Fundamentals of Multinational Finance

Book Preface

The subject of this book is the financial management of multinational enterprises (MNEs)—multinational financial management. MNEs are firms—both for-profit companies and not-for-profit organizations—that have operations in more than one country and conduct their business through branches, foreign subsidiaries, or joint ventures with host country firms.

Fundamentals of Multinational Finance, Sixth Edition, reflects the juxtaposed forces of an increasingly digital global marketplace and a resurgence of nationalist culture and identity. Financial forces, markets, and management are in many ways at the crux of this challenge. This edition has been revised to reflect a business world trying to find a new balance between new business startups like the micro-multinational, a maturing China, a separatist Britain (Brexit), and an attempt by governments globally to channel, regulate (and tax) multinational firms that continue to grow in stature and strength. The book focuses on the challenges faced in multinational financial management—with three points of emphasis.

■ Organizations. Multinational enterprises (MNEs) applies to organizations of all kinds—the publicly traded, the privately held, the state-run, the state-owned organizations—all forms that permeate global business today. Who owns and operates the organization alters its goals and therefore its management.
■ Markets. Country players in the emerging world are rapidly taking their place as both producers and consumers on an equal basis with the industrial countries and their tradi-tional corporate components. Although they may still be categorized as emerging, they are the economic drivers and primary challenges for global finance and global financial management.
■ Leadership. Individuals in positions of leadership within these organizations and markets are faced with a changing global landscape in which emerging market finance is no longer on the outer edge of financial management, but moving to its core. These leaders of MNEs face numerous foreign exchange and political risks that are actually more volatile, with global capital moving in and out of countries at an ever-increasing rate.

These risks can be daunting but they also present opportunities for creating value if prop-erly understood and managed. In the end, the primary question is whether business leaders are able to integrate the global strategic and financial challenges that business faces.

New in the Sixth Edition

Our primary challenge with the Sixth Edition is to strike a balance between our growing success with the Fifth Edition and the relevant and exacting recommendations by selected reviewers—the innovator’s dilemma. Surveys of adopters were extremely useful in this revision, and a number of specific developments included.

. All chapters are structured around a series of pedagogical Learning Objectives
aligned with the platform for Fundamentals of Multinational Finance’s teaching.

Interest Rate Risk and Swaps. A new chapter has been introduced that details the various interest rate risks of the MNE and the practical use of interest rate and cross–currency swaps.

■ The Impossible Trinity. A core international financial principle, the Impossible Trinity’s use as a unifying theoretical link across multiple subjects and chapters has been expanded.
■ The Foreign Exchange Market and Digital Trade. New material in this edition explores in depth how the changing structure of the global foreign exchange market—trading, com-munication, and settlement—is posing challenges for private players and public regulators and overseers.
■ International Taxation. Integrally linked to a world of digital commerce, multina-tional tax management continues to rise in its significance in multinational financial management. We have greatly expanded our coverage of this truly critical financial man-agement topic.
■ Political Risk and Financial Losses. The chapter on foreign direct investment and political risk has been revised to reflect the growing use of restrictions on convertibility, transfer-ability, and the possibility of repudiation or expropriation.
■ New and Edgier Mini-Cases. Eleven of the 18 Mini-Cases are completely new to the Sixth Edition, and explore many of the edgier debates rising between global business, social policy, and corporate social responsibility. Topics include Argentine debt and vulture investors, Apple’s global profit positioning and tax structure, Brexit and its potential impact on Rolls-Royce, Volkswagen’s governance structure and its defeat device “ strategy,” political risk in Kazakhstan’s oil and gas industry, and crowdfunding startups in Kenya, to name but a few.
■ Expanded Quantitative Applications. We have worked diligently to increase the quantita-tive elements across subjects and chapters to push students to explore the depth of analysis and comprehension.
■ End-of-Chapter Assessment. Questions and Problems are revised throughout and aligned

Fundamentals of Multinational Finance, Sixth Edition, however, retains and revises con-tinuing forces of change as seen in the growing dominance of China’s economy and currency, the disruptive financial forces of quantitative easing and near-zero interest rates, and the chal-lenge of the multinational firm to navigate foreign exchange risks.

International finance is a subject of sophistication, constant change, yet rich in history. We have tried to bridge the traditional business practices with digital practices with a mix of currency notations and symbols throughout the book, using both the common three-letter cur-rency codes—USD, CNY, EUR—with the traditional currency symbols—$, ¥, £, €—which are seeing a resurgence as countries like Russia and Turkey have introduced new “currency identities” of their own.

Audience

Fundamentals of Multinational Finance, Sixth Edition, is aimed at university-level courses in international financial management, international business finance, international finance, and similar titles. It can be used at either the undergraduate or graduate level as well as in executive education and corporate learning courses.
A prerequisite course or experience in corporate finance or financial management would be ideal. However, we review the basic finance concepts before we extend them to the multinational case. We also review the basic concepts of international economics and inter-national business.
We recognize the fact that a large number of our potential adopters live outside of the United States and Canada. Therefore, we utilize a significant number of non-U.S. examples, Mini-Cases, and Global Finance in Practice examples seen in the business and news press (anecdotes and illustrations).

Organization

Fundamentals of Multinational Finance, Sixth Edition, has been redesigned and restruc-tured for tightness—critical elements of the field but in a much shorter delivery framework. This has been accomplished by integrating a number of previous topics along financial management threads. The book is in five parts, the parts unified by the common thread of the globalization process by which a firm moves from a domestic to a multinational busi-ness orientation.

■ Part 1 introduces the global financial environment
■ Part 2 explains foreign exchange theory and markets
■ Part 3 explores foreign exchange rate exposure
■ Part 4 details the financing of the global firm
■ Part 5 analyzes international investment decisions