Literature Review of Finance Issues of MNCs
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In the project I will address about finance issues of major multinational companies. Companies in today's world operate in global stage marketplace, and sometimes they can disregard the fact that they are only at their peril. Multinational finance and commerce has given advancements in transportation, communication and technology. Hence this development has given us a dramatic reality that global market should be standardization of the consumer and industrial product on previously unimagined scale.
In my project I will take into account how multinational companies work. I will primarily through light on the issue of how these companies manage the finance. I will assess the various countries in comparing to UAE in finance dealings of big multinational companies. In later part of my project I will conduct a survey related to multinational finance in UAE, and then discuss the outcomes of the survey. Multinational finance is major topic and I will try to describe its significance to UAE.
Multinational Corporation (MNC) is a company which is engaged in production and selling of services or goods in more than one country. In generally it consists of a parent company which is at home country and it has at least five or more foreign subsidiaries, typically having high degree of strategic communication in between the units. MNC sometime have more than hundred foreign subsidiaries, one such company United Nations estimate at least 35000 companies around the world. General Electric Company has taken advantage of globalization and it focuses on global reach to have less expensive material and intellectual capital in foreign countries (Shapiro, 2006).
Internationalization of American economy is very surprising and analysts believe that 60% of USA companies' revenues come from foreign market in 1997. The investment of USA companies in foreign companies is 100's of billions of dollar each other. The stock of foreign direct investment by USA companies reached 2.07trillion in 2003 (Shapiro, 2006).
Defining MNC's Finance
Despite the underline reason of global expansion, the true MNC is characterized more by state of mind rather than size or world wide diffusion of its assets. Rather than to confine to its domestic plant site the MNC ask, where in the world should we build the plant? Correspondingly MNC marketing management seeks global but not domestic market segments to penetrate, and also MNC finance management doesn't limit itself investment opportunities to single national financial market. Therefore MNC true commitment is to seek out, undertake, integrate manufacturing, R&D, and finance prospects on global level not domestic level. For example IBM's superconductivity project started in Switzerland by German and Swiss scientists (Shapiro, 2006).
Make this landscape
Objective of Financial Management in MNC's
The main objectives of financial management are described below:
- Profit maximization: the main objective of any company is to maximize its profit and generally this is our companies work. Different companies collect finance by distributing of shares to the public.
- Return maximization: The goal of return maximization is to safeguard the economical interest of the company directly or indirectly such as its workers or shareholders. They always want to get maximum return on their contribution to the company.
- Wealth maximization: Maximization of wealth can also mean maximization the value for shareholders. The value of the company is represented by its share price and long term investment of the company.
Environment of International Finance
There are many topics in environment international finance in which decision are make, the basic factor is currency value which is related to central bank, foreign exchange market, economic and political motivations. International monetary system effects the determination of exchange rates. In environment international finance there should be balance of payment and there is link between national economics. In environment international finance country risk analysis and potential risk are related to making an investment (Shapiro, 2006). The environment international finance should have equilibrium between crucial factors:
- Inflation rate
- Interest rate
- Exchange rate
- Purchasing power parity
- Fisher effect
MNC's Finance Theory and Practices
The main objective of MNC finance management is to increase or maximize shareholders wealth as measured by share price. This means that making finance and investment decision that will add much more value as possible for the company. This also means that the company must manage its assets effectively. The focus on shareholder value steams by the fact that shareholders are legal owner of the company and management as fiduciary obligation to act in their best interest. A compelling reason for focus on having or creating shareholder wealth is those companies that don't are likely to be prime takeover target and a candidate for force corporate restructuring. An institution as complex as MNC cannot set to have single, unclear, principle of shareholder wealth maximization provide a rational guide to finance decision making. However, other financial goals reflect autonomy of management and external pressures (Shapiro, 2006).
Functions of Financial Management
Financial management traditionally is divided into two functions acquisition of funds and investment of these funds. This first function is known as financing decision, which is related to generating funds from internal or external sources to the company at lowest long run cost. Investment decision is related with allocation of funds overtime in a way that shareholder wealth is maximized (Shapiro, 2006).
Global Financial Market Place
Market efficiency is greatly facilitated by interaction of computers and telecommunication. The resulting infrastructure brings together the world into one global market for data, ideas, capital, and moving of fast speed to any part of the planet. There are more than 200000 computer terminal in 100's of trading rooms in dozen of nation which display flow of new (Shapiro, 2006).
Important of Total Risk
The message of Capital Assets Pricing Model (CAPM) and Arbitrage Price Theory (APT) is only that systematic component of risk will be rewarded with risk premium; this doesn't mean that total risk is the combination of systematic and unsystematic risk, and it is unimportant to the value of the company. What is true for a company is true for investors. International diversification can decrease the riskiness of investment portfolio because national finance markets tend to move somewhat independent of each other (Shapiro, 2006).
Overseas Exchange and Byproducts Markets
The primary function of foreign exchange market is to transfer purchasing power denominated in one currency to another and there for facilitate international investment and trade. The foreign exchange market consists of tires: the interbank market, in which big banks trade with each other, and retail market in which banks deal with their commercial customers (Shapiro, The foreign exchange market, 2008). The major participants of forward market are:
MNC can use creative finance system to achieve different objective such as lowering the cost of fund, reducing political risk, and cutting taxes. Currency swaps and Interest involves finance transaction in which two counterparties agree to exchange stream payment overtime. In Interest rate swap is no actual principal is exchange either at start or at maturity, but interest payment is exchanged according to predetermined rules based on underline notional amount. Currency swap pass on to a transaction in which two counterparties exchange explicit amount of two currencies at outset and repay overtime according to pre-specified rules that reflect both amortization of principal and interest payment (Shapiro, Swaps and Interest rate derivatives, 2008).
Overseas Exchange Risk Management
The circumventing profit repatriation restrictions
There are many ways available to MNC for moving of profit and funds from one country to another which include:
- Fee and royalty agreement
- Lagging and leading
- Transfer pricing
- Equity versus debt consideration
- Re-invoicing center
- Currency invoicing
Payoff profile for a forward contract
Payoff profile for forward contract
Original risk profile
Multinational networks and the exploitment of natural resources in developing countries. (2007). In UNEP/GRID-Arendal Maps and Graphics Library. Retrieved 11:30, May 12, 2011 from http://maps.grida.no/go/graphic/multinational_networks_and_the_exploi
Bankruptcy by MNC's
There are various concepts related to bankruptcy, business failure is refer to a situation in which business has terminated with loss to creditors, but even an all-equity company can fail. Legal bankruptcy happens when company or creditors bring quotation to federal court for bankruptcy. Bankruptcy is legal proceeding for liquidating or re-organizing of a company. Liquidation means termination of company as going concern, and it involves selling off the assets of the company. The proceeds net of selling cost are distributed to creditor by relationship to their established priority. Reorganization is the option of keeping the company a going concern; it involves issuing new securities to replace old securities. Liquidation and reorganization is result of bankruptcy proceeding which determines if the company is alive or dead.
(Ross, Westerfield, & Jordan, 2008)
Higher Financial Leverage
Lower Financial Leverage
Finance in MNC's
The growing of international markets with capital market has resulted in companies with lot of finance facilities and companies no longer stop at the water edge. An important feature of MNC finance strategy is wide range of external sources of fund that use on going bases. For instance British Telecommunication offers stock in New York, London and Tokyo (Shapiro, Finacing the Multinational Corporation, 2008).
Worldwide Finance and National Capital Market
There are many differences in economic systems of countries in their method and a source of financing but MNC seems convergent for instance many company by pass banks and directly going to financial market for their finance need. The joining of MNC finance practice largely reflects the internationalization of finance market that is linked by arbitrage of finance market world wide. The main international source includes development banks, project finance, capital market, and financial intermediaries (Shapiro, 2008).
The growth of international capital market especially Eurobond market and Eurocurrency is response of regulation restriction and cost that government inflict on domestic finance transactions. The principal mean by which markets are linked is using currency stock and interest rate where two counter parties agree to exchange stream of payments over time in order to convert one interest rate structure or currency to another. Eurobond is alternative of Eurocurrency loans and bank response by creating notes issuing under which borrower is able to issue its own euro-notes (Shapiro, 2008).
Foreign Investment Analysis
There was time when investor though that national boundaries are not to be broken and their financial options are region only. But now the time is changed consumer and companies are going global and number of investors is increasing (Shapiro, 2008).
MNC's Strategy and Foreign Direct Investment
Solution for developing successful strategy is by understanding and capitalizing on factors that lead to success in the past. The key factor in conducting an appropriate global investment analysis requires the establishment of MNC objective and policies that are congruent with each other and with company's resources that lead to continual development of new resources of different advantage as older ones reach obsolescence (Shapiro, 2008).
Capital Budgeting for the MNC
Capital budgeting for MNC's present many element which don't exist in domestic capital budgeting. In capital budgeting important factor is to adjust project cash flow insist of discount rate to reflect key economical and political risk that MNC face. Failure to make account the option available to manager to adjust scope of project will lead to descending bias in estimating project cash flow. The options include expanding the project or abandoning it, and chance to make use of radical new process technology by using skill develop from implementing the project and possibility of entering new line of business in which project leads (Shapiro, 2008).
Multinational Working Capital Management
MNC are very much involve in foreign trade in addition to there international activities. The finance of trade related working capital needs large amount of money finance service such as letter of credit and acceptances. MNC finance executive must have knowledge of institution and document procedure which evolve over century to facilitate global movement of goods (Shapiro, 2008).
Assets Management and Short Term Financing
Short-Term finance options: The three principal available for short term finance option available to MNC's are:
Local currency finance
Structure of a back-to-back loan
Parent firm in country A
Subsidiary in country B
Bank in country A
Direct intercompany loan
The short term finance objective is for a company to decide where and which currency to borrow, there are four possible such objectives:
Diminish expected cost: By ignoring risk this objective reduce information requirement and makes borrowing option evaluated on individual basis with relationship to loan cash flow and operating cash flow.
Diminishing risk without consideration to cost: A company that uses this format is on conclusions that dispose of its assets and investment the proceeds in government securities.
Trade off anticipated in systematic risk: The advantage of this objective is that it allows the company to evaluate different loans with considering the relationship between operation cash flow and non cash flow from operations.
Trade off anticipated cost and total risks: This type of objective relies on existence of potential substantial cost of financial distress.
Survey was conducted on different MNC's mangers.
The objective of the survey was to spot Finance Transparency in their Company.
To know if different MNC's have international standard of transparency.
Make questionnaire to collect data from MNC's mangers.
Demonstrate data in the form of charts and rational method.
Method of Collecting Data
I visit many MNC's which I selected randomly and when to their manager to fill the survey. This survey is containing of 16 questions which will determine finance transparency in their company.
The sample size I used is 20 with diverse age, nationality and monthly income.
Issue of reliable information due to privacy in MNC.
I only conducted survey only in Al-Ain and Abu Dhabi.
Time consumption to conduct the survey, going from one place to another.
Different structure of MNC's.
Analysis of Survey
Total Response 20
Less than Twenty-five years
Twenty-five –Forty years
Forty-one- Fifty years
Above Fifty years
45% people are of age 25- 40 years, 20% each were less than 25 and 41 – 50 years, and 15% were above 50 years.
UAE national represented 45% of national, 20% each Arab and Westerns, and Asian were 15%.
Less than 10,000
10,000 – 30,000
More than 30,000
45% have salary of 10000 to 30000, 40% have more than 30000 and 15% had less than 10000
Proportion of shares in your company is?
The proportion of share was 75% varied and 25 % limited.
Authorization of share is selling is done by whom?
Share selling was 45% done by CEO, 30% by senior managers and 25% of Director.
In your Company you have company governance charter or company governance guidelines.
The governor charter in the companies was present in 80% of the companies and not present in only 20%.
In your view in your company there is code business ethics and conducts.
Business ethic code is followed in 75% of the company and 25% have different opinion.
In your company there are voting rights for shareholders.
Voting rights for shareholders were present in 60% of the companies and 40% didn't have.
Do you release comprehensive press releases covering company events?
Company events are released in press by 65 % of the companies and 35% follow other methods.
Does your company have policy on information expose?
20% of companies said yes, company have policy on information expose while 80% said no.
Does your company uses accounting standards for its accounts?
Accounting standard are followed in 90% of the companies and 10% don't follow accounting standards.
12. Does your company give in audit fees to the assessor?
Audit fees to assessor are given by 70% of the companies and 30% have other methods
13. Does your company have particulars of the products or services your company generates?
60% say that there company has particulars of the products or services while 40% say no there company have no particulars of the products or services there company generates.
14. Does your company have comprehensive information about investment tactics for the coming years?
50% say yes there companies have comprehensive information about investment tactics for the coming years, on other hand 50% say no.
15. Does your company have detailed information about the current workers and position of staffs?
10% say no there company has no detailed information about the current workers and position of staffs while 90% say yes there company has.
16. Overall in your company the Earning is based on?
70% say there company's earning are based on experience, while 15% say there company's earning are based on education and standard salary.
17. Generally monitoring of finance in your company is strict?
75% say yes monitoring of finance in there company is strict while 25% say no it's not strict.
Summary of Finding
Survey of Managers about Finance Transparency in their Company
I conducted the survey in which I found out that the age of the most people who are working at MNC's have age between 25 to 40 years. UAE national represent in management of MNC's included 45%, and other people were also working such as Arab and Asians. The bracket of salary was big, and most people get high salary for working in immense MNC's. In my survey I found that transparency of finance in MNC's UAE has it place, but it may needs to be extensive to all areas of operations of MNC's. I also found out that monitoring of finance was present in MNC's but it needed more strict provision. MNC's keep track of every operation of their working such as having detailed information about staff, but they don't publish this information on their website or other medium of publishing. It was encouraging to know that most MNC's follow UAE standards of doing business, and it can only mean good things for UAE economy.
Managing the MNC's Financial System
Finance transactions which happen within MNC result from internal transfer of goods, technology, service and capital. These product and factor flow range from intermediate to finish good to less tangible items such as trademark, patent, and management skills. The value MNC network of finance links from wide variation in country tax system and significant cost and barrier related with international finance transfer (Shapiro, 2008).
Difference in global tax system
Company diminish tax paid move fund to tax low authority
Financial markets Arbitrage:
Imperfect market exist because
Barrier in trade formal
Deficiency in domestic capital market
It happens when subsidiary profits due to local regulations
Union salary pressure
Government cost control
Company can disguise its profit to gain better negotiations.
Looting of MNC's
Different research shows that there is absence of tough actions for MNC's and they benefit from varies ways such as they pay less tax. MNC's are tax haven and prominent feature international capital market and there activities create crime environment in which illicit finance flow and easily disguise legitimated transactions. The research also shows that there are practices which can reduce finance market opacity but there is less political will (John Christensen, 2011).
MNC's Secrecy in Middle East
Government control and influence make a challenge to enterprise in entire Middle East. The fundamental breaking down of secrecy in public and private sector is to promote system of information, provision and use (Laurence Leigh, 2011).
Determinant of Capital Structure in MNC's
The research study shows that liquidity, profitability, earning, tangibility are in relationship to debt ratio, and companies size is positively associated to debt ratio. Non debt tax shield and growth future don't relate to debt ratio. The finding of study shows that prediction of pecking order theory, trade off theory, and agency theory shows capital structure model drive from western countries doesn't help in knowing finance behavior of company in Middle East (Nadeem Ahmed Sheikh & Zongjun Wang, 2011)
Recommendation and Conclusion
Multinational companies are the most powerful institution of the today's world and there power can make an economy of the country or it can crush it. Multinational companies have independent system of finance. Multinational companies apply strategies and policies based upon the country they are operating in. Multinational companies have to observe the laws of the country in which they operate and also respect the traditions and not to go against the tradition of a country.
In my study of transparence of MNC's, I found out that most MNC's have governance charter to follow on, and they also have business ethic code of conduct as a principle guideline to work on best ethics. MNC's in UAE have given the right of voting to shareholders but it is very limited. I also found out that majority of MNC's release companies event in press but more companies should follow this tradition of information sharing to general public. Most MNC's were reluctant to have policy on information exposure, in my opinion this should not be the case. It is great pleasure to know that MNC's follow standard accounting principles for accounting purpose which guaranties good conduct of business. Most MNC's do the assessment of their business by assessor but my opinion they should hire company like Ernst & Young, and KPMG UAE. In my study I also found out that most MNC's give salaries based upon experience rather than education or standard salary. So generally overall I can say that the MNC's operating in UAE are transparent in their finance and other activities but they need to increas the level of transparency in financial operations and conduct to general people.
MNC's play important role in world of economy for instance the financial crisis in USA was brought by two largest MNC's The Goldman Sachs Group and American International Group (AIG), and which nearly crushed the economy of USA. So it is very important that we keep eye on the activities of MNC's in UAE, therefor UAE can be safe from such crisis and financial mess management.
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