Multinational Versus Domestic Financial Management

In theory. the concepts and procedures discussed in the first 17 chapters are valid for both domestic and multinational operations. However, six major factors distinguish financial management in firms operating entirely within a single country from firms that operate globally:

1. Different currency denominations. Cash flows in various parts of a multinational 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 the worldwide operations of its subsidiaries. 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 occurred. 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 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 differences also make it difficult for executives trained in one country to operate effectively in another.

3. Language differences. The ability to communicate is critical in all business transactions and here U.S. citizens are often at a disadvantage because we are generally fluent only in English. While European and Japanese business people are usually fluent in several languages including English. Thus they can invade our markets more easily than we can penetrate theirs.

4. Cultural differences. Even within geographic regions that are considered relatively 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 dramatically from one country to the next.

5. Role of governments. Most financial models assume the existence of a competitive 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 barometer of success and 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 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 determined not in the marketplace but by direct negotiation between the host government and the multinational corporation. This is essentially a political process and it must be treated as such. Thus our traditional financial models have to be recast to include political and other noneconomic aspects of the decision.