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Lecture Multinational financial management: Lecture 1 - Dr. Umara Noreen

Lecture 1 - Multinational financial management: an overview. After completing this chapter, students will be able to: To identify the main goal of the multinational corporation (MNC) and potential conflicts with that goal; to describe the key theories that justify international business; and to explain the common methods used to conduct international business. | Multinational Financial Management: An Overview 1 Lecture Chapter Objectives To identify the main goal of the multinational corporation (MNC) and potential conflicts with that goal; To describe the key theories that justify international business; and To explain the common methods used to conduct international business. Goal of the MNC The commonly accepted goal of an MNC is to maximize shareholder wealth. We will focus on MNCs that wholly own their foreign subsidiaries. Financial managers throughout the MNC have a single goal of maximizing the value of the entire MNC. Conflicts with the MNC Goal When a corporation’s shareholders differ from its managers, a conflict of goals can exist—the agency problem. Agency costs are normally larger for MNCs than for purely domestic firms, due to: the difficulty in monitoring distant managers, the different cultures of foreign managers, the sheer size of the larger MNCs, and the tendency to downplay short-term effects. Conflicts with the MNC . | Multinational Financial Management: An Overview 1 Lecture Chapter Objectives To identify the main goal of the multinational corporation (MNC) and potential conflicts with that goal; To describe the key theories that justify international business; and To explain the common methods used to conduct international business. Goal of the MNC The commonly accepted goal of an MNC is to maximize shareholder wealth. We will focus on MNCs that wholly own their foreign subsidiaries. Financial managers throughout the MNC have a single goal of maximizing the value of the entire MNC. Conflicts with the MNC Goal When a corporation’s shareholders differ from its managers, a conflict of goals can exist—the agency problem. Agency costs are normally larger for MNCs than for purely domestic firms, due to: the difficulty in monitoring distant managers, the different cultures of foreign managers, the sheer size of the larger MNCs, and the tendency to downplay short-term effects. Conflicts with the MNC Goal Subsidiary managers may be tempted to make decisions that maximize the values of their respective subsidiaries. Impact of Management Control The magnitude of agency costs can vary with the management style of the MNC. A centralized management style reduces agency costs. However, a decentralized style gives more control to those managers who are closer to the subsidiary’s operations and environment. Centralized Multinational Financial Management for an MNC with two subsidiaries, A and B Financial Managers of Parent Capital Expenditures at A Inventory and Accounts Receivable Management at A Cash Management at A Financing at A Capital Expenditures at B Inventory and Accounts Receivable Management at B Cash Management at B Financing at B Decentralized Multinational Financial Management for an MNC with two subsidiaries, A and B Financial Managers of A Capital Expenditures at A Inventory and Accounts Receivable Management at A Cash Management at A Financing at A Capital Expenditures at B .