Essay on "Multi National Corporations"

Essay 4 pages (1233 words) Sources: 2

[EXCERPT] . . . .

Multinational Corporations

When making the decision to expand internationally, there are a wide range of factors that a multinational company must consider. These range from the ways in which the expansion fits into the corporation's overall strategy to the ways in which their products/services will be marketed in the foreign nations. There are also a number of finance concerns as well. The mode of entry is a critical decision that incorporates elements of finance. The expansion must be paid for, so the firm must decide how that will be done. Once the expansion has been undertaken, the firm is now subject to foreign exchange rate risk, so a strategy must be developed to address that as well. This paper will investigate the financial issues surrounding international expansion and outline some of the ways in which these issues can be resolved.

One of the most important decisions with regards to international expansion is the mode of entry. There are many options, each with their own set of advantages and disadvantages. The company can set up a greenfield subsidiary. A joint venture could be set up. The company could simply ship product to the country and have local partners deal with the marketing aspects. The company could expand overseas through M&a activity. The mode of entry decision will not be based strictly on financial considerations as each potential mode implies specific strategic objectives, but the financial aspects of each mode are unique and must be considered during the decision-making process.

International expansion can be done strictly with internal resources or it may involve a joint venture. When partnerships and joint ventures are on the table, it is important for the MNC to determine in advance of market entry how the costs of and proceeds from the operation are to be split between itself and its partners. This split will heavily influence both the risk of the project and the cash flows that are expected to flow from it.

A merger or acquisition has its own set of financial considerations, including the financing and the impacts that the transaction may have on stock price, capital structure and the firm's existing shareholders. Each of these different factors must be taken into consideration when any international merger or acquisition is being evaluated, because while these impacts may not be strategic, they could have long-run repercussions for the firm's ability to execute its strategy.

All told, the myriad of mode of entry options that are available to MNCs considering international expansion each impacts the firm financially in ways that could have far-reaching effects. These effects in turn could have a significant impact on the firm's future profitability, so it is imperative that they are considered during the decision-making process. In general, the effects have been shown to be positive (Doukas & Travlos, 1988), but this also implies high risk due, which illustrates the need for the financial aspects of such expansions to be addressed with great care.

Once the decision to expand overseas has been made and the mode of entry has been settled upon, the MNC must then consider the best method of paying for the transaction. In some cases, the method of payment can have a significant impact on the project's net present value. For example, if a firm wishes to set up greenfield with a factory in a foreign country, it could pay with cash, with a debt issue or with an equity issue. Each of these options comes embedded with a different cost of capital and different time frames. As such, the financing decision becomes integral to the project's long-term success. When a merger or acquisition is undertaken, the decision becomes even more complex. Cash, stock or debt… READ MORE

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