Multinational corporations operate in two or more countries while domestic companies restrict their operations to a single country. The reasons companies expand to other countries vary. Some companies do it to seek new markets, others to find resources, yet others to reduce costs. All multinational companies learn to handle the special challenges of multinational financial management. Eugene F. Brigham and Phillip R. Davies suggest, in their advanced corporate finance textbook Intermediate Financial Management, there are six main differences that set apart multinational financial management from domestic financial management.
Different Economic and Legal Structure
Companies that expand to other countries must take to heart the medieval saying: when in Rome do as the Romans. Different countries have different legal structures, financial methods and customs, and a multinational corporation must learn how to adapt to these differences. For instance, a company in the United States might use the Securities Exchange Commission generally accepted accounting principles, GAAP, but may have to change to the international financial reporting standards when it has subsidiaries in other countries.
Different Currency Denominations
Multinational corporations must do business with different currencies depending on where their subsidiaries are located. This involves dealing with the cost and inconvenience of exchanging currencies when transferring funds between countries.
Multinational companies must generally deal with several languages through their everyday operations. For instance, a company with a subsidiary in Spain may have to carry out business in Spanish, Catalan, Galician or in the Basque language depending on where in Spain its offices are located. This generates extra costs and paperwork because you have to translate company policies, forms and even telephone conversations to two or more languages.
Successful multinational companies must be flexible enough to adapt to local culture and preferences. The cultural differences may vary how a product is marketed; for instance, changing a slogan that is unsavory or ineffective when translated, or by changing the product itself. For example, McDonald's will vary its menu to adapt to differences in the local palate: in Italy McDonald's serves pasta and in Nicaragua rice and beans.
Role of Governments
Not all governments deal with multinational companies in the same way. Some place burdensome tariffs on foreign corporations, while others welcome them with open arms and provide financial incentives in exchange for the new jobs the corporation generates. Governments also vary in their respective levels of corruption, efficiency and bureaucracy.
Multinational corporations must also assess the stability of a country's government before it decides to do business in it -- especially if the corporation must pay expensive licenses and "incentives" to oil the gears of bureaucracy. Countries where valuable natural resources are controlled by the government and licensed to foreign companies are a source of both great opportunity and risk to multinationals. For instance, while a license to extract raw materials at a low price is priceless for a multinational looking for a reliable line of supply, a change in government could mean financial ruin for a subsidiary with economic agreements with the previous administration.
- "Intermediate Financial Management: Multinational Financial Management"; Eugene F. Brigham; Phillip R. Daves; 2010
- "Financial Management: Theory and Practice; Eugene F. Brigham; Michael Ehrhardt"; 2008