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Introduction to Financial Management

Introduction to Financial Management. What is a Multinational Corporation?. A firm with investment and/or financial obligations in more than one country Physical plant and equipment in more than one country Customers and receivables in more than one country

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Introduction to Financial Management

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  1. Introduction to Financial Management

  2. What is a Multinational Corporation? • A firm with investment and/or financial obligations in more than one country • Physical plant and equipment in more than one country • Customers and receivables in more than one country • Suppliers and payables in more than one country

  3. Why Do MNC’s Exist? • Easy (and true) answer: To increase the set of opportunities available to the firm. • But this is really part of a bigger question: Why form firms at all? • A question to be dealt with more systematically latter this semester, but the essential answer is that • a) Economic progress requires organization but • b) Organization consumes real resources to overcome certain problems (e.g., communication and motivation) and thus • c) Firms seem to be a very efficient way of dealing with these problems

  4. What special problems might arise when organizing economic activity across national boundaries

  5. Cultural Differences • Language • Religion (e.g., holidays, usury) • Work ethic and habits • Attitudes towards men, women and children • Attitudes towards race and class

  6. Political Differences • Taxation • Labor, environmental and other regulations • Enforcement of property rights • Rules governing importing and exporting • Contract law • Rules governing information, accounting and reporting

  7. Economic Differences • “Natural” (resources and geography) • Political-economy (e.g., market economies v centrally planned) • Currency, banking and finance

  8. International finance and corporate finance are concernced with the same basic things. • Conventional corporate finance begins with the assumption that the objective of the firm is to maximize the value of the firm defined as the present value of cash flows CFt(1+r)-t where CFt = cash flow at time t and r is the discount rate

  9. Globalization of the World Economy: Recent Trends

  10. Emergence of globalized financial markets as a consequence of deregulation and technology • Financial Innovations, such as • Currency futures and options • Multi-currency bonds • Cross-border stock listings • International mutual funds

  11. Economic Integration • Over the past 50 years, international trade increased about twice as fast as world GDP. • There has been a sea change in the attitudes of many of the world’s governments who have abandoned mercantilist views and embraced free trade as the surest route to prosperity for their citizenry.

  12. TradeLiberalization • The General Agreement on Tariffs and Trade (GATT) a multilateral agreement among member countries has reduced many barriers to trade. • The World Trade Organization has the power to enforce the rules of international trade. • The North American Free Trade Agreement (NAFTA) calls for phasing out impediments to trade between Canada, Mexico and the United States over a 15-year period.

  13. Privatization • The selling off state-run enterprises to investors is also known as “Denationalization”. • Often seen in socialist economies in transition to market economies. • By most estimates this increases the efficiency of the enterprise. • Often spurs a tremendous increase in cross-border investment.

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