Basics of International Financial Management

International FinanceSession 1

Date: 27.7.2012

Session Objectives

1. Nature and Scope of International Finance

2. Factors responsible fro the fast growth of International Finance Function

3. Why to study International Finance

4. Comparison between the domestic financial Management and International Financial Management.

5. Broad Contours to discuss IFM in present context

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SO-1The nature and Scope of IFM?• IF is concerned with the management of

finance function related to international business

• So IFM is the function performed in to the various modes of IB.

• International Business and the wave of Globalization are the first aspects to be understood before we go into management of international financial operations.

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Factors responsible for the increased role of IF function

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SO-2The globalization is the result….

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• Globalization is the result of increasing activities in international business. Be it Multinational Company or any other way of doing business. The objectives of IB are:

– To expand the sales of products beyond national boundaries

– To acquire resources with minimum cost

– Minimizing competitive risk

– To diversify the sources of sales and supplies

– Economic factors

– Cultural factors

– Technological factors

– Social factors

Modes/Methods of International Business

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Operations and Influences of International Business

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SO-2Tremendous impact of Globalization

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SO-2Tremendous impact of Globalization

• Amazing increase in the global trade & transactions in recent years

• Increase in international business through different modes like licensing, franchising, FDI, FPI and MNCs etc.

• Strong position o f MNCs and TNCs in shaping the globalization

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SO-2Drivers of Globalization

1. Declining Trade and Investment Barriers

– Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods in order to protect domestic industries from foreign competition

– Reducing barriers to foreign trade and promoting global business was done by GATT. More reduction in the Uruguay Round-1993.

– It provided enhanced protection for the patents, trademarks and copyrights and established WTO to police the international trading system.

1. The role of technological change

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SO-2Drivers of Globalization

1. The role of technological change

1. Microprocessors and Telecommunications

2. The internet and World Wide Web

3. Development in Transportation technology as

4. A gateway for the globalization of production

5. A gateway for the globalization of markets

2. In short, the main reason is interest of several countries in trading with each other in order to maximize their profit and sales and protecting them from being eroded by the competition.

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SO-2The emergence of Global Institutions

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SO-2The globalization and the Multinational Enterprise

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• Why Multinational companies?

– Due to market imperfections

– Due to market seekers

– Due to raw material seekers

– Production efficiency seekers

– Political safety seekers

The latest trend is that the world economy is flourishing because of the existence of these MNEs and MNCs. Globalization is the result of increasing activities in international business.

Multi National Corporations: The Key participant in IF Function

• A Multinational corporation is an enterprise thatowns and controls production or service facilitiesoutside the country in which it operates. It has itsfacilities and other assets in at different countriesother than its home country. Like:

– General Electric, Nike, coca-Cola. Wal-Mart, Toshiba andHonda.

The strong hold of MNCs in host countries is evident formthe fact that in 2002, 57.5 % of total sales, 48.1% of totalassets and 49-1% of total employment in top 100 MNC’swere accounted by the host countries (United Nations,2004)

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Multi National Corporations: Meaning

• According to Vernon and Wells Jr, “ MNCs representa cluster of affiliated firms located in differentcountries That:

– Are linked through common ownership

– Draw upon common pool of resources

– Respond to a common strategy

• All this is because of high integration among differentunits of the firm.

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Multi National Corporations: Types

• Based on the strategic features , MNCs are grouped as:a. Ethnocentric

b. Polycentric

c. Geocentric

• Ethnocentric are those that adopt home market oriented policy andseldom distinguish between domestic operation and global operationpolicy.

• Polycentric firms operate in the foreign country just to cater to thedemand in those countries. These follow a host market oriented policy

• Geocentric firms maintain a balance between the home market and hostmarket oriented policies.

• A MNC is different form a TNC. IN the former decision making isdecentralized and activities of the firm are not strictly coordinated. In thelatter the global business activities of the firm are perfexctly configured,coordinated and controlled so as to achieve global competitiveness.

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Essentials to qualify as MNC

• It is the MNCs which are responsible for lion’s share of world trade and investment.

• For qualifying as MNC,

– the number of countries where the firm operates must be at least six ( Vernon, 1971; United Nations, 1978)

– Secondly the firm must generate a sizeable proportion of its revenue from the foreign operations ( exact % is yet to be decided)

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Multi National Corporations and India

• What are the specific risk exposures or vulnerabilitiesthe Indian domestic scene projects for a MNC topredict and protect its business continuity? Some ofthese are:

– Lack of adequate and assured supply of power

– Break down in telecommunication

– Heightened risk awareness of acts of terrorism,

– The frequency of natural catastrophe occurrences,

– The lack of contract certainty

– Endless judicial delays to resolve disputes Strident labour attitude

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Objectives of the Multi National Corporations

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So-3Why to study International Finance ?

• A knowledge of IF is crucial to Mncs:

I. It helps the companies and financial managers to decide how international events will affect the firm and what steps can be taken for the positive developments and insulate from negative ones

II. Second it helps companies to reconise how the firms are affected by movements in exchange rates, interest rates and inflation rates and asset values.

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SO-4Scope or Dimensions of International Finance1. The operations of financial companies at the stock

exchanges abroad.

2. Study of the functions of IMF

3. Investment decision of the international firms including both FDI and FPI

4. MNC’s Working Capital

5. Analysis of Balance of Payments showing flow of funds following international financial transactions.

6. International indebtedness and its management

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SO-4Scope or Dimensions of International Finance1. Knowledge of Convertible currency

2. Knowledge of Foreign exchange exposure and risk

3. Knowledge of varying exchange rates-its determination and forecasting along with the factors influencing exchange rates

4. Knowledge of Foreign exchange Markets and market for derivatives

5. Knowledge of financial institution as decision maker for international dealings

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SO-5Domestic FM and International FM

1. Difference in environment

2. Foreign Exchange risk

3. Political Risk

4. Expanded Opportunity sets

5. Market Imperfections

6. Various markets

7. Various currencies

8. Easy access to domestic capital markets as well as unregulated

international capital a markets by the MNCs.

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Topic for Seminar and Group Discussion

• Collect recent annual reports of 5 MNCS of your choice and comment on the impact of the MNCs foreign Business and how the MNCs has benefitted from its International Operations. You can also perform the above analysis industry wise.

• You can also develop a research paper on this.

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Topics to study this chapter from the book- Please start reading….

1. Factors leading to the emergence of International Finance.

1. Detailed study of Globalization – its importance, impact on the development of world

economy

2. Role of FDI – Detailed study

3. Role of Multinational Companies

4. Role of other modes of IB in the globalization

2. Objectives of Multinational Companies

3. Difference between domestic and international Finance

4. Distinguishing features or major dimensions of international finance

5. Modes or Methods of doing international Business

6. Importance of International Finance.

7. Role and functions of Finance Manager of Multinational Company

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The Session ends here

Next Session Chapter-2

- International Monetary System-

- Read it from the book and come prepared