Multinational Finance

Multinational companies differ from purely domestic companies in that they have the ability to enhance their operations by moving resources among various subsidiaries through internal transfers. This can be a distinct advantage over having to deal with various other companies, each operating in various countries, when resource issues arise. This diversity also makes companies less dependent on the vagaries of a single market, and instead opens up global markets. It also makes possible various financing options that are not available to purely domestic companies. Once a company decides to take advantage of these benefits and enter the international arena, there are distinct financing concern that need to be addressed.

These concerns can be divided into the following categories: acquisition and investment of funds. The acquisition of funds is concerned with determining how financing is accomplished. This includes considering whether it is best for the company to generate funds from internal sources, or whether the company should seek external financing at the lowest possible cost. Most companies, whether multinational or domestic, settle on a combination of these two approaches. The investment decision focuses on how funds are put to use once they are obtained. The goal here is to maximize value as measured by shareholder return.

These issues become more complex when viewed from the perspective of a multinational organization. Internally generated funds, for exampl

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e fluctuations and political risk are factors that need to be taken into account when making the decision whether to invest domestically or internationally. The advantage that multinational firms have over purely domestic ones is the method of transfer available to it when it moves funds or resources. While domestic firms can choose to send money abroad in the form of investment, they must do so by dealing with other companies. Multinational companies can do so by transferring funds internally, with the result that they are able to take advantage of tax codes and other environmental considerations not open to wholly independent companies. Multinational companies also have a distinct advantage over domestic companies with regard to leading and lagging. Leading is the practice of accelerating a fixed payment schedule, while lagging is the practice of delaying such schedules. The practice occurs most often with trade credit, and can have significant effects on a company's liquidity when trade credit terms change from one period to another. For example, a change on an open account from 30 to 60 days can greatly affect a company's cash flow. While these techniques can be used when two distinct companies are involved, a multinat

Category: Economics - M