Chapter 17 Multinational Financial Management 539- Economic and legal rami! cations. Each country has its own unique economic and
legal systems, and these differences can cause signi! cant problems when a
corporation tries to coordinate and control its worldwide operations. For
example, differences in tax laws among countries can cause a given economic
transaction to have strikingly different after-tax consequences depending on
where the transaction occurs. Similarly, differences in legal systems of host
nations, such as the Common Law of Great Britain versus the French Civil
Law, complicate matters ranging from the simple recording of business trans-
actions to the role the judiciary plays in resolving con" icts. Such differences
can restrict multinational corporations’ " exibility in deploying resources and
make procedures that are required in one part of the company illegal in others.
These differences also make it dif! cult for executives trained in one country to
move easily to another. - Role of governments. Most! nancial models developed in the United States
assume the existence of a competitive marketplace in which the participants
determine the terms of trade. The government, through its power to establish
basic ground rules, is involved in the process; but other than taxes, its role is
minimal. Thus, the market provides the primary barometer of success, and it
gives the best clues about what must be done to remain competitive. This view
of the process is reasonably correct for the United States and Western Europe,
but it does not accurately describe the situation in the rest of the world.
Although market imperfections can complicate the decision process, they can
also be valuable to the extent that they can be overcome by one! rm but still
serve as barriers to entry by competitors. Frequently, the terms under which
companies compete, the actions that must be taken or avoided, and the terms
of trade on various transactions are determined not in the marketplace, but by
direct negotiation between host governments and multinational enterprises.
This is essentially a political process, and it must be treated as such. Thus, tra-
ditional! nancial models have to be recast to include political and other non-
economic aspects of the decision. - Language and cultural differences. The ability to communicate is critical in all
business transactions. In this regard, U.S. citizens are often at a disadvantage
because they generally are " uent only in English. On the other hand, Euro-
pean and Japanese businesspeople are usually " uent in several languages,
including English. At the same time, even within geographic regions that are
considered relatively homogenous, different countries have unique cultural
heritages that shape values and in" uence the conduct of business. Multina-
tional corporations! nd that matters such as de! ning the appropriate goals of
the! rm and attitudes toward risk, performance evaluation and compensation
systems, interactions with employees, and the ability to curtail unpro! table
operations vary dramatically from one country to the next.
Those! ve factors complicate! nancial management and increase the risks that
multinational! rms face. However, the prospects for high returns and other factors
make it worthwhile for! rms to accept these risks and learn how to manage them.
SELF^ TEST Identify and brie! y discuss " ve major factors that complicate " nancial man-
agement in multinational " rms.