DESIGNING A GLOBAL FINANCING

STRATEGY
 INTRODUCTION

• In selecting an appropriate strategy for

financing its worldwide operations, the
multinational corporation (MNC) must
consider the availability of different sources of
funds and the relative cost and effects of
these sources on the firm's operating risks.
Some of the key variables in the evaluation include
• the firm's capital structure (debt-equity mix)
• taxes,
• exchange risk,
• diversification of fund sources,
• the freedom to move funds across borders, and
• a variety of government credit and
• capital controls and subsidies
The eventual funding strategy selected must
reconcile a variety of potentially conflicting
objectives, such as
• minimizing expected financing costs,
• reducing economic exposure,
• providing protection from currency controls
and other forms of political risk, and
• ensuring availability of funds in times of right
credit.
The choice of trade-offs to be made in establishing
a worldwide financial policy requires an explicit
analytical framework. We separate the financing
of international operations into three largely
separable objectives.
• A) Minimize Expected After - Tax Financing Costs
• B) Arrange Financing to Reduce the Riskiness of
Operating Cash Flows
• C) Achieve on Appropriate Worldwide Financial
Structure.
• Sharp-eyed firms are always on the lookout for
financing choices that are ''bargains'' that is,
financing options priced at below-market rates.

• Raising funds at a below-market rate is easier said

than done, however. A company selling securities
is competing for funds on a global basis, not only
with other firms in its industry but with all firms,
foreign and domestic, and with numerous
government units and private individuals as well
 A) Minimize Expected After - Tax
Financing Costs
• Taxes
The asymmetrical tax treatment of various
components of financial cost-such as dividend
payments versus interest expenses and
exchange losses versus exchange gains often
means that equality of before-tax costs will
lead to inequality in after-tax costs by
judicious selection of securities.Yet, everything
is not always what it seems.
 A) Minimize Expected After - Tax
Financing Costs

• Debt versus Equity Financing.

Interest payments on debt extended by either
the parent or a financial institution generally
are tax-deductible by an affiliate, but
dividends are not.
 A) Minimize Expected After - Tax
Financing Costs
Government Credit and Capital Controls
Governments intervene in their financial
markets for a number of reasons:
• to restrain the growth of lendable funds,
• to make certain types of borrowing more or
less expensive, and
• to direct funds to certain favored economic
activities
 A) Minimize Expected After - Tax
Financing Costs
• Government Subsidies and Incentives
Many government offers a growing list of incentives to
MNCs to influence their production and export
sourcing decisions. Direct investment incentives
include
• interest rate subsidies,
• loans with long maturities,
• official repatriation guarantees,
• grants related to project size,
• favorable prices for land, and
• favorable terms for the building of plants.
 A) Minimize Expected After - Tax
Financing Costs
• Export financing Strategy
• The key to this export financing strategy is to
view the foreign countries in which the MNC
has plants not only as markets, but also as
potential sources of financing for exports to
third countries.
 A) Minimize Expected After - Tax
Financing Costs
• Import Financing Strategy.
Firms engaged in projects that have sized
import requirements may be able to finance
these purchases on attractive terms. A
number of countries, including the United
States, make credit available to foreign
purchasers at low (below-market) interest
rates and with long repayment periods
 A) Minimize Expected After - Tax
Financing Costs
• Financial Innovation
The dizzying pace of securities innovation in
recent years has created an overwhelming
abundance of financing alternatives
 B). REDUCING OPERATING RISKS

• After taking advantage of the opportunities

available to it to lower its risk-adjusted
financing costs, the firm should then arrange
its additional financing in such a way that the
risk exposures of the company are kept at
manageable levels.
 B). REDUCING OPERATING RISKS
The risks and their relationship to financing
arrangements that we examine here arise
from four sources:
• currency fluctuations,
• political instability,
• sales uncertainty, and
• changing access to funds.
 B). REDUCING OPERATING RISKS
• Exchange Risk
If financing opportunities in various currencies
are fairly priced, firms can structure their
liabilities so as to reduce their exposure to
foreign exchange risk at no added cost to
shareholders.
 B). REDUCING OPERATING RISKS
• The use of financing to reduce political risks
typically involves mechanisms to avoid or at
least reduce the impact of certain risks, such
as those of exchange controls.
• Strategies include investing parent funds as
debt rather than equity,
• arranging back-to-back and parallel loans, and
• using local financing to the maximum extent
possible.
 B). REDUCING OPERATING RISKS
• Product Market Risk
Some firms sell their project's or plant's
expected output in advance to their
customers on the basis of mutual advantage.
The purchaser benefits from these so-called
''take-or-pay'' contracts by having a stable
source of supply, usually at a discount from
the market price
 B). REDUCING OPERATING RISKS
• Secure Access to Funds
A multinational firm's operational flexibility is
dependent in part on its ability to secure
continual access to funds at a reasonable cost
and without onerous restrictions
 B). REDUCING OPERATING RISKS
• Diversification of Fund Sources.
A key element of any MNC's global financial
strategy should be to gain access to a broad
range of fund sources to lessen its
dependence on any one financial market
 C). ESTABLISHING A WORLD WIDE
CAPITAL STRLUCTURE
• Foreign Subsidiary Capital Structure
Once a decision has been made regarding the
appropriate mix of debt and equity for the
entire corporation, questions about individual
operations can be raised. How should MNCs
arrange the capital structures of their foreign
affiliates? And what factors are relevant in
making this decision?
 C). ESTABLISHING A WORLD WIDE
CAPITAL STRLUCTURE
• Cost Minimizing Approach to Global Capital
Structure.

• The cost-minimizing approach to determining

foreign affiliate capital structures would be to
allow subsidiaries with access to low-cost capital
markets to exceed the parent company
capitalization norm, while subsidiaries in higher-
capital-cost nations would have lower target debt
ratios
• Joint Ventures
Because many MNCs participate in joint
ventures, either by choice or necessity,
establishing an appropriate financing mix for
this form of investment is an important
consideration