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Ch01 PP - Chapter 1 The International Financial Environment...

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Multinational Corporation (MNC) Foreign Exchange Markets Product Markets Subsidiaries International Financial Markets Dividend Remittance & Financing Exporting & Importing Investing & Financing Chapter 1 The International Financial Environment
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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.
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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.
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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.
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Centralized Multinational Financial Management for an MNC with two subsidiaries, A and B Financial Managers of Parent Capital Expenditures at A Inventory and Accounts Receivable Management at A Cash Management at A Financing at A Capital Expenditures at B Inventory and Accounts Receivable Management at B Cash Management at B Financing at B
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Decentralized Multinational Financial Management for an MNC with two subsidiaries, A and B Financial Managers of A Capital Expenditures at A Inventory and Accounts Receivable Management at A Cash Management at A Financing at A Capital Expenditures at B Inventory and Accounts Receivable Management at B Cash Management at B Financing at B Financial Managers of 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.
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Impact of Management Control Electronic networks make it easier for the parent to monitor the actions and performance of foreign subsidiaries.
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