relates to the need for international business.
v v v v v v v v v v v v v
ANSWER: The theory of comparative advantage implies that countries should specialize in
v v v v v v v v v v v
production, thereby relying on other countries for some products. Consequently, there is a need for
v v v v v v v v v v v v v v v
international business.
v v
b. Explain how the product cycle theory relates to the growth of an MNC.
v v v v v v v v v v v v
ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt to
v v v v v v v v v v v v v v v v
capitalize on its perceived advantages in markets other than where it was initially established.
v v v v v v v v v v v v v v
3. Imperfect Markets. v
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
v v v v v v v v v v v v v
in foreign markets.
v v v
ANSWER: Because of imperfect markets, resources cannot be easily and freely retrieved by
v v v v v v v v v v v v
the MNC. Consequently, the MNC must sometimes go to the resources rather than retrieve
v v v v v v v v v v v v v v
resources (such as land, labor, etc.).
v v v v v v
b. If perfect markets existed, would wages, prices, and interest rates among countries be
v v v v v v v v v v v v
more similar or less similar than under conditions of imperfect markets? Why?
v v v v v v v v v v v v
ANSWER: If perfect markets existed, resources would be more mobile and could therefore be
v v v v v v v v v v v v v
transferred to those countries more willing to pay a high price for them. As this occurred,
v v v v v v v v v v v v v v v v
shortages of resources in any particular country would be alleviated and the costs of such resources
v v v v v v v v v v v v v v v v
would be similar across countries.
v v v v v
4. International Opportunities. v
© v2021 vCengage vLearning. vAll vRights vReserved. vMay vnot vbe vcopied, vscanned, vor vduplicated, vin vwhole vor vin vpart, vexcept vfor vuse
vas v permitted vin va vlicense vdistributed vwith va vcertain vproduct vor vservice vor votherwise von va vpassword-protected vwebsite vfor
vclassroom vuse.
, Multinational Financial Management: An Overview 4 v v v v v v
a. Do you think that either the acquisition of a foreign firm or licensing will result in greater
v v v v v v v v v v v v v v v v
growth for an MNC? Which alternative is likely to have more risk?
v v v v v v v v v v v v
ANSWER: An acquisition will typically result in greater growth, but it is riskier because it normally
v v v v v v v v v v v v v v v
requires a larger investment and the decision can not be easily reversed once the acquisition is made.
v v v v v v v v v v v v v v v v v
b. Describe a scenario in which the size of a corporation is not affected by access to
v v v v v v v v v v v v v v v
international opportunities.
v v
ANSWER: Some firms may avoid opportunities because they lack knowledge about foreign markets
v v v v v v v v v v v v
or expect that the risks are excessive. Thus, the size of these firms is not affected by the
v v v v v v v v v v v v v v v v v v
opportunities.
v
c. Explain why MNCs such as Coca Cola and PepsiCo still have numerous opportunities
v v v v v v v v v v v v
for international expansion.
v v v
ANSWER: Coca Cola and PepsiCo still have new international opportunities because countries are at
v v v v v v v v v v v v v
various stages of development. Some countries have just recently opened their borders to MNCs.
v v v v v v v v v v v v v v
Many of these countries do not offer sufficient food or drink products to their consumers.
v v v v v v v v v v v v v v
5. International Opportunities Due to the Internet. v v v v v
a. What factors cause some firms to become more internationalized than others?
v v v v v v v v v v
ANSWER: The operating characteristics of the firm (what it produces or sells) and the risk perception
v v v v v v v v v v v v v v v
vof international business will influence the degree to which a firm becomes internationalized.
v v v v v v v v v v v v
vSeveral other factors such as access to capital could also be relevant here. Firms that are labor-
v v v v v v v v v v v v v v v v
intensive could more easily capitalize on low-wage countries while firms that rely on technological
v v v v v v v v v v v v v
vadvances could not. v v
b. Why might the Internet have resulted in more international business.
v v v v v v v v v
ANSWER: The Internet allows for easy and low-cost communication between countries, so that
v v v v v v v v v v v v
vfirms could now develop contacts with potential customers overseas by having a website. Many
v v v v v v v v v v v v v
firms use their website to identify the products that they sell, along with the prices for each product.
v v v v v v v v v v v v v v v v v v
vThis allows them to easily advertise their products to potential importers anywhere in the world
v v v v v v v v v v v v v v
without mailing brochures to various countries. In addition, they can add to their product line and
v v v v v v v v v v v v v v v v
change prices by simply revising their website, so importers are kept abreast of the exporter’s
v v v v v v v v v v v v v v v
product information by monitoring the exporter’s website periodically. Firms can also use their
v v v v v v v v v v v v v
websites to accept orders online. Some firms with an international reputation use their brand name
v v v v v v v v v v v v v v v
to advertise products over the internet. They may use manufacturers in some foreign countries to
v v v v v v v v v v v v v v v
produce some of their products subject to their specification
v v v v v v v v v
6. Impact of Exchange Rate Movements. Plak Co. of Chicago has several European subsidiaries
v v v v v v v v v v v v
that remit earnings to it each year. Explain how appreciation of the euro (the currency used in
v v v v v v v v v v v v v v v v v
many European countries) would affect Plak's valuation.
v v v v v v v
ANSWER: Plak’s valuation should increase because the appreciation of the euro will increase the
v v v v v v v v v v v v v
dollar value of the cash flows remitted by the European subsidiaries.
v v v v v v v v v v v
© v2021 vCengage vLearning. vAll vRights vReserved. vMay vnot vbe vcopied, vscanned, vor vduplicated, vin vwhole vor vin vpart, vexcept vfor vuse
vas v permitted vin va vlicense vdistributed vwith va vcertain vproduct vor vservice vor votherwise von va vpassword-protected vwebsite vfor
vclassroom vuse.
