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
Excel Books1– 2 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
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.
Excel Books1– 3 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
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.
Excel Books1– 4 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
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
Excel Books1– 5 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
Distinguishing features of International finance
1. Foreign exchange risk
2. Political risk
3. Expanded opportunity sets
4. Market imperfections
Excel Books1– 6 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
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
Excel Books1– 7 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
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.
Excel Books1– 8 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
International Business Methods
Licensing
Franchising
Joint Ventures
Establishing New Foreign Subsidiaries
Management Contracts
Excel Books1– 9 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
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….
Excel Books1– 10 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
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
Excel Books1– 11 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
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….
Excel Books1– 12 International Financial Management (2nd Edition) Madhu Vij
Part I: The International Financial Environment
International Financial Management: An OverviewC1
Copyright © 2003, Madhu Vij
Purely domesticfirm
MNC
MNC
Purelydomestic firm
Appropriatesize for purelydomestic firm
Appropriatesize for MNC
A B
MarginalReturn
Onprojects
Marginalcost ofcapital
Asset Level of Firm