Goal of the MNC

- Maximize SHAREHOLDER wealth (quantified by stock price and dividends)

- Financial managers throughout the MNC have a single goal of maximizing the
value of the the entire MNC (global firm)

Foreign MNC's
- Try to maximize STAKEHOLDER wealth
- Stakeholder: shareholders AND employees, customers, suppliers, and society
- Hard to quantify

Agency Problem
When a corporation's shareholders differ from its managers, a conflict of goals can
exist
(does not exist in sole proprietorship or partnerships)
- Compensation is based on earnings

Agency Costs for MNCs

- Difficulty in monitoring distant managers
- Different cultures of foreign managers
- The sheer size of the larger MNCs
- The tendency to downplay short-term effects (could hurt you in the long run)

Conflicts with the MNC Goal

1) Agency Problem
2) Subsidiary managers may be tempted to make decisions that maximize the values
of their respective subsidiaries

Centralized Management System

- Reduces agency costs
- Allows managers of the parent to control foreign subsidiaries and thus reduces the
power of subsidiary managers
- Advantage: less costly
- Disadvantage: the parent's managers may make poor decisions for the subsidiary if
they are less informed than the subsidiary's managers about its setting and financial
characteristics

Decentralized Management System

- Gives more control to those managers who are closer to the subsidiary's operations
and environment
- Advantage: More expertise in that area/culture --> can help customers faster
-Disadvantage: Higher agency costs because subsidiary managers may make
decisions that fail to maximize the value of the entire MNC
- Advances in technology has reduced the need for decentralized management
(internet, Skype, email, etc. make it possible to communicate faster)

Impact of Corporate Control

Various forms of Corporate Control can reduce agency costs:
- stock options
- hostile takeover threat
- investor monitoring ("activist investors")

Constraints of MNC's goal

1. Environmental constraints
- cultural, economic, political
2. Regulatory constraints
3. Ethical Constraints
- corruption
- Investors assigned a higher value to firms that exhibit high corporate governance
and are likely to obey ethical constraints (Nordic countries are least corrupt)

Theories of International Business

1. Theory of Comparative Advantage
2. Imperfect Markets Theory
3. Product Cycle Theory

Theory of Comparative Advantage

Specialization by countries can increase production efficiency (specialize in one
product)
- allows firms to penetrate foreign markets
- ex: Brazil --> coffee

Imperfect Markets Theory

The markets for the various resources used in production are "imperfect"
- like an oligopoly
- high profit margins
- few competitors
- factors of production are somewhat immobile
(perfect market = pure competition)

Product Cycle Theory

As a firm matures, it may recognize additional opportunities outside its home country
- use price-skimming strategy (start with high price in intro, then reduce as you get
more competition)
- ex: VCR
See graph in notes

International Product Life Cycle

1. Firm creates product to accommodate local demand
2. Firm exports product to accommodate foreign demand
3. Firm establishes foreign subsidiary to establish precedence in foreign country and
possibly to reduce costs
4a. Firm differentiates product from competitors and/or expands product line in
foreign country
OR
4b. Firm's foreign business declines as its competitive advantages are eliminated

International Business Methods

1) International Trade
2) Licensing
3) Franchising
4) Joint Venture
5) Acquisitions of existing operations
6) Establishing new foreign subsidiaries
International Trade
involves exporting and/or importing
- least risky

Licensing
Allows a firm to provide its technology in exchange for fees or some other benefits
- It might make more sense to produce the product locally instead of incurring large
transportation costs, so sell the license to produce the product instead
- Risk: product failure because of alteration of practice
- how well do you know your partner?

Franchising
Obligates a firm to provide a specialized sales or service strategy, support
assistance, and possibly an initial investment, in exchange for periodic fees
- Should all be alike
- Ex: McDonald's
- Risk of ruined reputation if partner does not follow instructions

Joint Venture
Firms may also penetrate foreign markets by engaging in joint ownership and
operation with firms that reside in those markets
- Partner is a foreign country
- Advantages:
1. Local knowledge
2. Share the risk

Acquisitions of existing operations

Allows firms to quickly gain control over foreign operations as well as a share of the
foreign market
- ex: Coca-Cola in India acquired Parles

Foreign Direct Investment (FDI)

any method of conducting business that requires a direct investment in foreign
operations

Investment Opportunities
The marginal returns on MNC projects are above those of purely domestic firms
since MNCs have expanded opportunity sets of possible projects from which to
select
- looks beyond domestic economies
Financing Opportunities
MNCs can obtain capital funding at a lower cost due to their larger opportunity set of
funding sources around the world
- can seek out lowest interest rates instead of being stuck with domestic rates
Single European Act of 1987
Free movement of labor, capital, and goods
- act like a single market (28 countries acting like 1)
- kind of like US
MERCOSUR
Brazil, Argentina, Uruguay Paraguay, Venezuela
Exposure to International Risk
International business usually increases an MNCs exposure to:
1. Exchange rate movements
2. Foreign economic risk
- different economic environments
3. Political risk
- different rules of law

Multi-Lateral Trade Agreements

- Want to reduce tariffs on a world wide basis (global basis)
- MFN - treat everyone as the "Most Favored Nation"
- Doha round: Could not reach agreement; need to bring down subsidies
Regional Trade Agreements (Bi-lateral)
Reduce tariffs only within a certain group of countries

Common Agricultural Policy (CAP)

- Helps become self-sufficient in food production
- Europe now has a surplus --> dump into international markets --> drives prices
down --> now African countries cannot produce... need to import

Financial Management
An MNC can control its degree of exposure to exchange rate risks, economic
conditions, and political conditions with its financial management