● Firms can penetrate markets by establishing new operations in foreign countries, this is a massive initial investment, acquiring new as opposed to buying an operation lets the firm control the entire process and tailor a need the way the firm wants exactly, may require smaller investment than buying existing firm.
● Any methods of increasing international business that requires a direct investment in foreign operations is referred to as direct foreign investment, international trade and licensing is usually not included in this, foreign acquisition and establishment of new foreign subsidiaries represent the largest portion of direct foreign investment. ● Valuation model for multi national corporations- Dollar cash flows- The dollar cash flows in period T represent funds received by the firm minus the funds needed to pay expenses or to reinvest in the firm. Cost of capital- The required rate of return (K) in the denominator of the valuation equation, a weighted average of the cost of capital based on all of the firm's projects. ● There is uncertainty surrounding MNC cash flows- Exposure to international economic conditions- If economic conditions in a foreign country weaken, purchase of products decline and MNC sales in that country may be lower than expected, a foreign government may increase taxes or impose barriers on the MNC’S subsidiary. ● If foreign currencies related to the MNC subsidiary weaken against the U.S. dollar, the MNC will receive a lower amount of dollar cash flows than was expected. ● A higher level of uncertainty increases the return on investment required by investors and the MNC’S valuation decreases. ● The main goal of a multinational corporation is to maximize shareholder wealth, when managers are tempted to serve their own interests instead of those of shareholders, an agency problem exists, MNCs tend to experience greater agency problems than do domestic firms. Proper incentives and communication from the parent may help to ensure that subsidiary managers focus on serving the overall MNC. Chapter 2 ● Balance of payments- Summary of transactions between domestic and foreign residents for a specific country over a specified period of time. From one country to the next, ● Current account - Largest account, keeps track of balance of trade, which is exports - imports= X-I, BOT, Factor payments- payments that are made for long term assets, interest/ dividends are all current account transactions, transfer payment- gift, aid, gifts, some grants. Summary of flow of funds due to purchases of goods or services or the provision of income on financial assets, capital account- summary of flow of funds resulting from sale of assets between the one specified country and all other countries over a specified period of time, financial account- refers to special types of investment, including DFI and portfolio investment.
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- International Finance