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Multinational FinanceRadboud University
Dr. Sven Nolte & Dr. Anita Kopányi-Peuker 2022
Email subject: MF22
Exam: 3 hours, mpc + open questions, via sowiso, similar to the assignments
1
,Part I International Financial Environment
CHAPTER 1 Multinational Financial Management: Overview
Main goals and potential conflicts of MNCs. What is agency cost about? Key theories to justify
international business. Methods to conduct international business.
Multinational Corporation (MNC) = A corporation with facilities and other assets in at least one
country other than its home country. MNCs need to communicate & present a portfolio to the
whole world.
Ex: Volkswagen (global marketing mix: different prices, brands etc), Anheuser-Busch, Nike, Boeing
▪ Blockholder system: fewer, larger stakeholders in companies with corporate governance laws
that seek to protect creditors and employees (Continental Europe).
▪ Market-based approach: more dispersed ownership and much greater emphasis on
shareholders’ rights (UK, US).
MNCs have a lot of influence in the economy: Conglomerates (Unilever, P&G)
International Consolidation: a few major leaders in the industry because they took over a lot
of competitors in the market (ex. media in US, car industry, cosmetics)
➔ Consolidation leads to MNCs becoming bigger & more complex (in money flows)
World has changed: Money (and power) is shifting from countries to companies. Some
countries such as NL are smaller in terms of revenue compared to companies (Walmart,
Amazon, Tesla), they have not enough leverage when these companies enter the domestic
market. This results in implications for market power, law suits etc.
➔ Ethical considerations are becoming more relevant due to these developments: code
of conduct
Negative aspects of MNCs Positive aspects
• Decapitalization of countries (power moves towards companies • Provide investments
iso countries) • Provide jobs
• Create income inequality (owners & shareholders of MNCs • Development of Infrastructure
become richer) • Transfer of technology
• Exploit poor workers/ countries (MNCs have more power; better • Access among countries
tax deals) (exchange)
• Shift responsibilities to others (legally)
• Dependency of countries
• Reduce domestic market shares (market shares of domestic
companies get reduced while the shares of conglomerates rise)
Foreign exchange markets
& exchange rates are
essential to everything that
happens internationally.
Financial manager’s goal:
Maximize the shareholder
wealth (value of the entire
MNC; max share price);
joint maximization of all the
subsidiaries
Constraints interfering with
the MNC’s goal:
▪ Environmental constraints: local environmental laws create additional costs and might
give reasons to locate elsewhere. (pollution controls, building codes)
▪ Regulatory constraints: affect cash flows. (employee rights, tax law)
▪ Ethical constraints: different norms and values. (working standards, bribes)
2
,Corporate Governance: System by which a company is directed and controlled
⁻ Do managers act in the best interest of shareholders?
→ Agency Problem: Conflict of goals between agents & principals; managers & shareholders;
the incentives are not aligned due to self-interest & asymmetric information.
Agency relationship exists whenever someone (the principal) contracts with someone else
(the agent) to take actions on behalf of the principal and represent the principal’s interests.
To assure that managers maximize the shareholder wealth, there are costs to monitor.
Managers’ incentives not in line with MNC value maximization?
▪ Direct costs: Monitoring, Compensation
▪ Indirect costs
o Free Cash Flow Hypothesis: the more free cash flow managers have, the more
unnecessary decisions they make
o Managers decide in favor of other stakeholders (relatives)
▪ Corporate control
o Compensation schemes aligned with shareholder interest: to partially
compensate the board members and executives.
o Hostile takeover threat: due to inefficient management; shareholders will sell the
shares of companies they believe to be badly run. It’s a threat to assure that managers
make better decisions.
o Investor monitoring: MNC whose decisions appear inconsistent with maximizing
shareholder wealth will be subjected to shareholder activism.
These costs are larger for MNCs compared to domestic companies because:
▪ Monitoring distant managers: MNCs with subsidiaries scattered around the world may
experience larger agency problems because monitoring managers of distant subsidiaries in
foreign countries is more difficult.
▪ Culture: Foreign subsidiary managers raised in different cultures may treat the goals of its
MNC in a different way from that intended by the senior management.
▪ Complexity of operation and communication: The sheer size of the larger MNCs can create
communication problems. The complexity of operations may result in decisions for foreign
subsidiaries of the MNCs that are inconsistent with maximizing shareholder wealth.
Do local managers maximize value of MNC or rather value of subsidiary?
Reduction of agency cost via management control? Decentralized vs. centralized
Impact of management control:
▪ Centralized management style: can reduce agency costs because it allows managers
of the parent direct control of foreign subsidiaries and therefore reduces the power of
subsidiary managers. (Apple – Steve Jobs, Tesla)
▪ Decentralized management style: results in higher agency costs because subsidiary
managers may make decisions that do not focus on maximizing the value of the entire
MNC. (franchises)
▪ Trade off (combination): allow subsidiaries to make the key decisions, but the parent
management monitors these decisions to ensure the interests of the entire MNC.
Negative aspects of Decentralization Positive aspects of Decentralization
• Less control • Subunit related knowledge and experience
• Focus on subunit: Suboptimal • Higher management can focus on the big
decisions picture
• Fragmented subunits • Efficient decision due to short chain of
• Higher costs command
• Inefficiencies due to duplication of • Cultural skills
activities • Local network
3
, Theories of international business: Why engage in international business?
Economic theories: Does international business increase / decrease a nation’s wealth?
▪ Theory of absolute & comparative advantage: countries should produce the good in
which they have a comparative advantage because this is more efficient and cheaper.
That way, the total amount of produces goods will be higher and hence, each country
is better off with trade. (ex. separate parts of Boeing)
Absolute advantage Comparative advantage
In the production of a product when it uses In the production of a good when that good
fewer resources to produce that product than can be produced at a lower cost in terms of
another country other goods
▪ Imperfect markets theory: to see differences in countries
o Unrestricted mobility of production factors: costs and returns would be
equalized and there wouldn’t be comparative advantages; Freely transferable,
Removes comparative advantage
o Restricted mobility of production factors: needed to make comparative
advantage available; Labor, machinery, patents, property rights, resources;
Tariffs, Quotas, Tax
Business theories: Why are firms motivated to expand their business internationally?
▪ Product cycle theory: looks at how one single product from a company behaves over
the lifetime. As a firm matures, it may recognize additional opportunities outside its
home country. It may be cheaper to expand the cycle by moving to a foreign country
than reinventing for the domestic market. Scalability! The company creates a product that
meets the local demands, then exports the product to meet local demands. Finally, when the
market stabilizes, production will be located internationally to exploit costs savings.
▪ Global strategies: large investments can only be recouped if demand is sufficiently
large (larger than the domestic consumer base).
International Business methods:
▪ International trade: export & import. There is limited risk because there’s no big
investment.
▪ Licensing: provide technology to foreign countries by selling the right to produce their
good (selling copyrights, patents, trademarks, etc) and earn fees (royalties); buyer
uses the technology without big investments or transport costs.
▪ Franchising: provide specialized sales / service strategy, support assistance and
(possibly) initial investment in exchange for periodic payments. Earn fees.
▪ Joint ventures: Joint ownership & operation with foreign company; venture is owned
by two/ more firms. (China: requirement that partner is a government owned company)
▪ Acquisitions: Quickly gain (full) control over: Foreign operations and infrastructure &
Foreign market share. Easy way to grow, but risks that you paid too much.
▪ Foreign subsidiaries: new operations in foreign countries to produce and sell their
products. Requires a big investment. → Network of corporate connections is growing
4
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