MGT 302 - Final Exam

Fronting Loans

a loan between a parent and its subsidiary channeled through a financial intermediary, usually a large international bank. In a direct intrafirm loan, the parent company lends cash directly to the foreign subsidiary, and the subsidiary repays it later. In a fronting loan, the parent company deposits funds in an international bank, and the bank then lends the same amounts to the foreign subsidiary.

Inventory Turnover versus Inventory Levels

efficient logistic practices reduce the amount of inventory in the system, increase inventory turnover, and facilitate the appropriate transportation modes being used

Master Franchise Agreements

puts the liability and responsibility of expansion onto the MF, instead of the franchiser. Very Crucial in international franchising success.

Licensing

- An arrangement in which the owner of an intellectual property (the licensor) greats another firm (the licensee) the right to use that intellectual property in exchange for payment - The licensor grants the licensee the right to use production processes, to reproduce a copyrighted item, to use the brand name, or to use a trademark for a specified period of time in exchange for royalties or other compensation. Advantages - Reduces costs and risks of establishing foreign enterprise - Establishes a physical presence - Overcomes trade and investment barriers - Rapid speed of entry - Reduces exposure to political risk Disadvantages - Difficult to maintain control over assets and know-how - Partners can become competitors - Damage to firm reputation - Income dependent on licensee's performance - Licensee earns the majority of the profit - Monitoring costs

Multipoint Competition

- Arises when two or more enterprises encounter each other in different regional markets, national markets, or industries - When a firm competes against the same rival in many geographic locations or across multiple products, the firm may closely follow its competitors actions and may anticipate how its rival will respond to its competitive actions

Impediments to the Sale of Know-How

- When licensing may result in a firm giving way its know-how to a potential foreign competitor. - When licensing does not give a firm the tight control needed to achieve its strategic goals. - When the firm's know-how is not amenable to licensing.

Centralized Depositories

- allows the firm to deposit larger amounts - it should have access to information about good short-term investment opportunities that the typical foreign subsidiary would lack - by pooling its cash reserves, the firm can reduce the total size of the cash pool it must hold in highly liquid accounts, which enables the firm to invest a larger amount of cash reserves in longer-term, less liquid financial instruments that earn a higher interest rate

Bilateral and Multilateral Netting

- bilateral netting - settlement in which the amount one subsidiary owes another can be canceled by the debt the second subsidiary owes the first - multilateral setting - a technique used to reduce the number of transactions between subsidiaries fo the firm, thereby reducing the total transaction costs arising from foreign exchange dealings and transfer fees

Barriers to International Communication

1. Cultural barriers 2. Source and country of origin effects 3. Noise levels

Monitoring Costs

??? the costs incurred by the organizer of production in seeing to it that the employees do what they're supposed to do

Channel Exclusivity

A distribution channel that outsiders find difficult to access.

Pull Strategy

A marketing strategy emphasizing mass media advertising as opposed to personal selling

Push Strategy

A marketing strategy emphasizing personal selling rather than mass media advertising

Price Elasticity of Demand:

A measure of how responsive demand for a product is to changes in price

Value-to-Weight Ratio

A measure of the monetary value a product has per kilogram or pound a high value to weight ratio would be something that is expensive and does not weigh very much

Strategic Alliances: Non-equity Strategic Alliances and Joint Ventures Synergy

A non-equity strategic alliance is a formal relationship between two or more parties to pursue a seat of agreed upon goals while remaining independent organizations A joint venture refers to the creating of a separate firm through the investment by two or more parent firms that gain joint ownership of the new legal entity Advantages Non-Equity Strategic Alliances - Facilitate entry into foreign market - Share fixed costs for new product development - Bring together complementary skills - Establish industry technology standards Disadvantages of Non-Equity Strategic Alliances - potential for opportunism - benefits can be lopsided Advantages of Joint Ventures - Benefit from partner's knowledge - Combines resources of the companies - Reduces cultural distance - Share costs/risks with partner - Overcomes ownership restrictions - Reduces political risk Disadvantages of Joint Ventures - Risk giving control of technology to partner - Slow decision making - Potential for conflicts - Lack of synergy - Cultural barriers - Difficult dissolution process

Fragmented Retail Systems

A retail system in which there are many retailers, none of which has a major share of the market

Subsidiaries/Wholly Owned Subsidiaries

A subsidiary is a company in which another corporation owns a controlling interest of the subsidiary's shares of common stock. A wholly own subsidiary is a subsidiary whose parent company owns 100% of its common stock and there are no minority owners Advantages of Wholly Owned Subsidiaries: - no risk of losing technical competence to a competitor - no sharing of profits - tight control of operations - realize location economies - gain knowledge of local market - can be viewed as an insider Disadvantages: - bear full cost and risk - requires more resources and commitment - may be difficult to manage the local resources

How exchange rate changes impact budgets and control systems

A subsidiary may fail to achieve profit goals not because of any performance problems, but merely because of a decline in the value of their currency against the dollar. The opposite can also occur making a foreign subsidiary's performance look better than it actually is.

Accounting Standards

Accounting standards refer to the collection of rules, procedures and conventions that define accepted accounting practice for firms in a country. National accounting standards are influenced by the providers of capital, political and economic ties, inflation, economic development and national culture.

Benefits of In-House Production versus the Advantages of Outsourcing

Advantages of In-House Production - lower costs - reduced dependency - protecting proprietary product technology - improved control Advantages of Outsourcing - lower costs - strategic flexibility Concentration of production makes the most sense when: - differences among countries in factor costs, political economy, and culture have a substantial impact on the costs of manufacturing in various countries - trade barriers are low - externalities arising from the concentration of like enterprises favor certain locations - important exchange rates are expected to remain relatively stable - the production technology has high fixed costs and high minimum efficient scale relative to global demand or flexible manufacturing technology exists - the products value-to-weight ratio is high - the product serves universal needs Decentralization of production is appropriate when - differences among countries in factor costs political economy and culture do not have a substantial impact on the costs of manufacturing in various countries - trade barriers are high - location externalities are not important - volatility in important exchange rates is expected - the production technology has low fixed costs and low minimum efficient scale, and flexible manufacturing technology is not available - the product's value-to-weight ratio is low - the product does not serve universal needs

Cross-Licensing Agreements

An arrangement in which a company licenses valuable intangible property to a foreign partner and receives a license for the partner's valuable knowledge; reduces risk of licensing.

Franchising

An arrangement in which one firm (the franchisor) allows another (the franchisee) the right to use an entire business system in exchange for fees, royalties or other forms of compensation Commonly used in the fast-food industry (e.g. McDonald's; Quiznos) and the hotel industry (e.g., Motel 6; Super 8). Advantages - Quick, low-cost entry into numerous locations - Reduces costs and risk of establishing enterprise - Expansion of name brand identification and market search - Can leverage the franchisees' local knowledge Disadvantages - Problems of assuring quality control and operating standards - Can tarnish franchisor's image - Conflicts and disputes likely - May create future competitors

Backward Vertical FDI vs. Forward Vertical FDI

Backward Vertical FDI - an investment industry abroad that provides inputs for a firm's domestic production processes Forward Vertical FDI - an investment in an industry abroad that sells the outputs of a firm's domestic production processes

Benefits and Costs of FDI for a Host Country

Benefits - Resource-Transfer Effects - Employment Effects - Effect on Competition and Economic Growth - Balance of Payment Effects Costs - Adverse Effects on Competition - National

Benefits and Costs of FDI for a Home Country

Benefits: - employment effects - resource-transfer effects - balance-of-payment effects Costs: - employment effects - balance of payment effects

Resource-Transfer Effects: Capital, Technology and Management

Capital - have access to financial resources not available to host-country firms Technology - can stimulate economic development and industrialization. Can be incorporated into production or the product. Management - more modern management practices, management skills of foreign MNE stimulate local suppliers, distributors, and competitors to improve their own management skills

Comparative Claims in Advertising

Comparative advertising compares two or more competing brands on one or more specific attributes, be it directly or indirectly (McDaniel et al, 2006). Comparative advertising gives consumers a logical decision factor as most of them do not want to make decisions (MacArthur and Cuneo, 2007). This way, by comparing one company's brand with other competing brands in the advertisement, the company most likely helps the consumers to choose which brand they would prefer to use.

Pioneering Costs

Costs an early entrant bears that later entrants avoid, such as time and effort in learning the rules, failure due to ignorance, and the liability of being a foreigner

Countertrade: Barter, Counterpurchase, Offset, Compensation/Buybacks, Switch Trading Factors factoring concentrated decentralized/dispersed production

Counter trade - an umbrella term for several forms o ftrade in which the seller accepts goods or services in partial or whole payment for its products. It includes export transactions where all or a portion of the payment is made in kind rather than in a cash as the medium of exchange Types: Barter Counterpurchase Offset Compensation or Buybacks Switch Trading

How uncertainty avoidance impacts accounting practices

Cultures that are high in uncertainty avoidance have more conservative accounting practices, and tend to prefer more secrecy. Cultures that are not high in uncertainty avoidance prefer more optimistic accounting practices, and tend to prefer being more transparent.

Current Rate Method versus the Temporal Rate Method

Current Rate Method - most items are translated at the current exchange rate The current rate method is a standard method of currency translation that utilizes the current market exchange rate. Currency translation is the process of converting the financial results of a parent company's foreign subsidiaries into its functional currency. Companies must report using the currency of the environment in which it primarily generates and expends cash. The current rate method is most often used when the subsidiary company is fairly independent from the parent's activities. It may be contrasted with the temporal method. Temporal Rate Method - exchanged at historical rates The temporal method is used to convert the currency of a foreign subsidiary into the same currency as the parent company. The parent company's currency is called the functional currency. The currency translation technique allows the parent company to report profits or losses and file financial statements when it has subsidiaries outside of the country where it is domiciled. Gains or losses due to exchange rate conversions are reported in the parent company's net earnings.

Employment Effects: Direct, Indirect, Substitution, and Acquisition Restructuring

Direct - arise when foreign MNE employs a number of host-country citizens Indirect - arise when jobs are created in local suppliers as a result of the investment and when jobs are created because of increased spending by employees of MNE. - as large, if not larger than direct effects

Home Country Policies to Encourage and Restrict Outward FDI

Encourage - foreign risk insurance - capital assistance - tax incentives to invest abroad - political pressure Restrict - limits on capital outflows - tax incentives to invest at home - nation-specific prohibitions

Host Country Policies to Encourage and Restrict Inward FDI

Encourage - incentives - regulatory exemptions Restrict - ownership restraints - performance requirements

Exporting: direct versus indirect

Exporting is the sale of products proceeded in one country to residents of another country - direct exporting - company conducts all phases of the sale and transfer of the merchandise to a buyer - indirect exporting - firm hires the expertise of someone else to facilitate the exchange for a fee Exporting Advantages - avoids the cost of establishing manufacturing operations in the host country - minimizes risk and investment - rapid speed of entry - may realize experience curve and location economies Disadvantages - trade barriers and tariffs - transportation costs - need standardized products - payment concerns - exchange rate risk Indirect exporting advantages - increased sales with little effort, risk or investment disadvantages - loss of control - lack of personal relationships - smaller profit margin

Flexible Machine Cells

Flexible manufacturing technology in which a grouping of various machine types, a common materials handler, and a centralized cell controller produce a family of products

Reasons for and against standardized advertising campaigns

For: 1) significant economic advantages 2) there is a concern that creative talent is scarce so one large effort to develop a campaign will produce better results than 40 or 50 smaller efforts 3) many brand names are global against: - cultural differences among nations are such that a message that works in one nation can fail miserably in another - advertising regulations may block the implementation of standardized advertising

How and why components of the marketing mix must be adapted in the international context

From the notes: •Reasons for Standardized: -Significant economic advantages -Scarce creative talent -Global brand names •Reasons for Non-standardized: -Cultural differences -Advertising regulations can be a restriction Cultural differences

Functional Currency versus Reporting Currency

Functional Currency - the parent company's currency

Greenfield Investment, Acquisitions and Mergers

Greenfield Investment - establishing a new operation Advantages of G.I. - Firms can build new subsidiary to desired specifications - It is easier to establish organizational culture and operating routines rather than trying to change an existing organizational culture and processes Disadvantages - Slow to establish - Risky - Preemption by aggressive competitors who enter market via acquisition _________________________________________________ Acquisition - when one firm buts an interest in another firm Merger - when two firms agree to integrate their operations on a relatively co-equal basis Advantages of M&A - M&A are quicker to execute and can be used to preempt competitors - Foreign firms have valuable strategic assets that would be risky and time consuming to develop - Acquiring firm believes it can use its core competencies to increase the efficiency of the acquired firm Disadvantages of M&A - Disappointing results - Culture clash - Problems with achieving synergies - Overpay for firm - Inadequate pre-acquisition screening

Historic Cost versus Current Cost Accounting

Historical cost considers the original cost of the item, at the time and date of its acquisition. Current accounting involves periodically updating the value of the items and to be recorded at that value, on which they can be sold on the market.

Horizontal FDI vs Vertical FDI

Horizontal FDI - investment in the same industry in which a firm operates at home Vertical FDI: investment in an industry that provides in puts for a firm's domestic operations or that sells the outputs of the firm's domestic operations

Balance-of-Payments Effects of FDI for the Home and Host Countries

Host Country - Host country benefits from initial capital inflow when MNC establishes business - Host country benefits if FDI substitutes for imports of goods and services - Host country benefits when MNC uses its foreign subsidiary to export to other countries

Marketing Segmentation

Identifying groups of consumers whose purchasing behavior differs from others in important ways

Fixed costs

In some cases the fixed costs of setting up a production plant are so high that a firm must serve the world market from a single location or from very few locations.

current account

In the balance of payments, records transactions involving the export or import of goods and services

Opportunism/Acting Opportunistically

Includes theft of technology and/or markets

Codified Knowledge

Information that can be easily captured in the form of text, tables, or diagrams. - product specifications, scientific formulas and computer programs are examples of this knowledge

Tacit Knowledge

Information that is intuitive and difficult to articulate or codify in writing. - can be gained through personal experience or interaction - shared knowledge might be dispersed throughout the company

Lessard-Lorange Model: Initial, Projected, Internal Forward and Ending Rates

Initial Rate - the spot exchange rate when the budget is adopted Projected Rate - the spot exchange rate forecast for the end of the budget period (i.e., the forward rate) Ending Rate - the spot exchange rate when the budget and performance are being compared

The Decision Framework for Inferential Entry Models

Is local production needed? Is it possible to share the firm's know how? Does the firm need access to local knowledge? Does the competitive environment warrant immediate long-term investment? Do the nation's governmental policies favor long-term investment? r

Dividend Remittances

Payment of dividends to transfer funds from foreign to parent

Multipoint Pricing

Occurs when a pricing strategy in one market may have an impact on a rival's pricing strategy in another market

Discount Rates

Once the cash flows have been estimated, they must be discoutned to determine their net present value using an appropriate discount rate Anything greater than 0 is a good idea.

Hubris Hypothesis

Postulates that top managers typically overestimate their ability to create value from an acquisition, primarily because rising to the top of a corporation has given them an exaggerated sense of their own capabilities

Determinants of National Accounting Standards

Providers of Capital Political and Economic Ties Level of Inflation Level of Economic Development National Culture

The Radical, Free Market and Pragmatic National Views of FDI

Radical View - MNE is an instrument of imperialist domination - argue they take profits from the host country and take them to their home country - no country should ever permit foreign corporations to under take FDI because they can never be instruments of economic development, only economic domination - where they already exist, they should be nationalized Free Market View - international production should be distributed among countries according to theory of comparative advantage Pragmatic

Competition Policy

Regulations designed to promote competition and restrict monopoly practices.

International Financial Reporting Standards Board (IFRS)

Rules made by the IASB

First Mover Advantage

The ability to preempt rivals and capture demand by establishing a strong brand name and customer satisfaction

Financial Structure

The cost of capital is typically lower in the foreign market, by virtue of its size and liquidity If governments make your company invest locally, and your cash flow is limited, this raises the cost of capital. The discount rate must be adjusted upward to reflect this. If using the foreign market, you can adjust the numbers downward. Also to be considered, the amount of local currency required to to meet interest payments and retire principal on local debt obligations is not affected when a country's currency depreciates. However, if foreign debt obligations must be served, the amount of local currency required to do this will increase as the currency depreciates, and this effectively raises the cost of capital. Thus, although the initial cost of capital may be greater with local borrowing, it may be better to borrow locally if the local currency is expected to depreciate on the foreign exchange market.

Channel Quality

The expertise, competencies, and skills of established retailers in a nation and their ability to sell and support products of international businesses.

Competitive Claims in Advertising

The goal of using competitive advertising is to influence demand for a specific brand (McDaniel et al, 2006). The advertisers usually provide information regarding a product's attributes and benefits which may not available from competing products (Yeshin, 1998). Even when other brands own the same attributes or benefits, advertisers often create an impression that their products are somehow 'much better' than other, similar products available in the marketplace.

Channel Length

The number of intermediaries that a product has to go through before it reaches the final customer

Mass Customization

The production of a variety of end products at a unit cost that could once be achieved only through mass production of a standardized output

Capital Budgeting

The technique financial managers use to try and quantify benefits, costs, and risks of an investment

Theoretical Explanations for FDI: Transportation Costs, Market Imperfections, Strategic Behavior, and Location-Specific Advantages

Transportation costs ??? Market Imperfections - when there are impediments to the free flow of products between nations - when there impediments to the sale of technological, marketing or management know-how Strategic Behavior - FDI flows are a reflection of the strategic rivalry between firms and the level of multipoint competition - a limitation of this theory is that it cannot explain why the first firm in an oligopoly decides to undertake FDI Location Specific Advantages - Contends that FDI patterns can be explained by the relationship between the advantages of combining resource endowments that are tied to a particular foreign location with a firm's unique assets - combining location-specific assets with a firm's own unique assets often requires FDI to be successful

Unbundling

Using a combination (more than one) of methods: dividend remittances, royalty payments and fees, transfer prices, and fronting loans to move money in between boarders

Techniques for adapting capital budgeting methods for political and economic risk

Using a higher discount rate in more risky countries, critics of this method argue they are penalizing cash flows too early and does not penalize cash flows late enough. Future cash flows from the project downward to reflect. Surveys show that both practices are about as popular as the other.

Turnkey Projects

When a firm agrees to set up an operating plant for a foreign client and then hand over the "keys" when the plant is fully operational. Advantages: - Can earn a return on knowledge asset - Less risky than traditional FDI Disadvantages: - Arrangement does not create long-term interest in the foreign country - May create a foreign competitor

Project versus Parent Cash Flows

When evaluating a foreign investment opportunity, the the parent company should focus on the cash flows it will receive, not the cash flows generated from the proejct - cash flows may be blocked from repatriation by the host-country government, they may be taxed at an unfavorable rate, or the host government may require that some percentage of the cash flows generated from the investment project be reinvested within the host nation - while the restrictions don't affect the net present value of the project itself, they do affect the net present value of the project to the parent company because they limit the cash flows that can be remitted to it from the project

Harmonization of Accounting Standards

Would save the time and money firms currently spend consolidating divergent financial information. Would allow firms to make better strategic decisions. Would allow investors to make informed, less risky investment decisions.

Bill of Lading

a document issued to an exporter by a common carrier transporting merchandise. It serves as a receipt, a contract, and a document of title

Concentrated Retail System

a retail system in which a few retailers supply most of the market

elastic

a small change in price produces a large change in demand

Generally Accepted Accounting Principles (GAAP)

accounting guidelines that govern the content and form of financial reports, made from the FASB. Used in the United States

Strategic Commitments

actions that are costly, long-term oriented, and difficult to reverse

Experience Curve Pricing

aggressive pricing designed to increase volume and help the firm realize experience curve economies

Draft/Bill of Exchange

draft - an order written by an exporter telling an importer what and when to pay bill of exchange - an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time

Price Discrimination

charging a different price to different countries for the same product. A firm can maximize profits this way, but has to be able to maximize profits.

Components of the Marketing Mix

choices about attributes, product strategy, communication strategy, and pricing strategy that a firm offers its targeted markets (product, place, promotion, and price)

National Sovereignty

countries are concerned about a loss of economic independence with FDI. Most economists dismiss this claim as groundless and irrational

Money Management Decisions

decisions attempt to manage the firm's global cash resources - its working capital - most efficiently. •Centralized Depositories - allows the firm to deposit larger amounts - it should have access to information about good short-term investment opportunities that the typical foreign subsidiary would lack - by pooling its cash reserves, the firm can reduce the total size of the cash pool it must hold in highly liquid accounts, which enables the firm to invest a larger amount of cash reserves in longer-term, less liquid financial instruments that earn a higher interest rate •Bilateral and Multilateral Netting - bilateral netting - settlement in which the amount one subsidiary owes another can be canceled by the debt the second subsidiary owes the first - multilateral setting - a technique used to reduce the number of transactions between subsidiaries fo the firm, thereby reducing the total transaction costs arising from foreign exchange dealings and transfer fees

Geographical Indications

indications which identify a good as originating in the territory of member where quality/reputation of good is attributable to region

Just-in-time Inventory (JIT)

inventory logistics system designed to deliver parts to a production process as they are needed, not before

Letters of Credit

issued by a bank, indicating that the bank will make payments under specific circumstances

Externalities

knowledge spillovers

Performance Requirements

local content, exports, technology transfer, and local participation in top management

Relational Capital

managing alliance successfully requires building interpersonal relationships between firms' managers

Specialized Assets

manufacturing a component part in house, this requires a nonrecoverable investment in ___.

Flexible Manufacturing Technology

manufacturing technology designed to improve job scheduling, reduce setup time, and improve quality control

balance of payment accounts

national accounts that track both payments to and receipts from foreigners.

Antidumping Regulations

occurs whenever a firm sells a product for a price that is less than the cost of producing it

Export Financing Risk

one side may not get paid - a third party reputable bank can act as an intermediary

Media Channels

print media (newspapers and magazines), broadcasting media (television and radio), and various forms using the internet (social media)

Export Credit Insurance

provided in the U.S. by the Foreign Credit Insurance Association (FICA) Provides coverage against commercial risks and political risks

Predatory Pricing

reducing prices below fair market value as a competitive weapon to drive weaker competitors out of the market ("fair" being cost plus some reasonable profit margin)

Royalty Payments

represent the remuneration paid to the owners of technology, patents, or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade names. it is common for a parent company to charge its foreign subsidiaries royalties fo the technology, patents, or trade names issued to them

Distribution Channel

set of people and organizations responsible for the flow of products and services from the producer to the ultimate user

Slight Drafts versus Time Drafts

sight draft - a draft payable on presentation to the drawee time draft - a promise to pay the accepting party at some future date.

Stock versus Flow of FDI

stock of FDI - the total accumulated value of foreign-owned assets at a given time flow - the amount of foreign direct investment undertaken over a given period of time (normally one year) outflows - flow of foreign direct investment out of a country inflows of FDI - flow of foreign direct investment into that country

Tax Credits, Tax Treaties and Tax Deferrals

tax credit - allows a firm to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government tax treaties - agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned. tax deferrals - parent subsidiaries are not taxed on the income of a foreign subsidiary until they actually receive a dividend from that subsidiary

Country of Origin versus Country of Origin Labeling

the extent to which the place of manufacturing influences product evaluations. country of origin may have one reputation, for example McDonald's, and then when they move to France they make fun of Americans

Minimum Efficient Scale

the level of output at which most plant-level scale economies are exhausted

Noise Levels

the number of other messages competing for a potential consumer's attention

Product Positioning

the place a product occupies in consumers' minds based on important attributes relative to competitive products

Transfer Prices

the price at which goods and services are transferred between entities within the firm is referred to as the transfer price

Market Price / Arm's-Length Price

the price that would prevail between unrelated firms in a market setting

The impact of transfer pricing on control systems, performance evaluation, and money management

the subsidiaries performance may depend as much on transfer prices as it does on other pertinent factors, such as management effort. A subsidiary told to charge a high transfer price for a good will appear doing better than it actually is, while the subsidiary purchasing the good will appear to be doing worse

Transaction Costs: Currency Conversion Fees and Transfer Fees-

transaction costs - the cost of exchange currency conversion fees - transfer fees -

Foreign Direct Investment

when a firm invests resources in facilities to produce and/or market a product in a foreign country

inelastic

when a large change in price produces only a small change in demand

Gray Market Products versus Black Market Products

•A gray market involves the sale of a product through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. •A black market involves the sale of goods that are illegal in themselves and/or distributed through illegal channels.

Financing Decisions

•How the investment will be financed? •What will be the source of the external financing? •How should the financial structure of the foreign subsidiary be configured?

Investment Decisions

•Investment decisions determine which projects should receive the firm's capital investment funds. •Firms use capital budgeting to determine what opportunities have positive net present values.

EU Directives

•Members of the EU are required to implement EU directives into their own national laws. •Financial statements issued by publically-listed companies in the EU must comply with IASB standards.

Consolidated Financial Statements

•Merge the accounts of the parent company and each subsidiary into a single set of financial statements. •Statements are denominated in a single currency and are prepared using a single accounting standard.

Financial Accounting Standards Board (FASB)

•The FASB standards, known as generally accepted accounting principles (GAAP), govern the preparation of financial statements for U.S. companies. •The FASB standards are officially recognized as authoritative by the Securities and Exchange Commission (SEC).

International Accounting Standards Board (IASB)

•The IASB is an independent standard-setting board that seeks to create globally accepted financial reporting standards. •The IASB establishes the International Financial Reporting Standards (IFRS).