1.Different currency denominations.Cash flows in various parts of a multi-
national corporate system will be denominated in different currencies. Hence, an
analysis of exchange rates must be included in all financial analyses.
2.Economic and legal ramifications.Each country has its own unique economic
and legal systems, and these differences can cause significant problems when a
corporation tries to coordinate and control its worldwide operations. For exam-
ple, differences in tax laws among countries can cause a given economic transac-
tion 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 mat-
ters ranging from the simple recording of business transactions to the role played
by the judiciary in resolving conflicts. Such differences can restrict multinational
corporations’ flexibility in deploying resources, and can even make procedures
that are required in one part of the company illegal in another part. These differ-
ences also make it difficult for executives trained in one country to move easily to
another.
3.Language differences.The ability to communicate is critical in all business trans-
actions, and here U.S. citizens are often at a disadvantage because we are generally
fluent only in English, while European and Japanese businesspeople are usually flu-
ent in several languages, including English. Thus, they can penetrate our markets
more easily than we can penetrate theirs.
4.Cultural differences.Even within geographic regions that are considered rela-
tively homogeneous, different countries have unique cultural heritages that shape
values and influence the conduct of business. Multinational corporations find that
matters such as defining the appropriate goals of the firm, attitudes toward risk,
dealings with employees, and the ability to curtail unprofitable operations vary dra-
matically from one country to the next.
5.Role of governments.Most financial models assume the existence of a competi-
tive marketplace in which the terms of trade are determined by the participants.
The government, through its power to establish basic ground rules, is involved in
the process, but its role is minimal. Thus, the market provides the primary barom-
eter of success, and it gives the best clues about what must be done to remain com-
petitive. This view of the process is reasonably correct for the United States and
Western Europe, but it does not accurately describe the situation in most of the
world. Frequently, the terms under which companies compete, the actions that
must be taken or avoided, and the terms of trade on various transactions are deter-
mined not in the marketplace but by direct negotiation between host governments
and multinational corporations. This is essentially a political process, and it must
be treated as such. Thus, our traditional financial models have to be recast to in-
clude political and other noneconomic aspects of the decision.
6.Political risk.A nation is free to place constraints on the transfer of corporate
resources and even to expropriate without compensation assets within their bound-
aries. This is political risk,and it tends to be largely a given rather than a variable
that can be changed by negotiation. Political risk varies from country to country,
and it must be addressed explicitly in any financial analysis. Another aspect of po-
litical risk is terrorism against U.S. firms or executives. For example, U.S. and
Japanese executives have been kidnapped and held for ransom—with some killed to
prove that the kidnappers were serious—in several South American countries.
These six factors complicate financial management, and they increase the risks
faced by multinational firms. However, the prospects for high returns, diversification
benefits, and other factors make it worthwhile for firms to accept these risks and learn
how to manage them.
Multinational versus Domestic Financial Management 549
Multinational Financial Management 543
