Oy Gaudeamus Ab, Helsinki 1975. A Doctoral Dissertation presented at
the Helsinki School of Economics the 29th of May, 1975. 206
pages.
Problems relating to big multinational business enterprises have
been subject to much research effort and debate for about two
decades. This results from the considerable role played by such
enterprises in the world economy. Recently one emerging research
trend in this context has been towards building operations research
models for global decision making in the multinational firm. This is
natural since research on the application of operations research
techniques to the planning problems of national firms has been
expanding at a fast pace. In the case of the multinational firm
short-term (tactical) management of finance has been subject to most
research of this kind. The separation of the treatment of physical
and financial flows is a simplification, however, which can lead to
nonoptimal total plans.
Several authors have presented mathematical programming models for
the (tactical) planning of finance in the multinational firm under
the assumption that the physical activities (trade and production)
have fist been fixed at a preceding planning stage. The most
advanced of these models are constructed to include the
probabilistic nature of currency exchange rates.
Linear programming models have also been presented for the planning
of trade and production in the multinational firm. Furthermore,
linear programming models have been constructed for joint planning
of physical and financial flows in the multinational firm under the
assumption of deterministic currency exchange rates. In addition to
the determinism of the currency exchange rates it should be noted
that these models treat certain decision variables as fixed or omit
them. These simplifications can lead to suboptimal total planning,
too.
It is my purpose to propound how certain tactical decisions, which
earlier O.R. modelling research has treated only separately can be
simultaneously treated in a manageable way in mathematical
programming models for the multinational firm.
In this dissertation I show how the probabilistic nature of currency
exchange rates (= "currency risk") can be taken into account in
linear programming models for joint planning of trade, production,
and financial flows in the multinational firm. This will mean that
only the (discrete) probability estimates of future exchange rates
have to be assumed to be available to the decision maker. The
inclusion of currency risk is achieved by applying two-stage linear
programming.
I also show how forward contracts can be included in linear
programming models for joint determination of trade, production, and
financial flows in the multinational firm facing risky currency
exchange rates.
Furthermore, I demonstrate how the exposure of assets and
liabilities to currency risk can be adjusted to fit into
predetermined bounds.
I demonstrate the inclusion of interaffiliate transfer prices, which
are declared for duty and tax assessment, as well as the inclusion
of interaffiliate interest rates as decision variables in the kind
of models discussed. I suggest the concept of "shadow transfer
prices" for the analysis of interaffiliate transfer price bounds.
The construction of separate equations for the formulation of the
objective function and the treatment of taxation is found
advantageous.
I also briefly discuss the possibility if using the propounded
normative model as a behavioral model of the multinational firm.
Particular attention is given to retaining readability, even at the
cost of scientific rigor. This dissertation is thus meant to be
applicable also and an advanced text-book in operations research and
multinational management.
Keywords: multinational firm, linear programming, uncertainty in
quantitative planning, integrated production and financial planning,
quantitative methods in budgeting
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