Global Financial Management
Domestic versus Multinational Financial Management
Exchange Rate Risk
Purchasing Power Parity
Effect of Inflation
The world as we know it is shrinking due to (1) jet transportation, and (2) electronic satellite communication. The
entire world is now the market for many companies due to demand from third-world and emerging nations.
Chapter 17 highlights the key differences between multinational and domestic corporations and the impact of
these differences on the financial management of multinational business. The text lists six major reasons for why
both U.S. and foreign companies go global: to broaden their markets, to seek raw materials, to seek new
technology, to seek production efficiency, to avoid political and regulatory hurdles, and to diversify.
Within the United States, the way of doing business may be
somewhat different from one state to another, say from Maine to
Louisiana, due to different cultures and politics. However, the
language is the same (somewhat), the monetary system is the
same, and the laws, while different from state to state, are generally
uniform as they relate to commercial transactions. Now, compare
this with an Illinois corporation doing business in France or China.
Our textbook lists, on pages 693-694, the six major factors that
distinguish financial management in firms operating within a single
country from firms that operate globally. These include
1. different currency denominations,
2. economic and legal ramifications,
3. language differences,
4. cultural differences,
5. role of governments, and
6. political risks.
As the book indicates, all six of these factors are important, but for now, we'll focus on different currency
denominations and political risk.
An exchange rate specifies the number of units of a given currency that can be purchased with one unit of
another currency. For example, if the British Pound is worth $1.6648 (direct quotation), then $1.00 is worth 0.6007
British Pound (indirect quotation). Since most nations currently operate under a system of floating exchange rates,