International Business Finance
5 stars based on
From a financial management standpoint, one of the distinguishing characteristics of the multinational corporation MNCin contrast with a collection of independent national firms dealing at arm's length with one another, is its ability to move money and profits among its various affiliates through internal transfer mechanisms.
These mechanisms include transfer prices on goods and services traded internally, intracorporate loans, dividend payments, leading speeding up and lagging slowing down intracorporate payments, and fee and royalty charges.
Financial transactions within the MNC result from the internal transfer of goods, services, technology, and capital. These product and factor flows range from intermediate and finished goods to less tangible items such as management skills, trademarks, and patents. Those transactions not liquidated immediately give rise to some type of financial claim such as royalties for the use of a patent or accounts receivable for goods sold on credit.
Although all of the links portrayed in Exhibit F. By unbundling the total flow of funds between each pair of affiliates into separate components that are associated with resources transferred in the form of products, capital, services, and technology, the MNC gains considerable freedom in selecting the financial channels through which funds, allocated profits, or both are moved.
For example, patents and trademarks can be sold outright or transferred financing options for multinational companies return for a contractual stream of royalty payments. By varying the prices at which transactions occur, profits and cash can be shifted within the worldwide organization. Similarly, funds can be moved from one unit to another by adjusting transfer prices on intracorporate sales and purchases of goods and services.
With regard to investment flows, capital can be sent overseas as debt with at least some choice of interest rate, currency of denomination, and repayment schedule, financing options for multinational companies as equity with returns in the form of dividends.
The multinational firm can use these various channels, singly or in combination, to transfer funds internationally, depending on the specific circumstances encountered. Furthermore, within the limits of various national laws and with regard to the relations between a foreign affiliate and its host government, these flows may be more advantageous than those that would result from dealings with independent firms.
Some of the internally generated financial claims require a fixed payment schedule; others can be accelerated or delayed. This leading and lagging is most often applied to interaffiliate trade credit in which a change in open account terms, say from 90 to days, can involve massive shifts in liquidity. Some nations, both developed and less developed, have regulations concerning the repatriation of the proceeds of export sales.
Thus, there is typically not complete freedom to move funds by means of leading and lagging. In addition, the timing of fee and royalty payments may be modified when all parties to the agreement are related. Even if the contract cannot be altered once the parties have agreed, the MNC generally has latitude when the terms are initially established. In the absence of exchange controls, firms have the greatest amount of flexibility in the timing of equity claims.
The earnings of a foreign affiliate can be retained or used to pay dividends that in turn can be deferred or paid in advance. Despite the frequent presence of governmental regulations or limiting contractual arrangements, most MNCs have at least some flexibility regarding the timing of fund flows.
This latitude is enhanced by the MNC's ability to control the timing of many of the underlying real transactions. For instance, shipping schedules can be altered so that one unit carries additional inventory for a sister affiliate.
The value of the MNC's network of financial linkages stems from the wide variations in national tax systems and significant costs and barriers associated with international financial transfers.
These restrictions are usually imposed to allow nations to maintain artificial values usually inflated for their financing options for multinational companies. In addition, capital controls are necessary when governments set the cost of local funds at a lower-than-market rate when currency risks are accounted for i.
Consequently, the ability to transfer funds and to reallocate profits financing options for multinational companies presents multinationals with three different types of arbitrage opportunities. A fourth possible arbitrage opportunity is the ability to permit an affiliate to negate the effect of credit restraint or controls in its country of operation. If a government limits access to additional borrowing locally, then the firm able to draw on external sources of funds not only can achieve greater short-term profits, but it also may be able to attain financing options for multinational companies more powerful market position over the long term.
It is apparent that the major benefit expected from engaging in financing options for multinational companies various maneuvers comes from government actions that distort the risk-return trade-offs associated with borrowing or lending in different currencies or that alter after-tax returns because of tax asymmetries. The fact that a particular action is legal and profitable, however, does not necessarily mean it should be undertaken. When devising currency, credit, and tax regulations, governments obviously have other goals in mind besides creating profitable arbitrage opportunities for multinational firms.
A company that consistently attempts to apply a "sharp pencil" and take maximum advantage of these arbitrage opportunities may optimize short-run profits, but this may be done at the expense of long-run profits.
In order to take full advantage of its global financial system, financing options for multinational companies multinational firm needs detailed information on affiliate financing requirements, sources and costs of external credit, local investment yields, available financial channels, the volume of interaffiliate transactions, all relevant tax factors, and government restrictions and regulations on fund flows.
Financing options for multinational companies costs and benefits of operating an integrated financial system depend on the funds and transfer options available as well as on the opportunity costs of money for different affiliates and the tax effects associated with these various financing options for multinational companies mechanisms.
Hence, the implementation financing options for multinational companies centralized decision making requires information concerning all these factors. Manipulating transfer prices on goods and services, financing options for multinational companies dividend payments, and leading and lagging remittances will lead to a reallocation of profits and liquidity among a firm's various affiliates.
Although the aim of this corporate intervention is to increase after-tax global profits, the actual result may be to destroy incentive systems based on profit centers and to cause confusion and computational chaos. Subsidiaries may rebel when asked to undertake actions that will benefit the corporation as a whole, but will adversely affect their own performance evaluations.
To counter this reaction, the rules must be clearly spelled out and profit center results adjusted to reflect true affiliate earnings rather than the distorted remnants of a global profit-maximizing exercise.