International Financial Management: An Overview

Part I: The International Financial Environment
Chapter
1
International Financial Management:
An Overview
1– 1
The Scope of International Finance

A Multinational Corporation (MNC) is a company involved in producing and
selling goods and services in more than one country. It usually consists of a
parent company located in its home country with numerous foreign
subsidiaries.
MNCs in two important ways.
1. it helps the companies
2. it helps the companies to recognise
The consequences of events affecting the stock markets and interest rates of
one country immediately show up around the world.
1– 2
Global Links
Globalisation increases the ability of firms to do business across national
boundaries. The barriers to crossing those boundaries are coming down
gradually. Globalisation is a phenomenon that no development agenda can
afford to ignore. National governments generally face frustrations in dealing
with Globalisation and these frustrations are magnified for small developing
countries. For developing countries, trade is the primary vehicle for realising
the benefits of Globalisation.
1– 3
Objective of the MNCs

An objective is necessary so that all decisions of the organisation contribute
towards the fulfillment of this purpose. The usually accepted objective of an
MNC is to maximise shareholders wealth. This is the objective which a domestic
firm also accepts and tries to fulfil.
Trade
(Percentage of GDP)
50
45
Industrial countries
40
35
30
Developing countries
25
20
1981 1983 1985 1987 1989 1991 1993 1995 1997
1– 4
Distinguishing features of International finance

1. Foreign exchange risk
2. Political risk
3. Expanded opportunity sets
4. Market imperfections
1– 5
International Business Activities

The volume of international business has exploded in recent years.
Globalisation is the new buzzword in industry circles today and is making
economies to be more open and adaptable to foreign investment. The inflow of
foreign investment is very important for the economic development of a
country. The inflows from foreign investment can be divided into two
categories:
1. Foreign Direct Investments (FDI)
2. Foreign Portfolio Investments
1– 6
Trends of FDI in India

FDI inflows into India are around 3.4% ($3.4 bn in 2001) which is very low when
compared with other developing Asian economies like China (46% – $46.8 bn in
2001) and Hong Kong (22.8%). China has been the largest recipient of FDI
inflows in Asia with India way behind. The liberalisation of FDI in the areas of
insurance, media and other infrastructure is a progressive step in this direction.
It has been observed that countries that attract FDI of large magnitudes regard
FDI as an outcome of unshakable confidence in the host economy. The
investment opportunities pertain to two areas (a) activities aimed at meeting
domestic demand for goods and services and (b) global demand for goods and
services in which India has a competitive advantage.
1– 7
International Business Methods

 Licensing
 Franchising
 Joint Ventures
 Establishing New Foreign Subsidiaries
 Management Contracts
1– 8
The Field of International Business

Several developments have encouraged Globalisation of world trade through
international business. Global integration of goods and services improves the
overall efficiency of resources and also tends to increase competition forcing
firms to be more efficient.
Cont….
1– 9
Operations and Influences of International Business

OPERATIONS INFLUENCES
Objectives Influences
· Sale expansion External environment
· Resource acquisition · Geographic
· Diversification · Historical
· Political
· Legal
· Economic
· Cultural
MEANS
Operational Functional Competitive Environment
• Import • Production
• Speed of product changes
• Export • Marketing
• Optimum production size
• Transport • Accounting
• Number of customers
• Licensing • Finance
• Amount bought by each customer
• Franchising • Personnel
• Homogeneity of customers
• Management contract
• Local versus international competitors
• Turnkey
• Cost of moving products
• Direct investment
• Unique capabilities of competitors
• Portfolio investment
1– 10
Motivations for International Business

There are three primary motivations for firms to pursue international business
– to expand sales, to acquire resources and to diversify sources of sales and
supplies. So the growth potential becomes much greater for companies that
seek out foreign markets.
Cont….
1– 11
Asset Level of Firm

Purely domestic MNC
firm
Marginal
Return
On
projects
MNC
Marginal Purely
cost of domestic firm
capital
Appropriate
size for purely Appropriate
domestic firm size for MNC
A B
1– 12

International Financial Management: An Overview

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Part I: The International Financial Environment

The Scope of International Finance

MNCs in two important ways.

1. it helps the companies

2. it helps the companies to recognise

Objective of the MNCs

1981 1983 1985 1987 1989 1991 1993 1995 1997

Distinguishing features of International finance

International Business Activities

Trends of FDI in India

International Business Methods

 Establishing New Foreign Subsidiaries

The Field of International Business

Operations and Influences of International Business

Motivations for International Business

Asset Level of Firm

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