Why should an MNC’s capital budgeting decision be based on the parent’s results rather than those of the subsidiary?

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Describe the additional complications facing an MNC compared with a domestic corporation when it is evaluating a capital budgeting project. Why should an MNC’s capital budgeting decision be based on the parent’s results rather than those of the subsidiary? Is an MNC generally faced with incurring double taxation on its profits in the subsidiary’s country? Why or why not?

ECO 518

Unit 6 Lecture This lecture will function as a guide to assist you in studying. It contains questions that you

should be able to answer after you read the chapters. As you read the text book think about the

questions posed below. The answers comprise the main topics and concepts that you should

know and understand after you have finished your readings. There are no quiz or test activities

associated with this lecture content.

Unit Learning Outcomes

Unit 6

ULO 1. Assess major functions of government in a market economy; and present your

understanding of market externalities and discuss whether government involvement is

necessary to deal with market externalities.

ULO 2. Explain why firms merge how government deregulation affects the decision making

process for firms to merge or not merge.

Chapter 13

Continue to use the resources provided by the author and publisher at:

http://wps.prenhall.com/bp_keat_managerial_7/236/60596/15512752.cw/index.html

A multinational corporation must compete not just domestically but worldwide. As we discuss in

previous chapters, managers must always be concerned with the economic environment facing

them. They must inform themselves about the demand for their products, the cost of supplies

and components, the productivity of their machinery and labor force, and changes in

technology. They must digest this information to try to maximize the corporation’s profitability (in

a broader definition, the corporation’s market value). We have learned that, to achieve best

results, corporate managers must be aware that any increase in revenue must be greater than

costs when the corporation grows; in other words, they must apply the concepts of marginal

revenue and marginal cost.

An MNC must consider these factors and many others:

• Economic factors: Exchange rates and exchange rate changes, differences in cost of

capital, economic stability of the foreign country, production costs in foreign country influencing

the choice of sourcing locations

• Political factors: Stability of government institutions, different tax systems, restrictions on

foreign ownership, blockage of fund transfers, laws regarding employment and wages,

bureaucracy and corruption, attitude of government toward multinational corporations,

expropriation, war, terrorism

• Social and cultural factors: Religious differences, differences in the hiring of and

promotion of female employees, different attitudes toward profit maximization

We describe in detail the differences in capital budgeting between a domestic and a

multinational corporation. We specifically direct our attention at differences in taxation,

consideration of differential rates of inflation and their influence on the exchange rate, and

differences in the cost of capital. We also discuss the question of whether the decision to make

an investment should be based on the results in the subsidiary or the parent.

We describe in detail the differences in capital budgeting between a domestic and a

multinational corporation. We specifically direct our attention at differences in taxation,

consideration of differential rates of inflation and their influence on the exchange rate, and

differences in the cost of capital. We also discuss the question of whether the decision to make

an investment should be based on the results in the subsidiary or the parent.

Chapter 14

We illustrate specifically how various business decisions can be influenced by government

involvement in the market economy. As we discuss in Chapter 1, the primary advantage of the

market process over the command and traditional processes is the efficient manner in which

market participants allocate a country’s scarce resources. Throughout this text, we try to show

how managers, equipped with an understanding of the major factors of the market process

(supply, demand, production, cost, and competition) and various quantitative tools of analysis

are able to make optimal decisions to help their firms maximize economic profit.

However, managers must often take government involvement into account in the making of an

optimal decision. This is particularly true when managers operate on a global basis and must

deal with the laws and regulations of different governments. A case in point is the failed attempt

by GE to merge with Honeywell discussed in this chapter’s “Global Application.” Government

laws and regulations can reduce a firm’s profits. But at the same time, as we show, the

government itself is a major customer and so businesses can profit by being suppliers to the

government’s demand for various goods and services. Today’s manager must be equally

versed in matters of government and private industry.

Chapter 15

Throughout the text, we have provided a number of hypothetical vignettes: Situations and

Solutions involving our hypothetical Global Foods Company and its production of different types

of soft drinks. In this concluding chapter, we illustrate how some of the key concepts in

managerial economics can be applied to the actual global soft drinks industry. The major

product categories of the soft drink industry are packaged water, carbonates, concentrates,

100% fruit juices, nectars, still drinks, ready-to-drink (RTD) tea and coffee, and energy and

sports drinks. We start with key factors and trends in this industry that are affecting market

demand. We then discuss the impact that these trends and factors have on supply. We close

with a brief look at the energy drink market, the segment of the soft drink market that our

hypothetical Global Foods Company decided to enter in Chapter 2.

The global soft drinks market had a total consumption of over 700 billion liters in 2011. The

percentage of the total held by each product category is as follows: carbonated soft drinks

(30.83 percent), sports and energy drinks (2.68 percent), RTD tea and coffee (5.96 percent),

packaged water (25.51 percent), bulk water (17.11 percent), 100% juice (3.13 percent), nectars

(2.36 percent), concentrates (2.63 percent), fruit powders (2.86 percent), and still drinks (6.94

percent). Coca-Cola claimed the first place in the global company ranking, while PepsiCo,

Nestle, and Danone Group claimed the second to fourth positions respectively.2 2 Canadean,

Global Soft Drinks Report, 2012. (http://www.canadean.com).

 

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