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