Concept International Domestic
Culture, history and institutions Each foreign country is unique and not always understood by MNE management
Each country has a known base case
Corporate governance Foreign countries’ regulations and institutional practices are all uniquely different
Regulations and institutions are well known
Foreign exchange risk MNEs face foreign exchange risks due to their subsidiaries, as well as import/export and foreign competitors
Foreign exchange risks from import/export and foreign competition (no subsidiaires)
Political risk MNEs face political risk because of their foreign subsidiaries and high profile
Negligible political risks
Modification of domestic finance theories MNEs must modify finance theories like capital budgeting and the cost of capital because of foreign complexities
Traditional financial theory applies
Modification of domestic financial instruments
MNEs utilize modified financial instruments such as options, forwards, swaps, and letters of credit
Limited use of financial instruments and derivatives because of few foreign exchange and political risks
What Is Different About International Financial Management?
12 CHAPTER 1 Current Multinational Challenges and the Global Economy
capital budgeting, working capital management, taxation, and credit analysis needs to be modified to accommodate foreign complexities. Moreover, a number of financial instruments that are used in domestic financial management have been modified for use in international financial management. Examples are foreign currency options and futures, interest rate and currency swaps, and letters of credit.
The main theme of this book is to analyze how an MNE’s financial management evolves as it pursues global strategic opportunities and new constraints emerge. In this chapter, we will take a brief look at the challenges and risks associated with Trident Corporation (Trident), a company evolving from domestic in scope to being truly multinational. The discussion will include the constraints that a company will face in terms of managerial goals and governance as it becomes increasingly involved in multinational operations. But first we need to clarify the unique value proposition and advantages that the MNE was created to exploit. And as noted by Global Finance in Practice 1.2, the objectives and responsibilities of the modern multinational have grown significantly more complex in the twenty-first century.
Market Imperfections: A Rationale for the Existence of the Multinational Firm MNEs strive to take advantage of imperfections in national markets for products, factors of production, and financial assets. Imperfections in the market for products translate into market opportunities for MNEs. Large international firms are better able to exploit such competitive factors as economies of scale, managerial and technological expertise, product differentiation, and financial strength than are their local competitors. In fact, MNEs thrive best in markets characterized by international oligopolistic competition, where these factors are particularly critical. In addition, once MNEs have established a physical presence abroad, they are in a better position than purely domestic firms to identify and implement market opportunities through their own internal information network.