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International Financial Management
Notes
4 LOVELY PROFESSIONAL UNIVERSITY
1.2 Objective of the MNCs
An objective is necessary so that all decisions of the organisation contribute towards the fulfillment
of this purpose. The usually accepted objective of an MNC is to maximise shareholders wealth.
This is the objective which a domestic firm also accepts and tries to fulfil. In the context of a
MNC, the objective of maximising shareholders’ wealth must be analysed in a much wider
context, with a much wider range of opportunities, taking into account the worldwide market
share. This makes the MNCs task much more complex than that of the domestic firms.
If the managers of MNCs are to achieve their objective of maximising the value of their firms or
the rate of return from foreign operations, they have to understand the environment in which
they function. The environment consists of:
1. The international financial system which consists of two segments: the official part
represented by the accepted code of behaviour by governments comprising the
International Monetary System and the private part which consists of international banks
and other multinational financial institutions that participate in the international money
and capital markets.
2. The foreign exchange market which consists of international banking, foreign exchange
dealers and 24 hour trading at organised exchanges around the world where currency
future options and derivatives are regularly traded.
3. The host country’s environment which consists of such aspects as the political and
socio-economic systems and people’s cultural values and aspirations. Understanding of
the host country’s environment is crucial for successful operation and assessment of the
political risk.
Further, the manager of a MNC must take into account the fact that the presence of his firm in a
number of countries presents challenges as well as opportunities. The basic challenges are the
multiplicity of currency and the associated unique risks a manager of a MNC has to face. Another
important challenge is the multiplicity and complexity of the taxation system which has an
impact on the MNC’s operations and profitability. But the manager can use the taxation tool to
reduce the firm’s overall tax burden through transfer of funds from high to low tax affiliates and
by using tax havens.
In addition, due to the multiplicity of sources of funds, the finance manager has to worry about
the foreign exchange and political risk in positioning funds and in modifying cash resources.
The MNC can reduce its cost of capital and, at the same time, maximise the return on its excess
cash resources by taking advantage of the fact that financial resources have been raised from
different capital markets.
Did u know?
A well diversified MNC can actually reduce risks and fluctuations in earnings and
cash flows by making the diversity in geography and currency work in its favour.
A successful manager of an MNC will take into account the various challenges of
operating his firm in a number of countries so that he can make the diversity and
complexity of the environment work for the total benefit of the firm.
1.2.1 Agency Problem
Financial executives in multinational corporations many times have to make decisions that
conflict with the objective of maximising shareholders wealth. It has been observed that as