Fin management materials / P4AFM-Session15_j08

SESSION 15 – THE ECONOMIC ENVIRONMENT FOR MULTINATIONALS

7EFFECT OF GLOBALIZATION ON THE STRATEGY OF MULTINATIONALS

All of the factors mentioned in the above sections will impact on the strategy of the MNC. The overall principle is to maximise after-tax funds received while minimising risk, this can be done in the following ways;

¾Using international sources of finance suitably hedged against interest rate, currency and political risks.

¾Diversifying type and source of funds.

¾Taking advantage of market imperfections which lead to cheap borrowings in some countries.

¾Taking advantage of government subsidised finance.

¾Using derivative products such as swaps to modify obligations as circumstances change.

¾Using tax havens to reduce the tax burden or to raise funds cheaply.

Key points

The rise of the multinational appears to be unstoppable, particularly with the continuing consolidation in many sectors via M&A’s.

Arguably there is a connected global trend for the removal of trade barriers, with increasing number of countries joining organisations such as the WTO. The banking and financial services sectors are certainly very much global in nature due the falling incidence of exchange controls and technological advances.

Whilst “globalisation” may bring dynamic economic gains it may also be bringing unexpected risks due to the increasing interdependence of economies – financial contagion.

There are also concerns about the huge use of increasingly complex derivatives and Asset-Backed Securities (where banks sell parts of their loan books) to transfer risks until they almost seem to have disappeared. Unfortunately although risk can be transferred it does not disappear – as the US sub-prime mortgage crisis revealed.

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SESSION 15 – THE ECONOMIC ENVIRONMENT FOR MULTINATIONALS

FOCUS

You should now be able to:

¾discuss the international aspects of financial management;

¾discuss elements of the international financial system.

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