Ch- 01

Excel Books1– 1 International Financial Management (2nd Edition) Madhu Vij

Part I: The International Financial Environment

International Financial Management: An OverviewC1

Copyright © 2003, Madhu Vij

Chapter1

International Financial Management: An Overview





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.





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.





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

40

35

30

25

20

Developing countries

Industrial countries

1981 1983 1985 1987 1989 1991 1993 1995 1997





Distinguishing features of International finance

1. Foreign exchange risk

2. Political risk

3. Expanded opportunity sets

4. Market imperfections





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





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.





International Business Methods

Licensing

Franchising

Joint Ventures

Establishing New Foreign Subsidiaries

Management Contracts





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….





Operations and Influences of International Business

OPERATIONS

Objectives

· Sale expansion · Resource acquisition · Diversification

INFLUENCES

InfluencesExternal environment

· Geographic · Historical · Political · Legal · Economic · Cultural

Competitive Environment

• Speed of product changes • Optimum production size • Number of customers • Amount bought by each customer• Homogeneity of customers• Local versus international competitors• Cost of moving products• Unique capabilities of competitors

Operational Functional

• Import• Export• Transport• Licensing• Franchising• Management contract• Turnkey• Direct investment• Portfolio investment

• Production• Marketing• Accounting• Finance• Personnel

MEANS





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….





Purely domesticfirm

MNC

MNC

Purelydomestic firm

Appropriatesize for purelydomestic firm

Appropriatesize for MNC

A B

MarginalReturn

Onprojects

Marginalcost ofcapital

Asset Level of Firm

Documents

Ch- 01