Chapter 1 Flashcards
goal of financial management
maximise current value of SH of the existing stock
AGENCY PROBLEM
Managing MNC
- M are expected to make decisions that will max. the stock price
- MNC whose parents fully own foreign subsidiaries
- Finance decisions are influenced by other business disciplines functions (marketing, management, A&IT systems)
Management Structure
Centralised
allows managers of the parent to control subsidiaries
recudes the power of subsidiary managers
but might not have same info. as subsidiary managers it-selves
Management Structure
Decentralised
gives more control to S.M
who are closer to the subsidiary´s operations &environment
but risk - agency problem
and Agency cost
Theory of Comparative Advantage
specialisation increases production efficiency
suggestion –> each country that should use its C.A to specialise in its productions and rely on other countries to meet other needs
Theory on Imperfect Markets
Suggestions –> I.M causes that factors of production are immobile and thus encourage countries to specialise based on the resources they have
costs &restrictions related to transfer of labour &other resources –> thus production is imperfect (not the same as produced at home)
comparative cost advantage (engage in C.A but also capitalise in foreign countries resources - seek foreign opportunities)
** competitive markets if you enter the international market
Imperfect Markets
Factors
imperfect/incomplete informations about prices and products
hard to transfer know-how
not perfectly homogeneous
high barriers to entry
Product Cycle Theory
firms mature - it recognises opportunities outside it domestic market
suggest that after firms are establish
Perfect Market
Disadvantage
a) close business -> not international trade
b) perfect market –> easy transferable –> labour &resources would flow wherever they were in demand
unrestricted mobility of factors would create equality in costs &returns and remove the comparative C.A (thus the rational for international trade &investments)
Engagement in I. business
1. International Trade
conservative approach use to penetrate markets(EP) obtain supplies at low cost (IP) minimal risk - no capital risk internet facilitates IT by allowing firms to advertise their Products &accept orders on their websites
Engagement in I. business
Licensing
- Obligates a firm to provide its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits
- Allows firms to use their technology in foreign markets without a major investment and without transportation costs that result from exporting
- Major disadvantage: difficult to ensure quality control in foreign production process
Engagement in I. business
Franchising
obligates firm to provide a spec. sales, strategy, service, support assistance
initial investment in franchise
exchange for periodic fee
allows penetration into F.M without major f. investment
Engagement in I. business
Joint Venture
jointly owned &operate
joined with firms that reside in those markets
mutual beneficial
allows firms to apply their respective cooperative advantages in a given project
Engagement in I. business
Acquisition
allows firms to have full control over their foreign business
quickly obtain a large portion of FM share
subject to risk of large losses due to large investment (depending on among)
liquidation may be difficult if the f.s performs monopoly
Engagement in I. business
New Foreign Subsidiary
penetrate FM by directly establishing new operations in
requires larger investment
acquiring new as opposed to buying existing allows operations to be tailored exactly to firms needs
may require smaller investment than buying the whole existing firm
