CHAPTER 17 Multinational Financial Management
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 high-
light the key di! erences between multinational and domestic corporations and we
discuss the impact these di! erences have on the " nancial management of multina-
tional businesses. By the time you complete this chapter, you should be able to:
- Identify the primary reasons companies choose to go “global.”
- Explain how exchange rates work and interpret di! erent exchange rate quotations.
- Discuss the intuition behind interest rate parity and purchasing power parity.
- Explain the di! erent opportunities and risks that investors face when they invest
overseas.- Identify some speci" c challenges that a multinational corporation faces and dis-
cuss how they in# uence its capital budgeting, capital structure, and working capi-
tal policies.17-1 MULTINATIONAL OR GLOBAL CORPORATIONS
The term multinational, or global, corporation describes a! rm that operates 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
that has greatly increased worldwide economic and political interdependence.
Rather than merely buy resources from and sell goods to foreign nations, multina-
tional! rms now make direct investments in fully integrated operations—from
extraction of raw materials through the manufacturing process and! nally to the
distribution of products 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 seven primary reasons:
- To seek production ef! ciency. As competition increases in their domestic market-
place and as demand increases in other markets, companies often conclude
that they must produce their products overseas. Companies based in high-cost
countries have strong incentives to shift production to lower-cost regions,
assuming an adequate supply of labor with the requisite skills and an ade-
quate transportation infrastructure. For example, GE has production and
Multinational, or
Global, Corporation
A firm that operates in an
integrated fashion in a
number of countries.Multinational, or
Global, Corporation
A firm that operates in an
integrated fashion in a
number of countries.Honda are all waging campaigns to be identified as Ameri-
can companies that employ Americans, transfer technology
to America, and help the U.S. trade balance.
The emergence of “world companies” raises a host of
questions for governments. For example, should domestic
firms be favored, or does it make no difference what a com-
pany’s nationality is as long as the firm provides domestic
jobs? Should a company make an effort to keep jobs in its
home country, or should it produce where total production
costs are lowest? What nation controls the technology
developed by a multinational corporation, particularly when
the technology can be used in military applications? Must a
multinational company adhere to rules imposed in its home
country with respect to its operations outside the home
country? And if a U.S. firm such as Xerox produces copiers in
Japan and then ships them to the United States, should
they be reflected in the trade deficit in the same way as
Toshiba copiers imported from Japan? Keep those ques-
tions in mind as you read this chapter. When you finish, you
should have a better appreciation of the problems that
governments face and the difficult but profitable opportu-
nities that managers of multinational companies face.P U T T I N G T H I N G S I N P E R S P E C T I V E