Basics of International Financial Management

International FinanceSession 1

Date: 12.7.2011

Session Objectives

• Nature and Scope of International Finance• Factors responsible fro the fast growth of

International Finance Function• Comparison between the domestic financial

Management and International Financial Management.

• Broad Contours to discuss IFM in present context

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The nature and Scope of IFM?

• IF is concerned with the management of international business related finance functions.

• 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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Tremendous impact of IB and Globalization

• Amazing increase in the global transactions and foreign trade in recent years

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

• 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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Objectives of doing international business

• 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

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Modes/Methods of International Business

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Operations and Influences of International Business

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Multi National Corporations: The Key participant in IF Function

• A Multinational corporation is an enterprise that owns and controls production or service facilities outside the country in which it operates. It has its facilities and other assets in at different countries other than its home country. Like:– General Electric, Nike, coca-Cola. Wal Mart, Toshiba and Honda.The strong hold of MNCs in host countries is evident form the fact that

in 2002, 57.5 % of total sales, 48.1% of total assets and 49-1% of total employment in top 100 MNC’s were accounted by the host countries ( United Nations, 2004)

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Multi National Corporations: Meaning

• According to Vernon and Wells Jr, “ MNCs represent a cluster of affiliated firms located in different countries 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 different units of the firm

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Multi National Corporations: Types• Based on the strategic features , MNCs are grouped as:

a. Ethnocentricb. Polycentricc. Geocentric

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

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

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

• A MNC is different form a TNC. IN the former decision making is decentralized and activities of the firm are not strictly coordinated. In the latter 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 vulnerabilities the Indian domestic scene projects for a MNC to predict and protect its business continuity? Some of these 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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The Scope of 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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Scope of International Finance• Knowledge of Convertible currency• Knowledge of Foreign exchange exposure and risk• Knowledge of varying exchange rates-its determination and forecasting along with

the factors influencing exchange rates• Knowledge of Foreign exchange Markets and market for derivatives• Knowledge of financial institution as decision maker for international dealings

• The operations of financial companies at the stock exchanges abroad.• Study of the functions of IMF• Investment decision of the international firms includng both FDI and FPI• MNC’s Working Capital• Analysis of Balance of Payments showing flow of funds following

international financial transactions.• International indebtedness and its management

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Domestic FM and International FM

• Difference in environment• Various markets• Various currencies• Easy access to domestic capital markets as well as unregulated

international capital a markets by the MNCs.

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END of The Session