International Financial Management Part I: The International Financial Environment Multinational Financial Management: An Overview Chapter Objectives • To identify the main goal of the multinational corporation (MNC) and 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 are based in the United States and that wholly own their foreign subsidiaries. Conflicts against the MNC Goal • For corporations with shareholders who differ from their managers, a conflict of goals can exist - the agency problem. • Agency costs are normally larger for MNCs than for purely domestic firms. ¤ The sheer size of the MNC. ¤ The scattering of distant subsidiaries. ¤ The culture of foreign managers. ¤ Subsidiary value versus overall MNC value. Impact of Corporate Control • Various forms of corporate control can reduce agency costs. ¤ Stock compensation for board members and executives. ¤ The threat of a hostile takeover. ¤ Monitoring and intervention by large shareholders. Constraints Interfering with the MNC’s Goal • As MNC managers attempt to maximize their firm’s value, they may be confronted with various constraints. ¤ Environmental constraints. Ex. Building code, disposal of waste, pollution control. ¤ Regulatory constraints. Ex. Tax codes, currency convertibility, earnings remittance restriction. ¤ Ethical constraints. Bribery, tax evasion, relax environmental care. Theories of International Business Why are firms motivated to expand their business internationally?  Theory of Comparative Advantage ¤ Specialization by countries can increase production efficiency.  Imperfect Markets Theory ¤ The markets for the various resources used in production are