...1. Multinational Corporations(MNCs) 1) Definition: firms that engage in some form of international business. 2) The goals of MNCs: maximizing the value of the MNCs and shareholder wealth. 2. Agency problems 1) Agency problems: The conflict of goals between a firm’s managers and shareholders is often referred to as the agency problem. 2) Agency costs are normally larger than for purely domestic firms for several reasons (1) MNCs with subsidiaries scattered around the world may experience larger agency problems because monitoring managers of distant subsidiaries in foreign countries is more difficult. (2) Foreign subsidiary managers raised in different cultures may not follow uniform goals. (3) The sheer size of the larger MNCs can also create large agency problems. (4) Some non-U.S. managers tend to downplay the short-term effects of decisions. 3) The parent corporation of an MNC may be able to prevent agency problems with proper governance. (1) Communicating the goals for each subsidiary to ensure that all subsidiaries focus on maximizing the value of the MNC rather than their respective subsidiary values. (2) Overseeing the subsidiary decisions to check whether the subsidiary managers are satisfying the MNC’s goals. (3) Implanting compensation plans such as stocks that reward the subsidiary managers who satisfy the MNC’s goals. 4) The ways to reinforce corporate governance of MNCs. (1) Establishing a centralized database...
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...Chapter 1 Multinational Financial Management: An Overview Specific Objectives • 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 conduct international business Outline Goals of the MNC Maximize shareholder wealth Problems encountered in meeting goals: 1) Agency problems larger for MNCs than purely domestic firms because: a) monitoring more difficult because of geographic distance b) different cultures c) MNC size d) subsidiary managers may maximize the value of their subsidiary but not of the MNC as a whole 2) Centralized vs. decentralized management a) centralized reduces agency costs because it gives parent more control; downside is that local managers may be better informed b) decentralized management increases agency costs but may result in better decisions c) Internet may facilitate monitoring of foreign subsidiaries 3) Corporate control used to reduce agency problems a) executive compensation with stock b) threat of hostile takeover c) monitoring by large shareholders Constraints encountered in meeting goals 1) Environmental - other countries may be tougher (e.g., pollution controls) 2) Regulatory - e.g., currency convertibility...
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...nance Chapter 1 Multinational Financial Management: An Overview 1. The commonly accepted goal of the MNC is to: A) maximize short-term earnings. B) maximize shareholder wealth. C) minimize risk. D) both maximize short-term earnings and minimize risk. E) maximize international sales. 2. With regard to corporate goals, an MNC is mostly concerned with maximizing _______, and a purely domestic firm is mostly concerned with maximizing _______. A) shareholder wealth; short-term earnings B) shareholder wealth; shareholder wealth C) short-term earnings; sales volume D) short-term earnings; shareholder wealth 3. For the MNC, agency costs are typically: A) non-existent. B) larger than agency costs of a small purely domestic firm. C) smaller than agency costs of a small purely domestic firm. D) the same as agency costs of a small purely domestic firm. 5. The valuation of an MNC should rise when an event causes the expected cash flows from foreign to _______ and when foreign currencies denominating these cash flows are expected to _______. A) decrease; appreciate B) increase; appreciate C) decrease; depreciate D) increase; depreciate 6. Which of the following theories identifies specialization as a reason for international business? A) theory of comparative advantage. B) imperfect markets theory. C) product cycle theory. D) none of these. 7. Which of the following theories identifies the non-transferability of...
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...ANY FIRM THAT ENGAGES IN SOME FORM OF INTERNATIONAL BUSINESS can be considered an MNC. Examples – Coca Cola Co. – 160 countries and 40 different currencies – 60 % of annual operating income is generated outside the US. What is the AGENCY ISSUE? Any manager who does not own 100 % of the company is an agent of the owners of the company. The agency issue is the idea that while financial managers recognize the goal of shareholder wealth maximization, they are also concerned with personal wealth, job security and fringe benefits. Such concerns may make a manager reluctant or unwilling to take more than moderate risk if they perceive that taking too much risk might jeopardize their jobs or reduce their personal wealth. THE RESULT is less than maximum return and a potential loss of wealth for the owners. What is the AGENCY PROBLEM? The likelihood that financial managers may place personal gorals ahead of corporate goals. How can corporations solve the AGENCY PROBLEM? – Market force and Agency costs. MARKET FORCE MAJOR shareholders can exert pressure on management to perform. When necessary they can use their voting rights to replace management. Threat of takeover – motivates management to act in the best interests of the firm’s owners. AGENCY COSTS The cost of monitoring management behavior, ensuring against dishonest acts of management AND giving managers the financial incentive to maximize share price. COMPENSATION PLANS INCENTIVE PLANS – tie management compensation...
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... INTRODUCTION Multinational corporations (MNCs) are firms that engage in some form of international business. Their managers conduct international financial management which involves international investing and financing decisions that are intended to maximize the value of the MNC. Management is motivated to achieve a number of goals and objectives, some of which conflict with each other. However, the commonly accepted objective of an MNC is to maximize stockholder wealth on a global basis, as reflected by stock price. Managers of an MNC may make decisions that conflict with the firm’s goal to maximize shareholder wealth. This conflict of goals between firm’s managers and shareholders’ is often referred to as the agency problem. For the firm to achieve its goals, it needs to put in place mechanism for control of agency problem. MNCs are recognized as the main actors of e international business, international business financing and global economies. According to Goshen and Bartlett, MNC is a firm that has substantial direct investment in foreign countries that it actively manages.2 the value of their sales in host countries overpasses the value of trade (imports and exports) in today’s World economy. Multinational companies attracted scientific and public attention from the moment of their appearance, and especially from the beginning of their intensive growth (during the 1960s). There are many interesting and important issues concerning MNC that have been elaborated in the literature...
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...Ottawa, Ont., Canada K1N 6N5 b Departement de finance et assurance, Faculte des sciences de l’administration, Uni6ersite La6al, ´ ´ ´ Quebec, P.Q., Canada G1K7P4 ´ Received 3 April 1999; accepted 22 October 1999 a Abstract This study examines the relationship between the capital structure of multinational corporations (MNCs) and their diversification strategy. Both the international market (multi-country operations) and the product (multi-industry operations) dimension of diversification are integrated into the analysis and a switching of regression regimes methodology is employed that accounts for the bi-dimensional nature of the diversification strategy pursued by MNCs. The model identifies four types of diversification regimes. The results suggest that leverage increases with both international and product diversification. It is also found that the combination of both types of diversification leads to lower levels of bankruptcy risk. Although the role of the determinants of MNC capital structure varies with the diversification strategy, there seem to be common determinants. In particular, profitability and bankruptcy risks are negatively related to the debt ratio of MNCs. © 2001 Elsevier Science B.V. All rights reserved. JEL classification: F23; G32 Keywords: Multinational corporation; Capital structure; International diversification; Product diversification * Corresponding author. Tel.: + 1-418-6562131, ext. 3380; fax: +1-418-6562624. E-mail address: jean-claude.cosset@fas.ulaval.ca (J...
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...considered as Multinational Corporation. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries. A Multinational Company is referred to as a Multinational Business Enterprise (MBE) or a Transnational Company (TNC) or International Business (INB). Multinational Companies (MNCs) are defined as firms that engage in some form of international business. Their managers conduct international financial management, which involves international investing & financing decisions that are intended to maximize the value of MNC.” An enterprise operating in several countries but managed from one (home) country is called a multinational corporation. Generally, any company or group that derives a quarter of its revenue from operations outside of its home country is considered a multinational corporation. The International Labor Organization (ILO) has defined an MNC as a company that has its management headquarters in one country, known as the home country, and it operates in several other countries, known as host countries. Oxford Dictionary of Business has defined as “A corporation that has production operations in more than one country for...
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...Kentucky Gatton College of Business and Economics International Finance FIN 423 Problem Set 1, Spring 2013 Due date: Jan 17, 2013 Name: _________________________ Please write all answers on this page, and turn in this page only. 1. _______ 2. _______ 3. _______ 4. _______ 5. _______ 6. _______ 7. _______ 8. _______ 9. _______ 10. _______ 11. _______ 12. _______ 13. _______ 14. _______ 15. _______ 16. _______ 17. _______ 18. _______ 19. _______ 20. _______ 1. The commonly accepted goal of the MNC is to: A) maximize shortterm earnings. B) maximize shareholder wealth. C) minimize risk. D) A and C. E) maximize international sales. 2. For the MNC, agency costs are typically: A) nonexistent. B) larger than agency costs of a small purely domestic firm. C) smaller than agency costs of a small purely domestic firm. D) the same as agency costs of a small purely domestic firm. ...
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...Goals of the MNC • Maximize shareholder wealth – Problems encountered in meeting goals: 1) Agency problems larger for MNCs than purely domestic firms because: a) monitoring more difficult because of geographic distance b) different cultures c) MNC size d) subsidiary managers may maximize the value of their subsidiary but not of the MNC as a whole 2) Centralized vs. decentralized management a) centralized reduces agency costs because it gives parent more control; downside is that local managers may be better informed b) decentralized management increases agency costs but may result in better decisions c) Internet may facilitate monitoring of foreign subsidiaries 3) Corporate control used to reduce agency problems a) executive compensation with stock b) threat of hostile takeover c) monitoring by large shareholders – Constraints encountered in meeting goals 1) Environmental - other countries may be tougher (e.g., pollution controls) 2) Regulatory - e.g., currency convertibility, remittance of profits, etc. 3) Ethical - e.g., bribes may be more acceptable in other countries Theories of International Business • Theory of Comparative Advantage – countries specialize in the production of goods they can produce with relative efficiency and trade for other products • Imperfect Markets Theory – factors of production (labor and other resources) are immobile. • Firms can capitalize on imperfect markets by...
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...International Financial Management Part I: The International Financial Environment Multinational Financial Management: An Overview Chapter Objectives • To identify the main goal of the multinational corporation (MNC) and conflicts with that goal; • To describe the key theories that justify international business; and • To explain the common methods used to conduct international business. Goal of the MNC • The commonly accepted goal of an MNC is to maximize shareholder wealth. • We will focus on MNCs that are based in the United States and that wholly own their foreign subsidiaries. Conflicts against the MNC Goal • For corporations with shareholders who differ from their managers, a conflict of goals can exist - the agency problem. • Agency costs are normally larger for MNCs than for purely domestic firms. ¤ The sheer size of the MNC. ¤ The scattering of distant subsidiaries. ¤ The culture of foreign managers. ¤ Subsidiary value versus overall MNC value. Impact of Corporate Control • Various forms of corporate control can reduce agency costs. ¤ Stock compensation for board members and executives. ¤ The threat of a hostile takeover. ¤ Monitoring and intervention by large shareholders. Constraints Interfering with the MNC’s Goal • As MNC managers attempt to maximize their firm’s value, they may be confronted with various constraints. ¤ Environmental constraints. Ex. Building code, disposal of waste, pollution control. ¤ Regulatory constraints. Ex. Tax codes, currency convertibility...
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...for a variety of purposes, such as to acquire and transfer knowledge, to manage a foreign subsidiary, to fill a staffing need, to maintain communication, coordination, and control between subsidiaries and corporate headquarters, and to develop global leadership competence. Given this, successful expatriate assignments are indispensable to Multinational companies for both developmental and functional reasons. Training: An expatriate’s success in the host country is largely determined by his or her cross-cultural adjustment to the host country. While immersed in the new culture, expatriates are ‘removed from the comfortable environment of their parental culture and placed in a less familiar culture’ and are susceptible to adjustment problems because of numerous challenges that inhibit their cross-cultural adjustment like the need to speak the foreign language, to cope with culture shock, to understand different laws and customs, and to interact with local nationals. Scholarly research that has been conducted in recent years suggests that expatriates who are not prepared to confront the challenges (e.g., to cope with culture shock) find it difficult to adjust and hence incur, and impose on others, costly implications. For example, expatriates who are unable to adjust are more likely to perform poorly. Poor performance on the assignment has costly implications for expatriates (such as low self-esteem, self-confidence, and loss of prestige among co-workers), for the parent firm...
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...There are no universal or International Standard of what is right or wrong because of the cultural differences among the countries. For example, some country appreciate child labor but some country has a strict law of child labor. So when a business organization conducts business in another country, they are trying to take advantage of that country. The reason for an organization to do business beyond the border is to maximize their profit. Sometimes some MNC does offshore or outsourcing to get the job done. So some MNC goes to the third world country to gain economies of scale. For example Apple Inc. Products are produced by a third party independent manufacturer Foxconn, which situated in China. They have some controversies about some unethical human rights issues which brings public attention. Even though Foxconn produce apple inc. products. But Apple Inc. Face any loss for that. So Yes, the use of third party independent contractors insulate MNC from being attacked by the customer for ethics. Yes, this practice would offer MNCs a good defensive...
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...OVERVIEW Background On August 3, 2005, Adidas-Salomon AG announced its plans to buy all outstanding shares of Reebok International Ltd.'s stock at $59.00 per share, for a total of $3.8 billion. Upon announcement, Reebok stock rose 30% while Adidas climbed 7%. As stated by Herbert Hainer, CEO of Adidas, "This is a once-in-a-lifetime opportunity to combine two of the most respected and well-known companies in the worldwide sporting goods industry. Together, we will expand our geographic reach, particularly in North America, and create a footwear, apparel and hardware offering that addresses a broader spectrum of consumers and demographics" (Adidas.com). The three leading sportswear companies in the world are Nike, Adidas and Reebok. In August 2005, Nike was the leader in global market share with 32.9% compared to the recently constituted Adidas-Reebok organisation that had 26.3% market share. In the largest market in the world, the United States (US), Nike had 36.3% market share in August 2005. Following the acquisition of Reebok in August 2005, the market share of Adidas-Reebok in the US jumped to 21.1% from 8.9%. A primary goal of the acquisition has been to challenge industry leader Nike for a higher share of the United States sporting goods market as well as the global sporting goods market. The acquisition has prompted much discussion as to what the future holds for the sporting goods industry and its major players. Today, the sportswear trade is a vast and dynamic...
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...Chapter 1 – Q5) A- The factors include international trading, licensing, franchising, joint ventures, and acquiring or establishing subsidiaries. For example, those factors allow MNCs to penetrate global markets by exporting and giving a license to foreign countries for a certain fee. Through these factors, MNCs will have more strength in foreign countries and learn more about international markets. B- 1) The MNC becomes more successful when it can monitor managers of the foreign subsidiaries, which is facilitated by the use of the internet, and therefore reducing agency costs. 2) Online price listings of products and services that are offered by the MNC 3) Online purchases can enhance sales 4) Eases the exporting/importing process by providing access to updated tracking information online Q7) Reasons for growth in international business: * Comparative advantage allows for more market efficiency by having more specialization and interaction between companies around the world. Specializing in what you do best and benefiting from what others do best allows for growth and attracts going global. * Imperfect markets describe the reality where not all goods that are needed by a company in a certain country can be imported or acquired easily. Therefore, local companies choose to go global to ease the process of acquiring certain resources and reduce the shipment costs that would be imposed if the company would rather import...
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...Pollution prevention describes activities that reduce the amount of pollution generated by a process, whether it is consumer consumption, driving, or industrial production. Pollution control is a term used in environmental management. It means the control of emissions and effluents into air, water or soil. Without pollution control, the waste products from consumption, heating agriculture, mining, manufacturing, transportation, and other human activities, whether they accumulate or disperse, will degrade the environment. In the hierarchy of controls, pollution prevention and waste minimization are more desirable than pollution controls. In the field of land development, low impact development is a similar technique for the prevention of urban runoff. Pollutants, the components of pollution, can be either foreign substances/energies or naturally occurring contaminants. Pollution is often classed as point source or nonpoint source pollution. Air pollution, light pollution, noise pollution, soil contamination, radioactive contamination, thermal pollution, and visual pollution and water pollution. Pollution has been found to be widely in the environment. Research indicates that living in areas of high pollution has serious long term health effects. Living in these areas during childhood and adolescence can lead to diminished mental capacity and an increased risk of brain damage. People of all ages who live in high pollution areas for extended periods place themselves at increased...
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