L1: An Introduction to Multinational Finance
Goals of the Multinational Corporation
Shareholder maximisation is far from the only objective of the MNC. Other stakeholders (suppliers, customers, employees, managers, debt holders, society – anyone with an interest in the company) have interests in the firm which are in conflict with shareholder wealth maximisation.
• Agency costs
Agency costs refer to any loss in value from conflicts of interest between managers and other stakeholders; mainly shareholders.
The presence of agency costs does not mean managers will not act in the best interest of shareholders; just that it is costly to encourage them to do so.
• Differences in corporate governance ( differences in legal framework by which stakeholders exert control over the firm.
• Managing the Costs and Risks of Multinational Operations
Country risk – the risk that the business environment in a host country will unexpectedly change. Two types; political and financial risk.
Political risk – risk that the business environment in a host country will unexpectedly change due to political events. Changes in; taxes, local content law, employment regulations & restrictions on foreign ownership.
Financial risk – unexpected change in the financial or economics environment of the host country. I.e. currency risk/forex risk.
The Opportunities of Multinational Operations
• Multinational Investment Opportunities
Objective is to choose investments from the investment opportunity set, which maximises present value of expected future operating cash flows. Accepting projects with an expected return greater then the required rate of return and rejecting those projects that do not meet this hurdle.
• Global branding
• Marketing flexibility – gear marketing funds towards markets willing to pay higher prices for products
• Advantages of scale and scope – exploit their competitive advantages on a larger scale and across the broader range of markets and products than domestic competitors.
Reducing Operating Costs
• Low-cost inputs – labour and raw materials
• Flexibility in global site selection – greater flexibility than domestic firms in the location and timing of investments
• Flexibility in sourcing and production – can use global production network to increase production in low-cost countries and decrease production in high cost.
• Economies of scale and scope – size results in lower average per-unit production cost. Economies of scope – efficiencies that arise across production lines, such as when joint production results in lower per-unit costs.
• Vertical integration – integrate supply chains from labour and raw material inputs right through to marketing and distribution.
• Multinational Financing Opportunities
Financing policy includes decisions regarding the mix of debt and equity, the maturity structure of debt, the markets in which capital is raised and its currency of denomination, the method of financing domestic and foreign operations & financial risk management.