What are the six major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?

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What are the six major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?

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With the growth in demand for exotic foods, Possum Inc.’s CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some
risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe.
 
Possum Inc.’s CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions:
b. What are the six major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?

Explanation & AnswerSolution by a verified expert

Explanation

Corporations go global with the desire to explore the opportunities existing in the foreign markets. However, the management of finances is different in foreign countries as compared to the domestic country. Following are the various aspects of such differences in the normal operations.

Cash flows of transactions occurring in the foreign country would be in the foreign currency, thus understanding of exchange rate fluctuations is important for managing foreign cash flows effectively. As the reporting of entity operations will be done with exchange rate fluctuations.
Secondly, the differences in the economic system of domestic and foreign countries play a vital role in framing financial policies of corporations. Some countries are free markets, which supports capitalism, whereas other countries might be planned economies, where there might be restrictions on movement of capital.
The next important aspect is the differential legal system. One company may follow common law where it encourages investors and businessmen for diversified investment. Whereas, other countries might follow civil law in order to implement stricter control over the business operations and movement of funds.
Corporate taxation is also a substantial factor when it comes to managing finances of the same business in multiple companies. Differences in tax structures may lead to variances in the final profit, which is available for distribution to the shareholders and for reinvestment in business.
The extent of government interventions in the business matters also impact the strategic formulation of trade policies and terms of competition. Sometimes, certain business policies are to be framed by the consent of government bodies. Also there might be some legal, social and environmental compliances which are mandated by the government.
Political risk is another factor, where poor political relations between domestic and host countries may not allow for free flow of the resources and smooth conduct of business operations.

Apart from these six factors, there are also certain aspects like different languages, culture differences, terrorism and crime which affects the financial management of business in foreign countries.

Verified Answer

The six major factors that differentiate foreign financial management from domestic financial management are exchange rate fluctuations, different economic systems, different legal framework, varied taxation system, government intervention and political risks.

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