International Financial Management
Part 1: The International Financial Environment
Chapter 1
The world has changed; it has never been more connected, socially, politically and
economically as it is today. The phenomenon of globalization is one that has been in the
eye of the public media for quite some time, all the aspects of the life of the people have
been affected by this phenomenon, and the corporations are no exception. As the world is
more connected commercially, the enterprises phase the challenge of not only facing intern
competition but also international competition, which makes them face a dilemma, do they
stay in their countries or do they use the competitive advantage they have in other
countries. This is how the Multinational companies were born, firms that saw they had a
competitive advantage in other countries so they decided to go abroad to do business, now
this seem easy on paper, but it is a lot more complicated than what it seems at first sight.
There are many reasons why corporations decide to take their enterprises abroad and
therefore to expand to other countries, the one that has more importance is the theory of the
comparative advantage, which suggests that in some areas and specific parts of business,
there are advantages that you will have versus the producers of set same product in another
country, this works as an incentive to expand internationally. However expanding to other
countries, even though it augmenters the cash flows and the income of the company, it also
brings some very important challenges to the companies.
One of the main challenges companies face, is that sometimes the manager of the company
won’t direct all the effort towards maximizing shareholders wealth, which should be their
main goal. What happens is that the company goes to other direction which can cause
conflict between the manager and the shareholders; this can be as severe as to what
happened in Worldcom, where the manager was doing all the things he wanted and
committing fraud, because the knowledge of the shareholders of what was happening in the
company was limited, this problem is called the agency problem. Since this is something
that has happened several times, many suggestions have come up to solve this serious issue.
, Many solutions have been made about the Agency problems, two examples are the Parent
Control of Agency Problems and the Corporate Control of Agency Problems; but what has
been more effective to control this problem is the Sarbanes-Oxley Act (SOX), enacted in
2002 is an act which establishes a series of processes that prevent the Agency Problems,
those are: Establishing a centralized database of information, ensuring that all data are
reported consistently among subsidiaries, implementing a system that automatically checks
data for unusual discrepancies relative to norms, speeding the process by which all
departments and all subsidiaries have access to the data that they need and by making
executives more accountable for financial statements by personally verifying their
accuracy. This has proven to diminish the possibilities of an agency problem from
happening.
Even though all this techniques are effective in preventing the agency problems, it is also
true that because of the rise of the internet, having a Multinational Corporation is easier
than ever before. It has never been easier to pass information and especially to trade good
than today, you can contact an importer or exporter via internet without the need of
traveling or seeing him face to face, this facilitates things a lot. This also helps that the
standardized information of the company, arrives clear and easy to the manager, which
would also help to track its work through time. But even if it is now easier than ever to
create a Multinational Corporation, it is important to take into account the different ways a
corporation can go abroad:
- Licensing: the company gives its technology in exchange for a periodical fee
- Franchising: the company is obligated to give specialized training, they might even
give a little initial investment
- Joint Venture: a venture where two or more firms participate
- Acquisition of Existing Operations: when the company buys preexisting companies
- Establishing New Foreign Subsidiaries: establish completely new operations in the
country’
It is important to mention, that when having a Multinational Corporation, your earnings in
set country are sensible to the political, social and economic decisions the government
makes in that country, which would affect your cash flow
Part 1: The International Financial Environment
Chapter 1
The world has changed; it has never been more connected, socially, politically and
economically as it is today. The phenomenon of globalization is one that has been in the
eye of the public media for quite some time, all the aspects of the life of the people have
been affected by this phenomenon, and the corporations are no exception. As the world is
more connected commercially, the enterprises phase the challenge of not only facing intern
competition but also international competition, which makes them face a dilemma, do they
stay in their countries or do they use the competitive advantage they have in other
countries. This is how the Multinational companies were born, firms that saw they had a
competitive advantage in other countries so they decided to go abroad to do business, now
this seem easy on paper, but it is a lot more complicated than what it seems at first sight.
There are many reasons why corporations decide to take their enterprises abroad and
therefore to expand to other countries, the one that has more importance is the theory of the
comparative advantage, which suggests that in some areas and specific parts of business,
there are advantages that you will have versus the producers of set same product in another
country, this works as an incentive to expand internationally. However expanding to other
countries, even though it augmenters the cash flows and the income of the company, it also
brings some very important challenges to the companies.
One of the main challenges companies face, is that sometimes the manager of the company
won’t direct all the effort towards maximizing shareholders wealth, which should be their
main goal. What happens is that the company goes to other direction which can cause
conflict between the manager and the shareholders; this can be as severe as to what
happened in Worldcom, where the manager was doing all the things he wanted and
committing fraud, because the knowledge of the shareholders of what was happening in the
company was limited, this problem is called the agency problem. Since this is something
that has happened several times, many suggestions have come up to solve this serious issue.
, Many solutions have been made about the Agency problems, two examples are the Parent
Control of Agency Problems and the Corporate Control of Agency Problems; but what has
been more effective to control this problem is the Sarbanes-Oxley Act (SOX), enacted in
2002 is an act which establishes a series of processes that prevent the Agency Problems,
those are: Establishing a centralized database of information, ensuring that all data are
reported consistently among subsidiaries, implementing a system that automatically checks
data for unusual discrepancies relative to norms, speeding the process by which all
departments and all subsidiaries have access to the data that they need and by making
executives more accountable for financial statements by personally verifying their
accuracy. This has proven to diminish the possibilities of an agency problem from
happening.
Even though all this techniques are effective in preventing the agency problems, it is also
true that because of the rise of the internet, having a Multinational Corporation is easier
than ever before. It has never been easier to pass information and especially to trade good
than today, you can contact an importer or exporter via internet without the need of
traveling or seeing him face to face, this facilitates things a lot. This also helps that the
standardized information of the company, arrives clear and easy to the manager, which
would also help to track its work through time. But even if it is now easier than ever to
create a Multinational Corporation, it is important to take into account the different ways a
corporation can go abroad:
- Licensing: the company gives its technology in exchange for a periodical fee
- Franchising: the company is obligated to give specialized training, they might even
give a little initial investment
- Joint Venture: a venture where two or more firms participate
- Acquisition of Existing Operations: when the company buys preexisting companies
- Establishing New Foreign Subsidiaries: establish completely new operations in the
country’
It is important to mention, that when having a Multinational Corporation, your earnings in
set country are sensible to the political, social and economic decisions the government
makes in that country, which would affect your cash flow
