FINANCIAL MANAGEMENT OF A MULTINATIONAL CORPORATION (MNC)
There are significant differences between international and domestic financial management. They include:
Multiple-currency problem. Sales revenues may be collected in one currency, assets denominated in another, and profits measured in a third.
Various legal, institutional, and economic constraints. There are variations in such things as tax laws, labor practices, balance of payment policies, and government controls with respect to the types and sizes of investments, types and amount of capital raised, and repatriation of profits. Repatriation is conversion of funds held in a foreign country into another currency and remittance of these funds to another nation.
Internal control problem. When the parent office of a MNC and its affiliates are widely located, internal organizational difficulties arise.
Popular Financial Goals of MNCs
A survey made of controllers of MNCs lists the financial goals of MNCs in the following order of importance:
Maximize growth in corporate earnings, whether total earnings, earnings before interest and taxes (EBIT), or earnings per share (EPS).
Maximize return on equity.
Guarantee that funds are always available when needed.
The Types of Foreign Operations
When strong competition exists in the U.S., a company may look to enter or expand its foreign base. However, if a company is unsuccessful in the domestic market, it is likely to have problems overseas as well. Further, the controller must be cognizant of local customs and risks in the international markets.
A large, well-established company with much international experience may eventually have wholly-owned subsidiaries. However, a small company with limited foreign experience operating in "risky areas" may be restricted to export and import activities.
If the company`s sales force has minimal experience in export sales, it is advisable to use foreign brokers when specialized knowledge of foreign markets is needed. When sufficient volume exists, the company may establish a foreign branch sales office including sales people and technical service staff. As the operation matures, production facilities may be located in the foreign market. However, some foreign countries require licensing before foreign sales and production can take place. In this case, a foreign licensee sells and produces the product. A problem with this is that confidential information and knowledge are passed on to the licensees who can then become a competitor at the expiration of the agreement.
A joint venture with a foreign company is another way to proceed internationally and share the risk. Some foreign governments require this to be the path to follow to operate in their countries. The foreign company may have local goodwill to assure success. A drawback is less control over activities and a conflict of interest.
In evaluating the impact that foreign operations have on the entity`s financial health, the controller should consider the extent of intercountry transactions, foreign restrictions and laws, tax structure of the foreign country, and the economic and political stability of the country. If a subsidiary is operating in a high tax country with a double-tax agreement, dividend payments are not subject to further U.S. taxes. One way to transfer income from high tax areas to low tax areas is to levy royalties or management fees on the subsidiaries.