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International Finance Lecture Notes 1-14

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International Finance Lecture Notes 1-14
Lecture 1 – Multinational Financial Management: An Overview

Review goals of multinational corporations (MNCs) and conflicts with those goals.

Describe the key theories that justify international business.

To explain the common methods used to conduct international business.

Multinational Corporations

Goal of the MNC – maximize shareholder wealth

Conflicts against this goal

Agency problems – managers act in their own interest to the detriment of the shareholders.

Expansion

Unnecessary perks

Fear of job loss

Philosophy of foreign managers

Subsidiary vs. parent performance

Multinational Corporations

Goal of the MNC – (continued)

Conflicts against this goal

Agency costs – costs incurred as a result of an agency problem. Typically higher for MNCs.

Wealth lost

Monitoring costs

Multinational Corporations

Constraints against shareholder wealth – shareholder wealth is being maximized subject to limiting factors.

Environmental constraints – each country has a different set of environmental rules.

Regulatory constraints – each country has its own set of taxes, currency convertibility rules, and other regulations.

Ethical constraints – ethical practices vary across countries.

International Business Theories

Comparative Advantage Theory – Country specialization can increase overall production efficiency.

Imperfect Markets Theory – factors of production are immobile

Product Cycle Theory – firms become established in their home country and expand overseas when a product matures.

Increasing Globalization, the rise of the MNC, and U.S. Dominance

Evidence

International trade has grown

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