Financial Management in Multinational Organizations

free essayThe current stage of development of the world economy is characterized by unprecedented changes in financial management taking place in the global business environment. Changes in mobilization of management resources have created favorable conditions for the transnationalization of capital and the internationalization of business and have caused a rise of transnational corporate structures (Anwar & Jabnoun, 2006). At the same time, cash flow management has become one of the most important aspects of financial management, due to the fact that cash is the most liquid asset of the entity capable for transforming into any other type of asset (Gunasekaran, Patel, & Tirtiroglu, 2001). That is why, the study of the theory and practice of resource management is urgent in the context of globalization.

Most financial management practices show that specific procedures are being developed and implemented to optimize management of resources and formation of cash flows across TNCs. Thus, globalization has identified the priority of financial management of resource policy, making effective mobilization of financial resources the main task of TNC.

To research the base of this hypothesis, financial resources on a global scale should be investigated.

Financial Resources of TNC in Global Conditions

The main volume of foreign direct investment and thus production and other activities of TNCs are concentrated within the European Union, the USA, and Japan due to the specific nature of the current stage of development of scientific and technological revolution and, hence, the restructuring of national economies. Foreign affiliates also confirm this: 45% of them are located in industrialized countries, 41% in developing countries, and 13% in the countries of Central and Eastern Europe (Xi, 2012). The process of financial management provides the formation of TNC resources so that management in this case performs the function of providing both economic and social activities as it ensures stability of entire countries.

60% of American and Japanese multinationals are engaged in the manufacturing sector, 37% in service industries, and only 3% in the primary sector. Thus, the trend of channeling financial resources confirms their presence on every continent, which determines importance of effective methods of mobilization of financial resources in the global environment.

Internal financial resources should be studied to characterize their management.

The Impact of Globalization on the Management of Internal Financial Resources of TNC

Management of this type of resources has gained a broad direction due to globalization. The capital of owners and co-owners of a corporation formed and accumulated within the course of the issue and placement of equity securities has become one of the most important and traditional internal financial resources. Purchasing shares of the corporation, individuals, workers of corporations, foreign business organizations, NGOs, and government agencies are included in the system of any corporation as its original elements with their functions and interactions. For its intended purpose, this kind of financial resources of corporations has become diversified (Anwar & Jabnoun, 2006). Forming fixed assets and working capital, the share capital of TNC shows the diversity of its use, becoming a source of financing expansion and development of the corporation, implementation of its social policy, and investment.

Share issue of transnational corporations has become one of the most proven sources of internal financial resources with a wide range of implementation due to globalization. It may be noted that a number of corporations have a significant share of equity in assets: Intel Corp. (78%), Compaq Computer Corp. (50%), Lucent Technologies (47%), and Advanced Micro Devices (45%) (Xi, 2012). Thus, different tools of recourse management should be described.

Subordinated Debt as an Instrument of Global Management of Resources

Intensifying use of another form of internal financial resources is linked with capital market instruments. This is subordinated debt, which shows issue and placement of a variety of short- and long-term securities among shareholders and the staff of the corporation. It has received a number of qualitative characteristics inherent for both equity and liabilities (borrowed or raised) as a result of globalization. On the one hand, the rights of investors as compared to holders of shares have become less numerous and varied. On the other hand, features of the corporation obligations denominated as debt securities, if necessary, can be significantly adjusted by the management. Reached by the Board of Directors and Shareholders’ Meeting Board, decisions may change the amount and timing of obligations of subordinated debt, reduce the level, make other types and timing of interest payments, convert debt into equity securities, and make cancellation of the debt. Naturally, this kind of internal financial resources is rarely activated in the process of formation of a corporation and it is not often used for maintaining operational functioning. However, as a source of funding for expansion and development of the corporation and compensation of losses during manifestation of risks of major projects, this kind of internal financial resources is promising. International practice makes a heavy use of subordinated debt as an internal financial resource.

Corporate Bonds and Additional Income as Management Tools of Internal Financial Resources

An effective tool for mobilizing internal financial resources by multinational corporations is corporate bonds most commonly used by US corporations (over the past five years, US corporations have mobilized nearly $ 2.5 trillion in the debt market, 20% of which has been obtained by placing high-risk bonds). Main issuers of corporate bonds are major companies of the industrial, transport, and energy sectors of the US economy (Tleuova & Yestekova, 2014).

Financial management of transnational corporations actively uses another specific type of internal financial resources associated with the formation of intra-corporate cash flows. Its peculiarity lies in the fact that, from the point of view of the entire corporation, it almost does not provide cash inflows, but it can be very significant from the standpoint of individual elements of the corporate structure of financial resources. It is additional income, which arises due to a difference in exchange rates, taxation, and financial constraints in countries and regions of the enterprise and corporate affiliates.

Uneven development of economies of different countries, differences in their monetary and fiscal policies, as well as in social priorities leads to the fact that at the same time one unit of the corporation develops produces free cash for efficient allocation and other units have financial difficulties. Central management of the cash flow within the corporation allows responding to both negative and positive changes in the situation until the accumulation of funds in the financial center in order to deal effectively with emerging imbalances. In addition, the scheme of a single financial center of the corporation also leads to significant cost savings for the transfer of funds.

Thus, the use of effective methods of internal financing activities allows to use financial resources to develop and strengthen business in countries with a strong and stable economy and at the same time allows effective support of subsidiaries. It characterizes development and diversification of sources of internal resource management and effective involvement of these sources enables generation of more revenue and financial stability in the context of globalization (Tleuova & Yestekova, 2014).

External financial resources of TNCs should also be examined to characterize resource management.

Management of External Financial Resources of TNCs in the Context of Globalization

Internal financial resources of multinational corporations, having several advantages, do not always fully able to ensure their financial needs. External financial resources have become more diversified, capacious, intense, and effective in some cases. They are particularly important during the development of the corporation, which requires maximum concentration of financial resources.

Multinationals have made an active use of external financial resources their economic priority. For example, the structure of sources of the assets of Advanced Micro Devices contains a large proportion of borrowed funds (43.7%). Coefficients of the debt / equity and long-term debt / equity amount to 0.41 and 0.37 respectively and the coefficient of financial independence is 0.55. Financial independence of this and other companies is higher than the coefficient of corporations that use internal financial resources, primarily equity, as a source of financing. For example, Intel Corp.’s debt / equity ratio and long-term debt / equity ratio are 0.03 and 0.02, respectively, while the financial independence ratio is 0.78.

However, such a different policy in the sphere of financial resource support in the conditions of high quality of financial management and the optimal structure of liabilities have led to the fact that both these corporations operating in the same industry and using different financial resources (mostly external for AMD and internal for Intel) have high financial stability. Due to the fact that long-term debt takes 90% of the debt of AMD, both companies have substantially the same coefficient of financial stability – 0.79 and 0.75 (Intel and AMD). In this case, profitability of both companies is much higher than the average for the industry.

As a result of the analysis, it can be concluded that both internal and external financial resources can provide an effective business with proper management. However, although external financial resources are harder to manage and harder to become more active and are more costly they have a number of advantages in comparison with internal financial resources (Anwar & Jabnoun, 2006).

Firstly, they provide greater adaptability to local financial and monetary conditions (taxes, controls, restrictions, and exchange rates). Secondly, they are more able to protect finances of corporations against inflation. Thirdly, unlike internal financial resources, their change capabilities are more diverse. It shows the need to research directions of management of external resources.

Directions of Management of External Resources of TNC

Comparing with conventional national business structures, multinational external financial resources are more diversified and potentially cheaper. It provides more opportunities for occupational effective management for the development and improvement of business corporations. A detailed analysis of the classification of management allows to determine the most effective, popular, affordable, and promising external financial resources of corporations and their possible combinations and balancing.

Firstly, management of external financial resources according to their economic essence is directed to financial, credit, and equity sources of their formation. Their characteristics are significantly different. Financial sources are often non-repayable, but difficult to manage and can be active only under certain specific conditions. Credit and equity sources require their repayment, maturity, interest payment, which, in turn, are diversified depending on mechanisms and instruments used to activate them. Secondly, the management of TNC directed to redistribution, loan and outsourcing depending on the features of the cash flows of the underlying, their power and motivation of participants.

External financial resources of transnational corporations can act as a capital investment or subsidies from the budget system. They can be formed in exceptional cases as financial assistance and funding for joint projects or commercial loans of business structures. They can be associated with a joint venture and investment infrastructure with the corporation, mobilized financial resources of the population, primarily savings, as well as means of public organizations through investment institutions. Means of public organizations may be preferable if the corporation activity puts a target for social priorities of public organizations.

Availability, intensity, and volume of financial resources for the globalized market now significantly differ depending on the target system of investors. Target plants or purpose of external financial resources of corporations are the maintenance of the operational functioning of the corporation, ensuring its development, expansion, or restructuring. It may be specific projects and creation of new transnational corporations. There is also a specific target for the installation of external financial resources. It is target investment priorities implemented through external financial resources such as acquisition or control of the corporation.

Essential solution for effective financial management of transnational corporations is a split of their external financial resources according to their activation. Similarly to internal resources, there are basic, additional, and random external financial resources, as well as actually and potentially used resources. In this case, specific regional factors limiting activation and use of external financial resources of TNCs have a particular importance. The effect of these factors, their direction, and intensity depend on the natural environment and resource base, presence and composition of the working population, as well as social traditions, regulations, and restrictions. They regulate activities of transnational corporations in the field of finance.

Euronotes and Euro-commercial Papers as a Management Tool of External Financial Resources

Both parent companies and subsidiaries of multinational corporations actively use various tools as external financial resources to mobilize short-term funds to provide liquidity. One of these tools is effective emission of euronotes. These bills are usually issued for a period of one, three, or six months with a floating rate, which is calculated based on LIBOR. However, many corporations use conversion charts and prolong them usually for the analogical period immediately after expiration of their bills. In fact, bills are transformed from short-term to medium-term instruments with activation of external financial resources. Underwriting of bills can be held by commercial banks, which often become owners of these bills, getting them for their investment portfolios.

In addition to euronotes, transnational corporations are actively using emission of euro-commercial papers in management processes for mobilization of external short-term financial resources. Emission of these securities, as a rule, can be made without involvement of the underwriting syndicates. Therefore, the price of their placing on the market cannot be guaranteed in advance. Validity of the European commercial paper ranges and can be often determined by the need of their investor. Dealers are actively working with these securities, forming a secondary market by proposing a possible resale.

Factors Influencing the Choice of Resources

Particular importance belongs to the selection of external financial resources of corporations and enterprises for markets in which they are activated (certain segments of the financial market, primarily credit, investment, and foreign exchange). For evaluating and selecting a source of external financing, corporations often use volume and value of financial resources. Volume indicators influence the intensity of formation of financial resources and their attractiveness as a source of funding for the formation and manifestation of risks (Wrigley, Coe, & Currah, 2005). The value of external financial resources can be defined in relation to equity corporation, its assets, corporation, or individual funds units (depreciation, wages, and other), as well as the cost of the project. The latter has considerable importance for the lender-investor because the ratio of resource / capital largely determines the degree of risk of funds allocation.

One of the most important factors determining policies of transnational corporations in the selection and activation of external financial resources is monetary policy. Regardless of the type of external financial resources, the parent company of a corporation or its subsidiaries has to choose the currency in which to borrow money. This is due to the fact that the interest rate on international markets tends to be lower than in the home country of the corporation (Persson, 2006).

Important factors are also:

  • Interest rate parity;
  • Forward rate as the most important mean of forecasting;
  • Projections of exchange rates dynamics.

A branded tool has become one of the factors mobilizing external financial resources. Brand of an efficient, well-built, and well-formed stable corporation not only contributes to the expansion of market segments and to the increase of sales and ultimately increase of profitability, but also enhances its attractiveness as an object of credit and portfolio investments. High ratings of transnational corporations with effective brands determine a more favorable assessment of their creditworthiness and, consequently, larger credit limits, as well as more extensive and rapid placement of equity instruments emitted. This is one of the most important areas of management efforts to influence parameters of external financial resources of transnational corporations.

These factors and approaches have become the most important in the selection and use of transnational corporations as external financing of investment instruments in the context of globalization.

Additional Ways of Resource Management

The decision of monetary issues is possible in the following ways. Since the rate of return of bonds issued in foreign currencies is often low, multinational corporations located in the United States often prefer to nominate their bonds in other currencies. Corporations such as Hewlett Packard IBM, Pepsi Co., and Walt Disney emit a significant portion of their bonds in Japanese yen in order to gain an advantage at the expense of low interest rates in the country of that currency.

With favorable movements of exchange rates and interest rates, it is advantageous to produce long-term corporate Eurobonds with a floating rate that firms often prefer instead a fixed coupon rate (Xi, 2012).

In many cases, the most preferred choice for the issuer may be more than one type of currency or bonds. It may be a portfolio of several foreign currencies. A monetary diversified stock portfolio can serve as an effective tool for reducing the risk assumed by the issuer of the bond in the context of globalization. A simplified modification of a diversified portfolio of stock exchange is an option that allows raising finance in several foreign currencies without the simultaneous emission of several types of bonds. Such a tool activation of financial resources in the form of currency cocktail has a number of distinct advantages over bonds in the same currency. It allows achieving a significant reduction in foreign exchange risk (Tleuova & Yestekova, 2014). Currency portfolio is a kind of multi-currency unit of account. If in Europe introduction of the euro as the single European currency has limited the issuance of bonds in the form of currency portfolio, the world practice of this financial instrument remains very popular.

Thus, raising of external funds for TNC is a powerful tool of financial resource management, ensuring increase of financial resources, liquidity, and stability of TNC as a whole and its individual parts.

Conclusion

A key task of the international financial management is optimization of conditions for mobilization of financial resources within both internal and external foreign markets. Resource management has changed significantly in the context of globalization. The choice of various schemes of financial resources mobilization is determined by the ratio value of borrowed funds and risks faced by the company during these operations. The tendency of channeling of financial resources of TNC confirms their presence on every continent. Globalization has affected management of both external and internal financial resources, creating conditions for the development of many tools to manage and mobilize capital.

According to the research, it has been determined globalization as the priority of financial management of resource policy. The process of effective mobilization of financial resources for activities of transnational corporations has become a major challenge, which confirms the hypothesis.

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