Chapter 1 Introduction

1. 1 Chapter 1 Introduction

2. 2 Topics A. Multinational corporation (MNC) and international financial management B. Why firm do international business C. How firms conduct international business

3. 3 Multinational Corporation (MNC) Firms that engage in some form of international business. import; export; direct foreign investment (DFI) The focus of this course is on the U.S.-based MNC whose parents wholly own any foreign subsidiaries.

4. 4 International Financial Management International financial management is important to both MNC and companies that have no international business. financial Management includes: financial analysis, issue of bond and stock, project evaluation (capital budgeting), etc.

5. 5 Incentive for International Business A. Comparative advantage Japan and U.S. vs. Mexico and China comparative advantage allows firms to penetrate foreign markets and benefit from savings in cost. B. Imperfect Market ---factors of production (such as labor and other resources) are somewhat immobile due to costs of transportation. MNC do direct foreign investment (DFI) in other countries. C. Product Cycle home market becomes mature and need to expand in foreign market and produce locally to reduce cost.

6. 6 Types of International Business International trade Licensing Direct Foreign Investment (DFI) Franchising Joint ventures Acquisitions of existing operations Establishing new subsidiaries

7. 7 DFI Risk

8. 8 The Value of a Firm (MNC) Determined by the present value of its expected future cash flows. Net Present Value (NPV)

9. 9 Example 1 Following the terrorist attack on the United States on September 11, 2001, the valuation of many MNCs decreased by more than 10%. Explain why the expected cash flows of MNCs were reduced, even if they were not directly hit by the terrorist attacks. a decline in travel would affect any MNCs that have business in travel-related industries. The airline, hotel, and tourist-related industries were expected to experience a decline in business. effects on travel-related industries can carry over to other industries, and weaken economies. some MNCs incurred expenses as a result of increasing security to protect their employees.a decline in travel would affect any MNCs that have business in travel-related industries. The airline, hotel, and tourist-related industries were expected to experience a decline in business. effects on travel-related industries can carry over to other industries, and weaken economies. some MNCs incurred expenses as a result of increasing security to protect their employees.

10. 10 Summary The incentive for international business Types of doing international business and associated risk Homework assignment: Q&A: 2,4,7,8,13,14,15,17.