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Fundamentals of Financial Management 15th Edition

Fundamentals of Financial Management (15th Edition)

Book Edition15th Edition
PublisherCengage Learning
Chapter 19, Section 19-2, SelfTest, Exercise 02
Page 671

Identify and briefly discuss five major factors that complicate financial management in multinational firms.


Different currency denominations: Cash flows and transactions are denominated in different currencies depending upon the region. A multinational must include exchange rates and currency risk in its financial analysis.


Political risk: At any time government can change the constraints on transferring and using of assets, tax rules, and import-export rules. Unstable government and extreme laws can be harsh for business growth. A multinational should consider these things in its financial analysis.


Economic and legal ramifications: Economic and legal systems are different in each country. Depending on the origin of a transaction, varying tax laws can have significant effects on the after-tax consequences of any transaction. Similarly, varying common, corporate, and civil laws complicate the day-to-day operations of any multinational.  Flexibility of multinationals is reduced due to such differences.  


Role of governments: In the US, most financial models assume a free market, where the government sets some basic ground rules and has minimal intervention limited to mostly tax collection. This is not the case everywhere: in most developing and poor countries, governments play crucial roles by establishing companies in the core sectors of economies such as steel, power, banking, etc. The main reason for the government's intervention is to provide jobs and maintain the affordability of basic necessities. This limits the scope of private companies in such countries. 


Language and cultural differences: Business is all about connecting with the customers and the general public. US companies are generally at a disadvantage as they are fluent in only English, whereas Asian and Europian companies are fluent in more than one language, plus English. Also, a marketing and advertising campaign used in one country may not be suitable for another country. A multinational has to take account of the demographics, geography, culture, and heritage of a region before establishing its operations. 

Sample Response

  1. Different currency denominations
  2. Political risk
  3. Economic and legal ramifications
  4. Role of governments
  5. Language and cultural differences
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