Chapter 1 Notes from online

Chapter 1 Notes from online - Chapter 1 Multinational...

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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 0. Maximize shareholder wealth 0. 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 1. 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 1. Theory of Comparative Advantage 2. countries specialize in the production of goods they can produce with relative efficiency and trade for other products 2. Imperfect Markets Theory 3. factors of production (labor and other resources) are immobile. 0. Firms can capitalize on imperfect markets by exploiting foreign opportunities. 3. Product Cycle Theory 4. firm introduces product in home market, then exports it, then establishes a subsidiary, then differentiates the product (see Exhibit 1.3 on p. 10) 1
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2 Chapter 1 International Business Methods 4. International Trade 5. export and import 6. low risk 7. Internet facilitates advertising and sales 5. Licensing 8. obligates firm to provide its technology in exchange for fees or other benefits (e.g., AT&T and Nynex Corp had licensing to build and operate India’s telephone system) 9. no major investment required 10. difficult to ensure quality control 11. Internet facilitates brand name advertising 6. Franchising 12. obligates firm to provide a specialized sales or service strategy, support assistance and possibly an initial investment in exchange for periodic fees 7. Joint Ventures 13. a venture that is jointly owned and operated by two or more firms 14. allow firms to apply comparative advantage (e.g., General Mills and Nestle) 8. Acquisitions of Existing Operations 15. acquire a firm in a foreign country to penetrate foreign markets 16. advantage: full control over foreign business 17. disadvantage: risky because of large investment and uncertainty 18. some firms make partial acquisitions, but these do not allow full control
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This note was uploaded on 03/08/2011 for the course FIN 404 taught by Professor Tyberg during the Spring '11 term at USC.

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Chapter 1 Notes from online - Chapter 1 Multinational...

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