Transcript Introduction to Financial Management

Introduction to Financial
Management
What is a Multinational
Corporation?
• A firm with investment and/or financial
obligations in more than one country
– Physical plant and equipment in more than one
country
– Customers and receivables in more than one
country
– Suppliers and payables in more than one
country
Why Do MNC’s Exist?
• Easy (and true) answer: To increase the set of
opportunities available to the firm.
• But this is really part of a bigger question: Why form
firms at all?
• A question to be dealt with more systematically latter this
semester, but the essential answer is that
– a) Economic progress requires organization but
– b) Organization consumes real resources to overcome
certain problems (e.g., communication and motivation)
and thus
– c) Firms seem to be a very efficient way of dealing with
these problems
What special problems might
arise when organizing economic
activity across national
boundaries
Cultural Differences
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Language
Religion (e.g., holidays, usury)
Work ethic and habits
Attitudes towards men, women and children
Attitudes towards race and class
Political Differences
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Taxation
Labor, environmental and other regulations
Enforcement of property rights
Rules governing importing and exporting
Contract law
Rules governing information, accounting
and reporting
Economic Differences
• “Natural” (resources and geography)
• Political-economy (e.g., market economies v
centrally planned)
• Currency, banking and finance
International finance and corporate finance are
concernced with the same basic things.
• Conventional corporate finance begins with the
assumption that the objective of the firm is to maximize the
value of the firm defined as the present value of cash flows
CFt(1+r)-t
where CFt = cash flow at time t and r is the discount rate
Globalization of the World Economy: Recent Trends
Emergence of globalized financial markets as a
consequence of deregulation and technology
• Financial Innovations, such as
– Currency futures and options
– Multi-currency bonds
– Cross-border stock listings
– International mutual funds
Economic Integration
• Over the past 50 years, international trade
increased about twice as fast as world GDP.
• There has been a sea change in the attitudes
of many of the world’s governments who
have abandoned mercantilist views and
embraced free trade as the surest route to
prosperity for their citizenry.
Trade Liberalization
• The General Agreement on Tariffs and Trade (GATT) a
multilateral agreement among member countries has
reduced many barriers to trade.
• The World Trade Organization has the power to enforce
the rules of international trade.
• The North American Free Trade Agreement (NAFTA) calls
for phasing out impediments to trade between Canada,
Mexico and the United States over a 15-year period.
Privatization
• The selling off state-run enterprises to investors is also
known as “Denationalization”.
• Often seen in socialist economies in transition to market
economies.
• By most estimates this increases the efficiency of the
enterprise.
• Often spurs a tremendous increase in cross-border
investment.