Managers of multinational companies must deal with a wide range of issues that are not
present when a company operates in a single country. In this chapter, we highlight the
key differences between multinational and domestic corporations, and we discuss the
effect these differences have on the financial management of multinational businesses.
Multinational, or Global, Corporations
The term multinational,or global, corporationis used to describe a firm that oper-
ates in an integrated fashion in a number of countries. During the past 20 years, a new
and fundamentally different form of international commercial activity has developed,
and this has greatly increased worldwide economic and political interdependence.
Rather than merely buying resources from and selling goods to foreign nations, multi-
national firms now make direct investments in fully integrated operations, from
extraction of raw materials, through the manufacturing process, to distribution to
consumers throughout the world. Today, multinational corporate networks control a
large and growing share of the world’s technological, marketing, and productive
resources.
Companies, both U.S. and foreign, “go global” for six primary reasons:
1.To broaden their markets.After a company has saturated its home market,
growth opportunities are often better in foreign markets. Thus, such homegrown
firms as Coca-Cola and McDonald’s are aggressively expanding into overseas mar-
kets, and foreign firms such as Sony and Toshiba now dominate the U.S. consumer
electronics market. Also, as products become more complex, and development be-
comes more expensive, it is necessary to sell more units to cover overhead costs, so
larger markets are critical. Thus, movie companies have “gone global” to get the
volume necessary to support pictures such as Lord of the Rings.
2.To seek raw materials.Many U.S. oil companies, such as Exxon Mobil, have ma-
jor subsidiaries around the world to ensure access to the basic resources needed to
sustain the companies’ primary business line.
3.To seek new technology.No single nation holds a commanding advantage in all
technologies, so companies are scouring the globe for leading scientific and design
ideas. For example, Xerox has introduced more than 80 different office copiers in
the United States that were engineered and built by its Japanese joint venture, Fuji
Xerox. Similarly, versions of the superconcentrated detergent that Procter & Gam-
ble first formulated in Japan in response to a rival’s product are now being mar-
keted in Europe and the United States.
4.To seek production efficiency.Companies in high-cost countries are shifting
production to low-cost regions. For example, GE has production and assembly
plants in Mexico, South Korea, and Singapore, and Japanese manufacturers are
shifting some of their production to lower-cost countries in the Pacific Rim. BMW,
in response to high production costs in Germany, has built assembly plants in the
United States. The ability to shift production from country to country has im-
portant implications for labor costs in all countries. For example, when Xerox
threatened to move its copier rebuilding work to Mexico, its union in Rochester
agreed to work rule changes and productivity improvements that kept the operation
in the United States. Some multinational companies make decisions almost daily on
where to shift production. When Dow Chemical saw European demand for a cer-
tain solvent declining, the company scaled back production at a German plant and
shifted its production to another chemical that had previously been imported from
the United States. Relying on complex computer models for making such decisions,
Dow runs its plants at peak capacity and thus keeps capital costs down.
546 CHAPTER 15 Multinational Financial Management
The textbook’s web site
contains an Excel file that
will guide you through the
chapter’s calculations. The
file for this chapter is Ch 15
Tool Kit.xls, and we encour-
age you to open the file and
follow along as you read the
chapter.
540 Multinational Financial Management
