International Financial Management

International Financial Management

Part I The International Financial Environment

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Chapter1 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 wholly own their foreign subsidiaries.

* It enables managers to have a single goal of maximizing the value of the entire MNC instead of maximizing the value of ant particular foreign subsidiary.

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 Management Control

* The magnitude of agency costs can vary with the management style of the MNC.

* A centralized management style reduces agency costs. However, a decentralized style gives more control to those managers who are closer to the subsidiary’s operations and environment.

Centralized Multinational Financial Management

for an MNC with two subsidiaries, A and B

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Decentralized Multinational Financial Management

for an MNC with two subsidiaries, A and B

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Impact of Management Control

* Some MNCs attempt to strike a balance - they allow subsidiary managers to make the key decisions for their respective operations, but the decisions are monitored by the parent’s management.

* Electronic networks make it easier for the parent to monitor the actions and performance of foreign subsidiaries.

* For example, corporate intranet...