Working Capital ManagementWorking Capital ManagementDef: Managing of Current Assets & Liabilities :Def: Managing of Current Assets & Liabilities :

Flow Prospective:Flow Prospective: Managing the location of liquid Managing the location of liquid funds to find both the funds to find both the currencycurrency in which liquid funds in which liquid funds are held and are held and countrycountry where such funds are placed where such funds are placed Tax StructureTax Structure Exchange RateExchange Rate Liquidity considerationLiquidity consideration Import RestrictionsImport Restrictions Political and social considerationPolitical and social consideration Rate of return for excess cash investmentRate of return for excess cash investment Inconvertibility of the fundInconvertibility of the fund Exchange controlExchange control Conversion BlockageConversion Blockage Heavy withholdingHeavy withholding TAX ON FOREIGN INCOME, TAX ON FOREIGN INCOME,

DIVIDEND,ROYALTY, AND OTHER RESTRICTION FOR DIVIDEND,ROYALTY, AND OTHER RESTRICTION FOR REMITTANCE OF THE FUND.REMITTANCE OF THE FUND.

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International Fund TransferInternational Fund Transfer Recovering funds from affiliate without piquing host country’s Recovering funds from affiliate without piquing host country’s

sensitivity with a sensitivity with a large Dividend drainlarge Dividend drain

Allocation of a large Allocation of a large overheadoverhead from parent to an affiliate from parent to an affiliate

Facilitate the entry of local capital toFacilitate the entry of local capital to joint venture joint venture

FUND TRANSFER STRATEGIES:FUND TRANSFER STRATEGIES:

If foreign exchange losses are expected, speed up the transferIf foreign exchange losses are expected, speed up the transfer

Consideration for the age and size of the affiliateConsideration for the age and size of the affiliate

Availability of the fund to the affiliateAvailability of the fund to the affiliate

Availability of the joint ventureAvailability of the joint venture

Transferability of royalty fees and other foreign incomeTransferability of royalty fees and other foreign income

Consideration for transaction, speculative and precautionary Consideration for transaction, speculative and precautionary balancesbalances

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Managing International Receivables & Managing International Receivables & InventoryInventory

Receivable: Lead and Lag Techniques:Receivable: Lead and Lag Techniques:

Provide funds to affiliate in exchange for equitiesProvide funds to affiliate in exchange for equities

Sell in and provide credit in long run from one Sell in and provide credit in long run from one affiliate to othersaffiliate to others

Re-invoicing centers: separate subsidies to Re-invoicing centers: separate subsidies to manage intercompany transactions when the manage intercompany transactions when the title passes to re-invoice center but goods are title passes to re-invoice center but goods are directed to the affiliate.directed to the affiliate.

Inventory:Inventory:

Taking advantage of free trade zoneTaking advantage of free trade zone

Consideration for inflation rateConsideration for inflation rate

Consideration for currency devaluation, price Consideration for currency devaluation, price freeze, import restrictions etc..freeze, import restrictions etc.. MENU

MNC’s Strategy & Direct InvestmentMNC’s Strategy & Direct Investment

1. Theory of MNC1. Theory of MNC• Most MNC’s are oligopoliesMost MNC’s are oligopolies..

• They operate in product and factor market imperfection.They operate in product and factor market imperfection.

• They have intangible capital in the form of trade markets, patents, They have intangible capital in the form of trade markets, patents, general marketing skills, organizational abilities to raise the market general marketing skills, organizational abilities to raise the market and introduce new products, quality control, advertising, distribution, and introduce new products, quality control, advertising, distribution, after-the-sale service and ability to forecast exchange markets.after-the-sale service and ability to forecast exchange markets.

2. Investment Strategy2. Investment Strategy• Vertical Integration - diversification across the industry.Vertical Integration - diversification across the industry.

• Horizontal Integration - investment within the industry.Horizontal Integration - investment within the industry.

• Trade innovation and barriers prohibit market entry by continuous Trade innovation and barriers prohibit market entry by continuous introduction of new products, different services and product introduction of new products, different services and product differentiation.differentiation.

3. Follow-the-Lead Behavior• Cost reduction and economy of scale; low cost production site with Cost reduction and economy of scale; low cost production site with

low price -- oligopoly price leadership and cost minimizer.low price -- oligopoly price leadership and cost minimizer.

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MNC’s Strategy & Direct MNC’s Strategy & Direct Investment (con...)Investment (con...)

4. Joint Venture4. Joint Venture

5. Pricing Conversion5. Pricing Conversion High prices in home country High prices in home country

to compensate for low prices to compensate for low prices overseas.overseas.

6. Investing in Each Other’s Market• “if you undercut me in my

home market, I will do the same thing in your market.”

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Process Classification

MaterialSavings 19% 54% 48%

LaborSavings 61% 18% 16%

CapitalSavings 19% 24% 28%

MultipleFactors 1% 4% 8%

Process U.S. E.C. Japan

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