Financial Management in Multinational Organizations
This study focuses on the different financial management practices being used by Multinational firms, such examples are the provision of dividends on the firm’s dividend policies in relation to its earnings, the different applications of management of ownership to benefit from its various advantages depending on the firm’s needs. The debt financing structure, how these companies allocate payments for its debts from its net income; and how credit becomes important to their overall operations. And lastly the structure and challenge a multinational firm has with its corporate governance.
Introduction The grip on power by the United States on World Economy since the end of World War 2 up until the 1970s has wore down a little bit, since a variety of raw materials, goods, services and including innovative ideas and new technologies coming from different countries who utilizes free flow of their goods and export to different national boundaries (Brigham & Houston, 2007 p. 615). These types of companies who operate in more than one country are called Multinational Corporations (Eldridge, 2010).
As for the US and Canada; in order to remain competitive they also have created multinational companies to maximize shareholder value. Factors like obtaining capital from foreign investors, breakthroughs in
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Then it will study how financial managers cope with a multinational company, what are the main strategies employed and how do they differ by strategies employed on their homeland country; by citing a couple of multinational companies for analysis. Possible factors/Differences affecting the Financial Management of a Multinational Company Operating in a different country a lot of times demands different strategies due to the potential numerous challenges that a firm encounters outside their homeland. The basic factors are Language, Currency, Regulations or Governmental interference and culture.
For American or Canadian firms, depending on the country they plan to operate, English usually becomes a secondary language, as the firm in order to operate effectively needs to adapt the host country’s language. Currency can also be tricky, especially with the fluctuations of currency rates depending on the economic situation of the country being operated on. It could be either advantageous or disadvantageous to the firm depending on the currency’s strength. Firms need to also understand basic regulations and policies imposed by the country’s government, and must follow exactly all those rules to continue operations.
In terms of culture, diversity is another aspect that firms should be aware of treating foreign customers’ right with the knowledge of their culture can be profitable in the long run. Challenges on this aspect can happen if the culture of a different country is not in line with the Multinational company’s goals (Dossing, 2010). Financial Management Practices by Multinational Companies Dividend Policy One important practice of Multinational companies is the provision of a dividend policy. This policy simply means is the provision by companies regarding the amount it would pay to their shareholders as dividend.
With profit making comes the question of utilizing the profit gainfully (MapsXL Inc. , 2009). Financial managers employ this method to either attract more investors or maximize current shareholders value. Thus with this goal in mind firms presents an attractive dividend policy for its investors, but one of the real purpose for multinational companies is mainly to reduce taxation since these companies are now subject to different tax rates and also these different organizational forms has a corresponding tax factors (Desai, 2007).
Usually multinational firms operating on a host country is taxed locally, and then funds repatriated may be subject to US taxes. This US Tax treatment of foreign income has a strong implication to American multinational corporations should not simultaneously remit dividends from low-tax foreign locations and transfer equity funds into the same foreign locations. If this is applied it would generate to what is called a Home-Country Tax liability that can be easily avoided by equity transfers and reduction of dividends. (Desai, Foley and Hines, 2007 p.
17). Multinational firms act as though in relation to fluctuations in their earnings, chooses target payouts for their foreign affiliates (Desai, Foley and Hines, 2007 p. 3). This method is quite an important part of multinational financial management as also the pronouncement to repatriate earnings from a foreign subsidiary. The factors that affect the concept of a dividend policy besides the taxation of dividend income are domestic financing and investment needs, including internal agency problems (same as Desai, Foley and Hines, 2007 p.
3). Managing Ownership Managing ownership is another way managers and directors use when running a multinational company, depending on the goals for possible profit realization, cost reduction and even tax avoidance, multinational firms may opt to use various ownership strategies such as management contracts, joint ventures, subsidiary production, Franchising or licensing, turnkey contracts, marketing contracts, expatriations and mergers and acquisitions.
McDonald’s for example uses its wide influence of media to enter foreign markets via franchising, Under their conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurant businesses, and by reinvesting in the business over time, but the Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites.
This maintains long-term occupancy rights; helps control related costs and assists in alignment with franchisees (McDonald’s Corporation, 2009 p. 9). Other Multinational firms may also decide based on the unfamiliarity of the economic environment may elect the host country to be its partner on a joint venture which in turn can help them be familiarized local economic conditions. Microsoft used licensing to ensure that their softwares would not be easily pirated or copied if sold to foreign markets.
Foreign direct investment via a merger or direct acquisition of an existing firm is also a common practice to have the advantages of large economies of scale and easy access of the new local markets. Debt A healthy financial position of a multinational company can be assessed by its proper management of its debt. Managing debt could be a challenging task for any firm’s manager especially those working in a multinational firm, it is always best to ensure that there are enough revenues to even partially repay its debts, even with this challenge, having a global corporation has also its own distinct advantages.
An example is the Coca Cola which is currently enjoying the privilege of a global presence due to strong brand marketing, have uncomplicated access to key financial markets all over the world, this have helped them maintain debt levels by using their debt financing practice to lower overall cost of capital which in turns increase returns on shareowners’ equity (The Coca-Cola Company, 2009 p. 13). This strategy is a fundamental part of managing debt for multinational companies; firms also look at strong foreign currencies to operate to partly offset debt by repayment from gained profits.
A company like McDonald’s employ the same approach as Coca-cola’s due to its significant revenues and substantial credit availability which can cover its debt repayments (McDonald’s Corporation, 2009 p. 21). Some employs this strategy to further expand their operations, borrowing heavily which can also have adverse effects multiplied also by higher interest rates, which have affected Wal Mart during its early stages before becoming an Global industrial giant it is now, they still do have enough net cash flow provided by its operating activities of continuing operations for payments for its long term debt (Wal-Mart, 2009).
But what if the multinational firm doesn’t have the ability to allocate partial payments for its debts due to low net income, then comes the necessity of credit or borrowings. Being a multinational company, credit becomes more vital since business especially to lesser-developed economies of countries always depend on credit. Multinational firms find countries especially those who have relatively low inflation rates, since this equates to lower interest rates as well, which in turn may appear attractive to most firms who operate globally.
Debt can also be applied by multinational firms such as highly rated companies Berkshire Hathaway and Kraft Foods to find buyers for their debts, this is due to their strong portfolio and almost recession proof product staples (Thomson Reuters, 2010). Corporate Governance One characteristic that stands out of a multinational company is its complex corporate governance in which is the responsibility of its board of directors to ensure continuous monitoring of its management from its homeland and its foreign affiliates.
The purpose of the headquarters or parent corporate governance is to align all of its policies across its subsidiaries internationally. A challenge can occur here, when the factors of different cultures and divergent backgrounds collide with the bundle of specific governance (Costello & Costello, 2010 p. 3). An approach for any specific country can almost be executed independently of the firm’s interest and operations in other parts of the world.
The purpose of this so-called bundled corporate governance is in direct relation to the principle of value maximization, in which the bundle of corporate governance mechanisms is designed in order that the benefits and advantages from the bundle monitoring and bonding mechanisms can be achieved with the minimum possible costs (Costello & Costello, 2010 p. 6). Conclusion In order for a firm to stay competitive especially in a Global Market, they employ various financial management practices to adapt to their position.
This study have discussed some of those approaches such as the use of Dividend policies to reduce taxation and to benefit from its cost savings, The way multinational companies use different types of ownership for both market entry and to sustain growth, How do they handle debt and values credit especially on low inflation countries and finally the structure of the corporate governance and how it applies specific bundles for its subsidiaries. These practices are all important to consider ensuring long term growth and continuous profitable operations by such multinational firms.
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