Chapter 1 - International Financial Management and the Multinational Firm
International Finance is concerned with the multinational firm and
with the international business activities to which a domestic firm faces exposure in its
operations, as well as the reasons why a firm becomes involved in international markets.
Corporate Financial Management principles that were presented in previous courses must
be adapted for the reality that all firms now operate in a truly global market.
1. What is the Multinational Enterprise?
A Multinational Enterprise (MNE) is a business (firm) that has operating
subsidiaries, branches, and affiliates located in foreign countries. MNEs operate in
manufacturing, mining, agriculture, construction, entertainment, travel services,
accounting, consulting, advertising, legal, banking, communications, and virtually every
conceivable "market" or industry.
firm refers to firms with ownership dispersed internationally
such that the firm is managed not from a perspective of a particular country but from a
Corporate finance strategies for the MNE must consider complexities of the
international financial arena, including currency exchange, interest rate differences, and
financing arrangements such as letters of credit.
2. Business Risk for the Multinational Firm
Firms operating across international borders (especially with significant
capital investments in multiple countries) face increased risks and must pay a risk
premium in raising funds to finance these investments.
Foreign Exchange Risk
results from operating in countries with volatile
currencies. As a result of volatile exchange rates, investors will require a higher return for
moving funds from more stable currencies into the country with more volatile currencies.
Advantages of "low costs" can be wiped out if broad currency fluctuations increase those
costs in terms of the stable currencies.
results from operations in countries that are viewed as
relatively less stable politically, or especially in "emerging markets" or developing
countries that may be perceived as politically volatile. Again, investors will require a
premium - or higher return - for moving funds into such a politically unstable
environment. Management must recognize and forecast levels of political risk when
evaluating whether to operate in a particular country. (Suppose, for example, a major
agricultural conglomerate were to consider buying several farms in Zimbabwe to take
advantage of low costs and economies of scale available in that country. How might that
decision differ today from two or three years ago?)
are risks that affect all foreign firms operating in a particular
country and are characterized primarily by risks of