A multinational corporation operates in two or more countries, consisting of a parent company in its home country and foreign subsidiaries. The goal is to maximize shareholder wealth. Managing finances across countries introduces challenges like different currencies, economic systems, languages, cultures and political risks compared to domestic firms. Firms expand internationally to access new markets, resources, technologies and efficiencies or avoid regulatory hurdles. Financial managers must operate within environmental, regulatory and ethical constraints that vary between countries.

1. What is a multinational corporation?
A corporation that operates in two or
more countries.

2. A multinational corporation is a company
engaged in producing and selling goods or
services in more than one country. It
ordinary consists of a parent company
located in home country and at least five
or six foreign subsidiaries.

3.  The commonly accepted goal of an
MNC is to maximize shareholder
wealth. Developing a goal is
necessary because all decisions
should contribute to its
accomplishment.

4. Difference b/w domestic and multinational financial
management
1. Different currency denominations.
2. Economic and legal ramifications.
3. Language differences.
4. Cultural differences.
5. Role of governments.
6. Political risk.

5. Why do firms expand into other countries?
1. To seek new markets.
2. To seek raw materials.
3. To seek new technology.
4. To seek production efficiency.
5. To avoid political and regulatory hurdles.
6. To diversify.

6. Constraints Interfering with the MNC's Goal
When financial managers of MNCs attempt to
maximize their firm's value, they are confronted
with various constraints that can be classified as
:
 Environmental.
 Regulatory.
 Ethical in nature.

7. Environmental constraints :
 Each country enforces its own environmental
constraints. Some countries may enforce more of
these restrictions on a subsidiary whose parent is
based in a different country. Building codes,
disposal of production, waste materials, and
pollution controls are examples of restrictions
that force subsidiaries to incur additional costs.
Many European countries have recently imposed
rougher antipollution laws as a result of severe
pollution problems.

8. Regulatory constraints :
 Each country also enforces its own regulatory
constraints pertaining to taxes, currency
convertibility rules, earnings remittance
restrictions, and other regulations that can
affect cash flows of a subsidiary established
there.
Ethical Constraints :
 There is no consensus standard of business
conduct that applies to all countries. A business
practice that is perceived unethical in one
country may be totally ethical in another.

10.  International monetary systems are sets of internationally
agreed rules, conventions and supporting institutions that
facilitate international trade, cross border investment and
generally the reallocation of capital between nation states.
 They provide means of payment acceptable between buyers
and sellers of different nationality, including deferred
payment.
 To operate successfully, they need to inspire confidence, to
provide sufficient liquidity for fluctuating levels of trade and
to provide means by which global imbalances can be
corrected.
 The systems can grow organically as the collective result of
numerous individual agreements between international
economic actors spread over several decades.
 Alternatively, they can arise from a single architectural vision
as happened at Bretton Woods in 1944

11. Almost from the dawn of history gold has been
used as a medium of exchange because of its
desirable properties. It is durable, storable,
portable , easily recognized, divisible and
easily standardized.
The gold standard essentially involved a
commitment by the participating countries
to fix the prices in terms of their domestic
currencies in terms of a specified amount of
gold.

12.  Bimetallism: Before 1875
 Classical Gold Standard: 1875-1914
 Interwar Period: 1915-1944
 Bretton Woods System: 1945-1972
 The Flexible Exchange Rate Regime: 1973-Present

13. A “double standard” in the sense that both gold and
silver were used as money.
 Some countries were on the gold standard, some on
the silver standard, some on both.
 Both gold and silver were used as international
means of payment and the exchange rates among
currencies were determined by either their gold or
silver contents.
 Gresham’sLaw implied that it would be the least
valuable metal that would tend to circulate.

14.  During this period in most major countries:
 Gold alone was assured of unrestricted coinage
 There was two-way convertibility between gold and
national currencies at a stable ratio.
 Gold could be freely exported or imported.
 The
exchange rate between two country’s currencies
would be determined by their relative gold contents.

15.  Exchange rates fluctuated as countries widely used
“predatory” depreciations of their currencies as a
means of gaining advantage in the world export
market.
 Attempts were made to restore the gold standard,
but participants lacked the political will to “follow
the rules of the game”.
 The result for international trade and investment was
profoundly detrimental.

16.  Named for a 1944 meeting of 44 nations at Bretton
Woods, New Hampshire.
 The purpose was to design a postwar international
monetary system.
 The goal was exchange rate stability without the gold
standard.
 The result was the creation of the IMF and the World
Bank.

17.  Underthe Bretton Woods system, the U.S. dollar was
pegged to gold at $35 per ounce and other currencies
were pegged to the U.S. dollar.
 Eachcountry was responsible for maintaining its
exchange rate within 1% of the adopted par value
by buying or selling foreign reserves as necessary.
 TheBretton Woods system was a dollar-based gold
exchange standard.

18.  Flexible exchange rates were declared acceptable to the
IMF members.
 Central banks were allowed to intervene in the exchange
rate markets to iron out unwarranted volatilities.
 Gold was abandoned as an international reserve asset.
 Non-oil-exporting countries and less-developed countries
were given greater access to IMF funds.

19.  Development banks are specialized financial institutions
which perform the twin function of providing medium
and long term finance to private entrepreneurs and of
performing various promotional roles essential for
economic development.
CHARACTERSTICS:
 Development banks do not accept deposits from public
as ordinary banks do.
 They are unique financial institution that perform the
special task of accelerating economic development.
 Development banks are engaged in promotional services
such as underwriting of new shares, arranging for
foreign exchange loan , preparation of project reports.

20.  An agent of development.(sectors like
industry, agriculture and international
trade.)
 To accelerate the growth of economy.
 To allocate the resources.
 To foster rapid Industrialization.
 To develop entrepreneurial skills.
 To provide rural development.
 To provide finance.

21.  Entrepreneurial role : Development banks
undertake the role of entrepreneurial gap
filling .They perform the task of discovering
investment projects, promotion of industrial
enterprise, provide technical and managerial
assistance undertaking technical and
economic research, conducting surveys.
 Task of Financial Gap filling: Through
purchase of debentures, bonds of a company.
 Credit guarantee.
 Refinancing.

22.  Underwriting
 Joint
financing
 Commercial banking business
Need for development banks:
 Industrialization.
 Capital requirements.
 Promotional activities.
 Aid to small scale units.

23. The foreign rulers in India do not take much
interest in the industrial development of the
country. They were interested to take raw
materials to England and bring back finished
goods to India. The government did not show
any interest for setting up institutions
needed for industrial financing .
The recommendations for setting up industrial
financing institutions was made in 1931 by
central banking enquiry committee.

24.  1948 the first development bank i.e.. IFCI(INDUSTRIAL
FINANCE CORPORATION OF INDIA).IFCI was assigned the
role of a gap filler which implied that it was not expected
to compete with the existing channels of industrial
finance . It was expected to provide medium & long term
credit to industrial concerns only when they could not
raise sufficient finances .
 1951 parliament passes state financial corporation act
.Under this act state govt could establish financial
corporations for their respective region . At present there
are 18 State Financial Corporations (SFC’s)in India.

25.  The IFCI AND SFC served only a limited purpose . There was a need for
dynamic institutions which could operate as true development
agencies . NIDC (National Industrial development Corporation) was
established in 1954 with the objective of promoting industries which
could not serve the ambitious role assigned to it .
 1955 ICICI(Industry Credit Investment Corporation Of India) as a joint
stock company. ICICI was supported by govt of India , World Bank, and
other foreign institutions.
 Another institution RCI Refinance corporation for industry was set up
in 1958 by RBI,LIC and commercial banks . The purpose of RCI was to
provide refinance to commercial banks and SFC’s against term loans
granted by them to industrial concerns in private sector.
 1964 IDBI Industry development bank of India was set up as an apex
institution in the area of Industrial Finance ,RCI was merged with
ICICI.
 SIDC’s State Industrial development corporation were established in
the sixties to promote medium scale industrial units. At present there
are 28 SID’C.

26. Other financial institutions were:
 UTI UNIT TRUST OF INDIA 1964.
 LIC LIFE INSURANCE CORPORATION OF INDIA 1956.
 GIC (GENERAL INSURANCE CORPORATION OF INDIA)
1973.
 EXIM BANK(EXPORT IMPORT BANK) 1982.
 NAMBARD 1982(NATIONAL BANK FOR AGRICULTURE
AND RURAL DEVELOPMENT) :It is responsible for
short term , medium term and long term financing
of agriculture and allied activities.
The institutions like film finance corporation,
handloom finance corporation, housing
development finance corporation also provides
financial and other facilities in various areas.

27. FINANCE FUNCTIONS IN A MULTINATIONAL FIRM
 Acquistionof Funds.
 Investment of those funds.
International Flow of Funds: