A Written Report on

Global Finance with Electronic Banking

By:

Acquiatan, Florence C.
Angurin, Janice B.
Apilan, Elmer G.
Arcenal, Mary Grace P.
Bacornay, Gracel
Barrientos, Cheska M.
Bertulfo, Divine Grace G.
Canda, Leah A.
Colipano, Beverly Rose T.

Submitted to:
Dr. Suzette L. Josol

4FMB Tuesday/Friday 9:00-10:30

In Partial Fulfillment of the Course Efm5/ Global Finance with Electronic Banking
leading to the degree Bachelor of Science in Business Administration Major in Financial
Management

August 27, 2024

Topic: Global Financial Environment

Course Intended Learning Outcomes:

● Analyzed the multifaceted nature of international fund flows and their implications for
economic stability and growth.
● Evaluate the functioning of international financial markets and the influence of
geopolitical factors on global financial dynamics.

LESSON 1

What is MULTINATIONAL FINANCIAL MANAGEMENT?

Multinational financial management involves making financial decisions, managing foreign

exchange risk, and complying with local tax laws and regulations. It encompasses a wide
range of activities, including foreign exchange management, international taxation, capital
budgeting, and global risk management. The objective of MFM is to maximize shareholder value
while minimizing financial risks associated with international operations.
Multinational financial management is related to the strategic failure of the resources to enable
businesses in achieving their goals. This report aims to provide a comprehensive overview of
MFM, exploring its key concepts, challenges, and best practices.

Imagine a company that wants to expand its business beyond its home country. That's where
Multinational Financial Management (MFM) comes in. It's like a special set of tools and
strategies designed to help companies navigate the complexities of operating in multiple
countries.

Think of it like this:

- Regular financial management: You're managing money for your local business.
- Multinational financial management: You're managing money for a business that
operates in many countries, each with its own currency, laws, and economic conditions.

Key Goals of MFM:

 - Maximize shareholder value: Make the most money for the company's owners.
- Minimize financial risks: Protect the company from potential losses due to things like
currency fluctuations or political instability.

Example:

Let's say a U.S. company wants to open a factory in Mexico. Here's how MFM would be used:

➢ Foreign exchange management: The company needs to figure out how to exchange
U.S. dollars for Mexican pesos to pay for the factory and its operations. They might use
strategies like hedging to protect themselves from currency fluctuations.
➢ International taxation: The company needs to understand and comply with Mexican tax
laws, including how to pay taxes on their profits and how to handle any tax treaties
between the U.S. and Mexico.
➢ Capital budgeting: The company needs to decide if the investment in the Mexican
factory is worth it, taking into account things like the cost of labor, the cost of materials,
and the potential for profit.
➢ Global risk management: The company needs to assess and manage risks associated
with operating in Mexico, such as political instability, economic downturns, and natural
disasters.

In short, MFM is about making smart financial decisions in a globalized world. It's about
understanding the unique challenges and opportunities of operating in multiple countries and
using strategies to maximize profits while minimizing risks.

Key Concepts

➢ FOREIGN EXCHANGE RISK: Fluctuations in exchange rates can significantly impact

a multinational company's profitability. MFM involves strategies to mitigate this risk,
such as hedging, forward contracts, and currency options (Eun & Resnick, 2018). These
strategies aim to lock in exchange rates for future transactions, reducing the potential for
losses due to currency fluctuations.

Imagine you're a U.S. company selling products to customers in Europe. You'll need to convert
your earnings in Euros back to U.S. Dollars. If the Euro weakens against the Dollar, you'll get
fewer Dollars for your Euros, meaning you'll make less profit. This is foreign exchange risk.

Mitigating Foreign Exchange Risk:

Multinational Financial Management (MFM) uses strategies to minimize this risk. Here are three
common ones:

1. Hedging: This involves using financial instruments to offset potential losses from
currency fluctuations. It's like buying insurance against a drop in the Euro's value.
2. Forward Contracts: These are agreements to buy or sell a specific amount of currency at
a fixed exchange rate in the future. This locks in a rate and eliminates uncertainty.
3. Currency Options: These give you the right, but not the obligation, to buy or sell
currency at a specific rate within a certain timeframe. This provides flexibility and
protection against unexpected currency swings.

Example:

Let's say your U.S. company is expecting to receive €1 million in Euros for its European sales in
three months.

- Without MFM: If the Euro weakens from €1 = $1.10 to €1 = $1.00 in three months, you'll
only get $1 million instead of the expected $1.1 million.
- With MFM: You could use a forward contract to lock in a rate of €1 = $1.05. This guarantees
you'll receive $1.05 million even if the Euro weakens further.

In essence, MFM strategies help companies manage the uncertainty of currency fluctuations and
protect their profits. By locking in exchange rates or having options to buy or sell currency at
favorable rates, companies can minimize the financial impact of currency movements.

➢ INTERNATIONAL TAXATION: Multinational companies face complex tax

regulations in different countries. MFM involves optimizing tax strategies, minimizing
tax liabilities, and complying with international tax laws (Deloitte, 2023). This includes
understanding transfer pricing rules, double taxation treaties, and tax incentives offered
by various countries.

Imagine a company with operations in the United States, Canada, and Mexico. Each country
has its own set of tax laws, rates, and regulations. This is the reality for multinational
companies, and it's where international taxation becomes a major challenge.

Multinational Financial Management (MFM) helps companies navigate this complex tax
landscape by:
 - Optimizing tax strategies: Finding the most advantageous ways to structure their
business and transactions to minimize their overall tax burden.
- Minimizing tax liabilities: Reducing the amount of taxes they owe in each country.
- Complying with international tax laws: Ensuring they follow all the rules and
regulations in every country they operate in.

Key Concepts in International Taxation:

- Transfer Pricing: This refers to how companies set the prices for goods, services, or
intellectual property exchanged between different parts of their global operations.
Transfer pricing rules aim to prevent companies from shifting profits to countries with
lower tax rates.
- Double Taxation Treaties: These agreements between countries help prevent companies
from being taxed twice on the same income. For example, a company might be taxed on
its profits in Canada and then again in the United States. A double taxation treaty would
help reduce or eliminate this double taxation.
- Tax Incentives: Many countries offer tax incentives to encourage investment and
business activity. These incentives can take many forms, such as tax breaks, subsidies, or
exemptions. MFM involves identifying and taking advantage of these incentives to
reduce tax liabilities.

Example:

Let's say a U.S. company manufactures parts in Mexico and sells them to its Canadian
subsidiary.

- Transfer Pricing: The company needs to set a fair price for the parts transferred from
Mexico to Canada. This price must be consistent with market values and avoid
artificially shifting profits to Mexico to take advantage of lower tax rates.
- Double Taxation Treaty: The company needs to understand any double taxation treaties
between the United States, Canada, and Mexico to ensure it's not taxed twice on the same
income.
- Tax Incentives: The company might be eligible for tax incentives in Mexico for
manufacturing activities or in Canada for research and development. MFM would
involve researching and applying for these incentives to reduce tax liabilities.

In short, international taxation is a complex and ever-changing field. MFM helps companies
navigate this complexity by understanding the rules, optimizing their strategies, and taking
advantage of available opportunities to minimize their tax burden while remaining compliant
with international tax laws.
 ➢ CAPITAL BUDGETING: MFM requires careful consideration of investment
opportunities across various countries, taking into account factors such as political
stability, economic growth, and local regulations (Brealey, Myers, & Allen, 2018). This
involves evaluating project feasibility, considering risk adjustments for foreign markets,
and ensuring alignment with the company's global strategic objectives.

Imagine a company wanting to build a new factory in India. This is a major investment decision,
and it requires careful consideration, especially when operating in a foreign country. This is
where Capital Budgeting comes into play within Multinational Financial Management (MFM).

Capital Budgeting in MFM:

- Investment Opportunities: MFM involves evaluating potential investments across

various countries, looking for opportunities that align with the company's global strategy.
- Key Considerations: Factors like political stability, economic growth, and local
regulations are crucial. A politically unstable country might pose risks to the investment,
while a strong economy could offer growth potential. Local regulations might impact the
cost and feasibility of the project.
- Project Feasibility: MFM requires a thorough analysis of the project's viability,
including assessing the costs, potential revenue, and the time it takes to recoup the
investment.
- Risk Adjustments: Foreign markets often present unique risks. MFM incorporates risk
adjustments to account for these uncertainties, potentially requiring higher returns to
compensate for the added risk.
- Global Strategic Alignment: The investment decision should align with the company's
overall global strategy. For example, if the company aims to expand its market share in
Asia, investing in a factory in India would be a strategic move.

Example:

Let's say a U.S. company wants to build a new manufacturing plant in Brazil.

- Political Stability: Brazil has experienced political instability in recent years, which
could impact the investment's success. The company would need to assess the political
climate and potential risks.
- Economic Growth: Brazil's economy has been slow to recover from a recent recession.
The company would need to consider the economic outlook and potential impact on the
factory's profitability.
- Local Regulations: Brazil has strict environmental regulations, which could add costs to
the project. The company would need to understand and comply with these regulations.
 - Project Feasibility: The company would need to evaluate the costs of building and
operating the factory, the potential for sales in the Brazilian market, and the time it takes
to recoup the investment.
- Global Strategic Alignment: If the company aims to expand its presence in South
America, investing in a Brazilian factory would be a strategic move.

In essence, Capital Budgeting in MFM is about making smart investment decisions in a

globalized world. It's about assessing risks, evaluating opportunities, and ensuring that
investments align with the company's global strategy.

➢ GLOBAL RISK MANAGEMENT: Multinational companies face a wider range of

risks, including political instability, economic downturns, and natural disasters (Hill &
Jones, 2019). MFM involves developing strategies to manage these risks through
diversification, insurance, and contingency planning. This includes assessing potential
risks, developing mitigation strategies, and implementing robust risk monitoring and
reporting systems.

Imagine a company with operations in multiple countries, each with its own unique challenges.
This is the reality for multinational companies, and they face a wider range of risks compared to
purely domestic businesses. Global Risk Management is a crucial aspect of Multinational
Financial Management (MFM) that helps these companies identify, assess, and mitigate these
risks.

Key Elements of Global Risk Management:

- Identifying and Assessing Risks: Multinational companies face a diverse set of risks,
including:
- Political Instability: Political unrest, coups, or changes in government policies can
disrupt operations and impact investments.
- Economic Downturns: Recessions, currency fluctuations, and inflation can affect
profitability and financial stability.
- Natural Disasters: Earthquakes, floods, hurricanes, and other natural disasters can
damage infrastructure, disrupt supply chains, and impact operations.
- Cybersecurity Threats: Data breaches, cyberattacks, and system failures can lead to
financial losses, reputational damage, and legal liabilities.
- Developing Mitigation Strategies: MFM employs various strategies to manage these
risks, including:
- Diversification: Spreading operations across different countries and regions reduces the
impact of localized risks.
- Insurance: Purchasing insurance policies can provide financial protection against
specific risks, such as political instability, natural disasters, or cyberattacks.
 - Contingency Planning: Developing backup plans and procedures to address potential
disruptions, ensuring business continuity in case of emergencies.
- Risk Monitoring and Reporting: Implementing robust systems to track potential risks,
monitor their impact, and report on the effectiveness of mitigation strategies.

Example:

Imagine a U.S. company with manufacturing facilities in China and a distribution center in
Thailand.

- Risks: The company faces risks such as:

- Political Instability in China: Trade tensions between the U.S. and China could disrupt
operations and impact supply chains.
- Economic Downturn in Thailand: A recession in Thailand could reduce consumer
demand and impact sales.
- Natural Disasters in Both Countries: Typhoons in Thailand and earthquakes in China
could damage facilities and disrupt operations.

MITIGATION STRATEGIES:

- Diversification: The company could consider diversifying its manufacturing operations

to other countries, reducing its reliance on China.
- Insurance: The company could purchase insurance policies to cover potential losses
from political instability, natural disasters, and cyberattacks.
- Contingency Planning: The company could develop backup plans for sourcing
materials, manufacturing, and distribution in case of disruptions.
- Risk Monitoring: The company would need to continuously monitor political and
economic developments in China and Thailand, as well as natural disaster risks, and
adjust its mitigation strategies accordingly.

In essence, Global Risk Management is about being proactive in identifying and addressing
potential threats. By diversifying operations, securing insurance, and developing contingency
plans, multinational companies can navigate the complexities of a globalized world and
minimize the impact of unexpected events.

CHALLENGES OF MFM

● POLITICAL AND ECONOMIC UNCERTAINTY: Global events, such as political

instability or economic crises, can significantly impact multinational operations. MFM
 requires flexibility and adaptability to navigate these uncertainties and adjust strategies
accordingly (Krugman, Obstfeld, & Melitz, 2015).

Imagine a company with operations in a country that suddenly experiences a political upheaval,
leading to instability and uncertainty. Or, consider a company facing a global economic crisis
that disrupts supply chains and reduces consumer spending. These are just two examples of how
political and economic uncertainty can significantly impact multinational operations.

Navigating Uncertainty with MFM:

Multinational Financial Management (MFM) acknowledges that these unpredictable events are a
constant reality for global businesses. It emphasizes the need for:

- Flexibility: MFM requires companies to be adaptable and responsive to changing

circumstances. This means having contingency plans in place to address potential
disruptions and being able to adjust strategies quickly.
- Adaptability: MFM encourages companies to be agile and willing to modify their
approach based on evolving conditions. This might involve shifting resources, adjusting
production, or exploring new markets.

Example:

Let's say a U.S. company has a manufacturing facility in a country that experiences a sudden
political coup.

- Potential Impacts: The coup could lead to:

- Political Instability: Unrest, violence, and uncertainty could disrupt operations and make
it difficult to continue production.
- Economic Uncertainty: The coup could destabilize the economy, leading to currency
fluctuations, inflation, and reduced consumer spending.
- Changes in Regulations: The new government might introduce new laws or policies
that impact the company's operations, such as stricter environmental regulations or higher
taxes.

MFM Strategies: The company could use MFM to:

- Diversify Operations: Shift some production to other countries to reduce reliance on the
unstable region.
- Adjust Pricing: Increase prices to offset rising costs due to economic instability or new
regulations.
 - Explore Alternative Markets: Seek new customers in other countries to reduce
dependence on the affected market.
- Develop Contingency Plans: Have backup plans in place for sourcing materials,
manufacturing, and distribution in case of disruptions.

In essence, MFM helps multinational companies navigate political and economic uncertainty by
emphasizing flexibility, adaptability, and proactive risk management. By being prepared for
unexpected events and having the ability to adjust their strategies, companies can minimize the
impact of these challenges and maintain their global operations.

● CULTURAL DIFFERENCES: Managing a diverse workforce across different cultures

requires sensitivity and understanding of local customs and practices (Hofstede, 2010).
This includes respecting cultural nuances in communication, decision-making, and
business practices.

In today's interconnected world, businesses often operate across diverse cultures, leading to a
globalized workforce. This presents both opportunities and challenges, as different cultures have
unique customs, practices, and ways of interacting. Managing a diverse workforce effectively
requires sensitivity and understanding of these cultural nuances.

Understanding Cultural Differences:

- Local Customs and Practices: Each culture has its own set of unwritten rules and
expectations that govern behavior, communication, and business practices. These can
range from how people greet each other to how they approach negotiations.
- Communication Styles: Different cultures have distinct communication styles,
including:
- Direct vs. Indirect: Some cultures value direct communication, while others prefer
indirect approaches to avoid confrontation.
- Formal vs. Informal: The level of formality in communication can vary significantly,
with some cultures emphasizing titles and protocols, while others are more casual.
- Verbal vs. Nonverbal: Nonverbal cues, such as body language and gestures, can carry
different meanings in different cultures.
- Decision-Making Processes: Decision-making processes can also vary across cultures.
Some cultures emphasize consensus-building, while others favor a more hierarchical
approach.
- Business Practices: Business practices, such as negotiation styles, time management,
and work-life balance, can be influenced by cultural norms.

Respecting Cultural Nuances:

To effectively manage a diverse workforce, it's essential to:
- Embrace Cultural Sensitivity: Be aware of and respectful of cultural differences. Avoid
making assumptions or imposing your own cultural values on others.
- Promote Cultural Understanding: Encourage employees to learn about each other's
cultures and share their perspectives. This can foster empathy and appreciation for
diversity.
- Adapt Communication Styles: Be mindful of communication styles and adjust your
approach accordingly. Use clear and concise language, avoid slang or jargon, and be
attentive to nonverbal cues.
- Respect Decision-Making Processes: Understand and respect different decision-making
processes. Be patient and willing to engage in collaborative discussions.
- Foster Inclusivity: Create an inclusive work environment where all employees feel
valued and respected, regardless of their cultural background.

Example:

Imagine a company with a team composed of employees from the United States, Japan, and
Germany.

- Communication: A U.S. manager might be accustomed to direct communication and

giving straightforward feedback. However, a Japanese employee might perceive this as
being overly blunt and disrespectful. The manager needs to adapt their communication
style to be more indirect and considerate of the Japanese employee's cultural norms.
- Decision-Making: A German employee might expect a structured and hierarchical
decision-making process, while a U.S. employee might prefer a more collaborative
approach. The manager needs to find a balance that respects both cultures and ensures
that all voices are heard.
- Business Practices: A Japanese employee might be accustomed to a longer negotiation
process, while a U.S. employee might prefer a more direct and efficient approach. The
manager needs to be aware of these differences and adjust their negotiation style
accordingly.

In essence, managing a diverse workforce requires a commitment to cultural sensitivity,

understanding, and inclusivity. By embracing these principles, companies can leverage the
strengths of a globalized workforce and create a more productive and harmonious work
environment.

● REGULATORY COMPLEXITY: Navigating the complex web of regulations in

multiple countries can be challenging and time-consuming. MFM involves staying
updated on evolving regulations, ensuring compliance, and seeking expert legal and
accounting advice (PwC, 2023).
 ● INFORMATION ASYMMETRY: Accessing reliable and timely information about
foreign markets and regulations can be difficult. MFM requires developing robust
information gathering systems, leveraging local networks, and utilizing reputable
research sources (World Bank, 2023).

BEST PRACTICES IN MFM

- CENTRALIZED FINANCIAL CONTROL: Establishing a centralized financial control

system helps ensure consistency and efficiency across all operations. This involves setting clear
financial policies, implementing standardized reporting procedures, and leveraging technology
for data consolidation and analysis (Horngren, Datar, & Rajan, 2015).
- LOCAL EXPERTISE: Hiring local professionals with expertise in the relevant markets can
provide valuable insights and support. This includes engaging local accountants, lawyers, and
financial advisors who understand the nuances of the local business environment (Deloitte,
2023).
- STRONG RISK MANAGEMENT: Implementing robust risk management strategies is
crucial to mitigate potential losses from global events. This involves identifying and assessing
potential risks, developing mitigation plans, and continuously monitoring and evaluating risk
exposures (Crouhy, Galai, & Mark, 2001).
- EFFECTIVE COMMUNICATION: Maintaining open and transparent communication
channels between headquarters and subsidiaries is essential for effective coordination. This
includes establishing clear communication protocols, utilizing technology for real-time updates,
and fostering a culture of collaboration and information sharing (Mintzberg, 2009).
- TECHNOLOGY ADOPTION: Utilizing advanced technology, such as enterprise resource
planning (ERP) systems, can streamline financial processes and improve efficiency. This
includes implementing systems for financial consolidation, foreign exchange management, and
global reporting, enabling better data analysis and decision-making (Brynjolfsson & McAfee,
2014).

CONCLUSION

Multinational financial management is a complex and dynamic field that requires a holistic
approach to managing financial operations in a globalized world. By understanding the key
concepts, challenges, and best practices, multinational companies can effectively manage their
financial operations, optimize profitability, and achieve sustainable growth.

References
- Brealey, R. A., Myers, S. C., & Allen, F. (2018). Principles of corporate finance. McGraw-Hill
Education.

- Brynjolfsson, E., & McAfee, A. (2014). The second machine age: Work, progress, and
prosperity in a time of brilliant technologies. W. W. Norton & Company.

- Crouhy, M., Galai, D., & Mark, R. (2001). Risk management. McGraw-Hill Education.

- Deloitte. (2023). International tax services. Retrieved from

https://www2.deloitte.com/us/en/pages/tax/topics/international-tax.html

- Eun, C. S., & Resnick, B. G. (2018). International financial management. McGraw-Hill

Education.

- Hill, C. W. L., & Jones, G. R. (2019). Strategic management: An integrated approach. Cengage
Learning.

- Hofstede, G. (2010). Cultures and organizations: Software of the mind. McGraw-Hill

Education.

- Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost accounting: A managerial
emphasis. Pearson Education.

- Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2015). International economics: Theory and
policy. Pearson Education.

- Mintzberg, H. (2009). Managing. Pearson Education.

- PwC. (2023). International tax services. Retrieved from

https://www.pwc.com/us/en/tax/international-tax.html

- World Bank. (2023). Doing business. Retrieved from https://www.doingbusiness.org/

-https://www.bmsauditing.com/blogs/what-is-multinational-financial-
management#:~:text=Multinational%20financial%20management%20involves%20making,and
%20managing%20working%20capital%20effectively.

https://www.bmsauditing.com/blogs/what-is-multinational-financial-management?
fbclid=IwZXh0bgNhZW0CMTEAAR3fxJzCYrJFjX6t1Ki1PTY1byfgTy8Ik1anF8XjwvT9q3dm
hYvD-0FVgvw_aem_uRhULzDV8vHYEpQd98Dk-A
https://www.blackline.com/resources/glossaries/multinational-financial-management/?
fbclid=IwZXh0bgNhZW0CMTEAAR1CkseqWDUIFKi0M_rhKoJmP0EKhlBqskTVKcxLsub1
TW1BYn7sDr8l3Bo_aem_KtoAsPGsVPRufsfcAvDCAQ