Topic 1
Multinational Financial Management:
Opportunities and Challenges
Reading: Ch.1
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FIN6108
International Financial Management
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At the end of the topic, you should be able to
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 Define the multinational enterprise (MNE)
 Tell the differences between domestic and international financial
management
 Describe the globalization process of an MNE
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The subject nature of International Financial Management:
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 Financial management of multinational enterprises (MNEs) - multinational
financial management.
 MNEs are firms - both for-profit companies and not-for-profit organizations
- that have operations in more than one country and conduct their business
through branches, foreign subsidiaries, or joint ventures with host country
firms.
 International financial management requires managers and leaders all over
the world to identify and navigate the prospective returns and risks of the
global financial marketplace.
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Why Study International Financial Management ?
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We are not only living in an open economy but also in a highly globalized
and integrated world economy:
 Consumption (e.g., Mac computer)
 Production (e.g., Korean-made keyboard)
 Investment (e.g., build a factory in Vietnam)
 As economies are closely connected nowadays, the domestic economy is
easily influenced by foreign events.
 It is important for financial managers to fully understand the international
dimensions of financial management.
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3 Major Dimensions of international financial management
that set apart from domestic financial management :
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(1) foreign exchange risks and political risks
(2) market imperfections
(3) expanded opportunity set as well as threats
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(1) Foreign exchange risks and political risks
 When firms and individuals are involved in cross-border transactions,
they may need foreign currency. So, they are potentially exposed to
foreign exchange risk.
 Major currencies have been fluctuating since 1970s.
 Uncertainties in exchange rate affect consumption, production and
investment activities.
Firms
Individuals
Firms
Individuals
USA ($) China (yuan)
Transactions
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Case 1: P&G News Release, January 27, 2015
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 “The October–December 2014 quarter was a challenging one with unprecedented
currency devaluations,” said Chairman, President and Chief Executive Officer A. G.
Lafley.
 “Virtually every currency in the world devalued versus the U.S. dollar, with the Russian
Ruble leading the way.
 While we continue to make steady progress on the strategic transformation of the
company—which focuses P&G on about a dozen core categories and 70 to 80 brands, on
leading brand growth, on accelerating meaningful product innovation, and increasing
productivity savings—the considerable business portfolio, product innovation, and
productivity progress was not enough to overcome foreign exchange.”
—P&G News Release, January 27, 2015.
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Case 1: P&G News Release, January 27, 2015
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(1) Foreign exchange risks and political risks
 Political risk arises when the “rules of the game” in a sovereign country
changes e.g.,
➢ changes of tax policies,
➢ changes of policies towards foreigners,
➢ changes of government,
➢ trade war (e.g., U.S.-China Trade Relationship),
➢ national security (e.g., US bans sale of Huawei, ZTE tech amid security fears)
Assigned Reading 1: Waldron, K. (2020). HUAWEI AND NATIONAL SECURITY: LESSONS
FOR 6G.
Tax policy
Political structure
Tax policy
Political structure
USA China
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(2) Market Imperfections
 Various barriers (e.g., immigration policies, trade policies, transportation
and transaction costs, information asymmetry, etc.) hindering the
movements of people, goods, services, capital across national boundaries.
 To circumvent the trade barriers imposed by the foreign nations, establish
a production process overseas may be a solution. (e.g., Kia Georgia, USA)
Country
A
Country B
workers
capital OK
goods Yes, but paying tariff
Production
process
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(3) Expanded opportunity set as well as threats
 A larger market for products
 More sources of raw materials
 Reduction in the cost of capital because funds can be raised from more
sources
 More opportunities for investment and diversification
 But ….. also subject to more foreign risks
Country
A
Country B
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International Financial Management:
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 To deal with foreign exchange risk and market imperfections
by employing various tools and instruments available, so as to
maximize benefits from the global arena.
 International financial management is important particular to
managers of Multinational Enterprises (MNEs)
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The Multinational Enterprise (MNE)
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 An MNE, also called multinational corporation (MNC), is a company
engaged in producing and selling goods / services, and has operating
subsidiaries, branches or affiliates located in foreign countries.
 The growth of MNE may be linked to “globalization”.
 “I define globalization as producing where it is most cost-effective, selling where it is
most profitable, and sourcing capital where it is cheapest, without worrying about
national boundaries.”—Narayana Murthy, President and CEO, Infosys.
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Market Imperfections: A Rationale for the Existence of
the Multinational Firm
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 MNEs strive to take advantage of imperfections in national markets for
products, factors of production, and financial assets.
 Imperfections in the market for products can translate into market
opportunities for MNEs.
 Large international firms are better able to exploit such competitive
factors as economies of scale, managerial and technological expertise, product
differentiation, and financial strength than their local competitors.
 In addition, once MNEs have established a physical presence abroad, they
are in a better position than purely domestic firms to identify and
implement market opportunities through their own internal information
network.
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Strategic motives drive the decision to invest abroad and become an MNE:
 Market seekers (to enlarge the market for products, factors, financial
assets, e.g., Tesla in China )
 Raw material seekers (to get access to raw materials like copper, nickel,
oil, forest product, e.g., wood fiber in Brazil)
 Production efficiency seekers (cost minimization: low labor cost in
Vietnam)
 Knowledge seekers (to gain information and experience that is expected
to prove useful elsewhere, e.g., Japanese firms have purchased U.S.
electronics firms for their technology.)
 Political safety seekers (e.g., Hong Kong firms invested heavily in the
United States)
 These motives are not mutually exclusive.
Why Do Firms Go Global?
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Differences between International and Domestic
Financial Management
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The differences between international and domestic financial
management may be summarized under:
 Culture and history differ among countries
 Corporate governance
 Greater levels of foreign exchange and political risks
 Financial theory and applications (e.g., cost of capital, sourcing debt and equity,
capital budgeting, working capital management, taxation, etc.) are modified in
the global versus domestic marketplace
 Specialized and complicated financial instruments (e.g., foreign currency options
and futures, interest rate and currency swaps, etc.) become tools of the trade.
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Differences between International and Domestic Financial Management
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The globalization process of a hypothetical firm:
Ganado Corporation
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Phase 1: Domestic Production
 Ganado started as a family-owned business
 it manufactured and distributed telecommunication devices in US
 received revenue and made payments in US dollar; operated
under US practices & procedures
 Later, it raised additional capital from an IPO and expanded its
production
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Ganado Corporation: Initiation of the Globalization Process
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Ganado Corporation: The globalization process
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Phase 2: Expansion into International Trade
 Then Ganado imported inputs from Mexico and made export sales to
Canada
 It needed to quote prices and accept payment in foreign
currencies, and hence facing foreign exchange risk
 It had to evaluate the credit quality of foreign buyers and sellers (so credit
risk management is required)
 Ganado is subject to foreign business practices and legal systems
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Ganado Corporation: Initiation of the Globalization Process
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Ganado Corporation: The globalization process
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Phase 3: Globalization Phase
 It established sales & service affiliates
 Established manufacturing operations abroad / licensing foreign firms to
produce and service products
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Ganado’s Foreign Direct Investment Sequence
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END