What is a multinational corporation?

A corporation that operates in two or more countries.

A multinational corporation is a company engaged in producing and selling goods or services in more than one country. It ordinary consists of a parent company located in home country and at least five or six foreign subsidiaries.

The commonly accepted goal of an MNC is to maximize shareholder wealth. Developing a goal is necessary because all decisions should contribute to its accomplishment.

Difference b/w domestic and multinational financial management

1. Different currency denominations. 2. Economic and legal ramifications. 3. Language differences. 4. Cultural differences. 5. Role of governments.

6. Political risk.

Why do firms expand into other countries?

1. To seek new markets. 2. To seek raw materials.

3. To seek new technology.

4. To seek production efficiency. 5. To avoid political and regulatory hurdles. 6. To diversify.

Constraints Interfering with the MNC's Goal

When financial managers of MNCs attempt to maximize their firm's value, they are confronted with various constraints that can be classified as :

Environmental. Regulatory. Ethical in nature.

Environmental constraints :

Each country enforces its own environmental constraints. Some countries may enforce more of these restrictions on a subsidiary whose parent is based in a different country. Building codes, disposal of production, waste materials, and pollution controls are examples of restrictions that force subsidiaries to incur additional costs. Many European countries have recently imposed rougher antipollution laws as a result of severe pollution problems.

Regulatory constraints : Each country also enforces its own regulatory constraints pertaining to taxes, currency convertibility rules, earnings remittance restrictions, and other regulations that can affect cash flows of a subsidiary established there. Ethical Constraints : There is no consensus standard of business conduct that applies to all countries. A business practice that is perceived unethical in one country may be totally ethical in another.

International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. The systems can grow organically as the collective result of numerous individual agreements between international economic actors spread over several decades. Alternatively, they can arise from a single architectural

Almost from the dawn of history gold has been used as a medium of exchange because of its desirable properties. It is durable, storable, portable , easily recognized, divisible and easily standardized. The gold standard essentially involved a commitment by the participating countries to fix the prices in terms of their domestic currencies in terms of a specified amount of gold.

Bimetallism: Before 1875

Classical Gold Standard: 1875-1914 Interwar Period: 1915-1944

Bretton Woods System: 1945-1972

The Flexible Exchange Rate Regime: 1973Present

A double standard in the sense that both gold and silver were used as money. Some countries were on the gold standard, some on the silver standard, some on both. Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Greshams Law implied that it would be the least valuable metal that would tend to circulate.

During this period in most major countries:

Gold alone was assured of unrestricted coinage There was two-way convertibility between gold and national currencies at a stable ratio. Gold could be freely exported or imported.

The exchange rate between two countrys currencies would be determined by their relative gold contents.

Exchange rates fluctuated as countries widely used predatory depreciations of their currencies as a means of gaining advantage in the world export market. Attempts were made to restore the gold standard, but participants lacked the political will to follow the rules of the game. The result for international trade and investment was profoundly detrimental.

Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire. The purpose was to design a postwar international monetary system. The goal was exchange rate stability without the gold standard. The result was the creation of the IMF and the World Bank.

Under the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U.S. dollar. Each country was responsible for maintaining its exchange rate within 1% of the adopted par value by buying or selling foreign reserves as necessary. The Bretton Woods system was a dollar-based gold exchange standard.

Flexible exchange rates were declared acceptable to the IMF members. Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities.

Gold was abandoned as an international reserve asset.

Non-oil-exporting countries and less-developed

Development banks are specialized financial institutions which perform the twin function of providing medium and long term finance to private entrepreneurs and of performing various promotional roles essential for economic development.

CHARACTERSTICS: Development banks do not accept deposits from public as ordinary banks do. They are unique financial institution that perform the special task of accelerating economic development. Development banks are engaged in promotional services such as underwriting of new shares,

An agent of development.(sectors like industry, agriculture and international trade.) To accelerate the growth of economy. To allocate the resources. To foster rapid Industrialization. To develop entrepreneurial skills. To provide rural development. To provide finance.

Entrepreneurial role : Development banks undertake the role of entrepreneurial gap filling .They perform the task of discovering investment projects, promotion of industrial enterprise, provide technical and managerial assistance undertaking technical and economic research, conducting surveys. Task of Financial Gap filling: Through purchase of debentures, bonds of a company. Credit guarantee. Refinancing.

Underwriting Joint financing Commercial banking business

Need for development banks: Industrialization. Capital requirements. Promotional activities. Aid to small scale units.

The foreign rulers in India do not take much interest in the industrial development of the country. They were interested to take raw materials to England and bring back finished goods to India. The government did not show any interest for setting up institutions needed for industrial financing . The recommendations for setting up industrial financing institutions was made in 1931 by central banking enquiry committee.

1948 the first development bank i.e.. IFCI(INDUSTRIAL FINANCE CORPORATION OF INDIA).IFCI was assigned the role of a gap filler which implied that it was not expected to compete with the existing channels of industrial finance . It was expected to provide medium & long term credit to industrial concerns only when they could not raise sufficient finances . 1951 parliament passes state financial corporation act .Under this act state govt could establish financial corporations for their respective region . At present there are 18 State Financial Corporations (SFCs)in India.

The IFCI AND SFC served only a limited purpose . There was a need for dynamic institutions which could operate as true development agencies . NIDC (National Industrial development Corporation) was established in 1954 with the objective of promoting industries which could not serve the ambitious role assigned to it . 1955 ICICI(Industry Credit Investment Corporation Of India) as a joint stock company. ICICI was supported by govt of India , World Bank, and other foreign institutions.

Another institution RCI Refinance corporation for industry was set up in 1958 by RBI,LIC and commercial banks . The purpose of RCI was to provide refinance to commercial banks and SFCs against term loans granted by them to industrial concerns in private sector.
1964 IDBI Industry development bank of India was set up as an apex institution in the area of Industrial Finance ,RCI was merged with ICICI.

SIDCs State Industrial development corporation were

Other financial institutions were: UTI UNIT TRUST OF INDIA 1964. LIC LIFE INSURANCE CORPORATION OF INDIA 1956. GIC (GENERAL INSURANCE CORPORATION OF INDIA) 1973. EXIM BANK(EXPORT IMPORT BANK) 1982. NAMBARD 1982(NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT) :It is responsible for short term , medium term and long term financing of agriculture and allied activities. The institutions like film finance corporation, handloom finance corporation, housing development finance corporation also provides

FINANCE FUNCTIONS IN A MULTINATIONAL FIRM

Acquisition of Funds. Investment of those funds.

Three major decisions are involved: Financing Dividend Investment

A. B. C. D.

Balance of Payments International Trade Flows International Trade Issues Factors Affecting International Trade Flows E. Correcting a Balance of Trade Deficit F. International Capital Flows G. Agencies That Facilitate International Flows
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1.

Current Account:Is A broader concept it inculdes balance of servicesand balance of unilateral transfers.balance of services exported & imported by a country in a year .Service transactions inculde:transportation,banking,insurance reciepts & paymentsand to the foreign country.Unilateral transactions inculde gifts, donations. 2.Capital and Financial Accounts:It inculdes balances of private direct investment ,private portfolio investment and govt loans to foreign govenments.It basicallly deals with borrowing or lending of the country.
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1. Distribution of U.S. Exports and 2. U.S. Balance of Trade (BOT) Trend.

Imports.

3. Should the U.S. be Concerned about a Huge BOT Deficit?

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2006 Distribution of U.S. Exports and Imports

Insert Exhibit 2.4 from page 28

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1. Events that Increased International Trade issues a. Removal of the Berlin Wall: During second world war berlin was constructed in 1961. To provide a physical barrier between east and west berlin .Removal of berlin war it marked the end of communism in germany. b. Single European Act:Introduced in 1956 aimed at achieving an internal market for instance (harmonisation)plus institutional changes.It was the first major attempt made by members states to amend the arrrangements made in treaty of rome(1957)
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c. NAFTA:(North American Free Trade Agreement). On jannuary 1994 the north american free trade agggrement between united states, canada, mexico entered into force. All remaining duties and quantitative restrictions were eliminated as scheduled on 1st jan 2008.They created the free trade area which now links 40 milllion people producing $17 trillion worth of goods and services . Exports: Us goods exports to NAFTA in 2010.NAFTA countries(canada, mexico)were the two purchasers of US exports in 2010. Imports: NAFTA countries were the second

INCEPTION OF EURO: Euro came into existence in 1st jan 1999 is a monetary unit of European union .It was a non cash monetary unit used to standardize exchange rate conversions .1st jan 2002 Currency notes and coins were released to participating countries. 28th feb 20002 Euro became sole currency of (EU) and indivual national currencies were no longer accepted as legal tender. EU-was establish to help satblize its member economies and asset Europe as a top power.

European union expansion : Process begins with the inner six who founded the European coal and steel community 1952 . EU has grown t0 26 countries with most expansion to Bulgaria & Romania in 2007. A scheduled expansion in 2013 will add croatia to the union.

1. Three Factors Affecting International Portfolio Investment a. Tax Rates (on Interest or Dividends) b. Interest Rate which a country is charging. c .Exchange Rates .

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Causes of deficit: Low exports Increase in demand for imports. Shortage of capital goods. Unfavourable climatic condition which leads to fall in countrys production. Correcting the deficit: Export promotion. Increasing the production of goods. International cooperation: international organisations like IMF, world bank can help correcting the balance of trade deficit.

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J-Curve Effect

J-curve effect : when a country's trade balance initially worsens following a devaluation or depreciation of its currency.

The higher exchange rate will at first correspond to more costly imports and less valuable exports, leading to a bigger initial deficit or a smaller surplus. Due to the competitive, relatively lowpriced exports, however, a country's exports will start to increase. Local consumers will also purchase less of the more expensive imports and focus on local goods. The trade balance eventually improves to better levels compared to before devaluation.

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International capital flows are the financial side of international trade When someone imports a good or service, the buyer (the importer) gives the seller (the exporter) a monetary payment, just as in domestic transactions. If total exports were equal to total imports, these monetary transactions would balance at net zero. people in the country would receive as much in financial flows as they paid out in financial flows. But generally the trade balance is not zero. The most general description of a countrys balance of trade, covering its trade in goods and services, income receipts, and transfers, is called its current account balance. If the country has a surplus or deficit on its current account, there is an offsetting net financial flow consisting of currency, securities, or other real property ownership claims. This net financial flow is called its capital account balance.

Impact of International Capital

Flows

Impact of the international Flow of Funds on U.S. Interest Rates and Business Investment in the United States

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International Capital Flows (quarterly numbers, annualized; in billions of $)

Insert exhibit 2.7 page 39

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1. International Monetary Funds 2. World Bank 3. World Trade Organization

4. 5. 6. 7. International Financial Corporation International Development Association Bank for International Settlements Organization for Economic Cooperation and Development Regional Development Agencies

8.

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