CHAPTER 1

1. Importance of International Financial Management

It is important to study financial management since we are living in a globalized and
integrated world economy. American consumers, for example, routinely purchase oil imported
from Saudi Arabia and Nigeria, TV sets from Korea, automobiles from Germany and Japan,
garments from China, shoes from Indonesia, handbags from Italy, and wine from France.
Owing to the continuous liberalization of international trade and investment, and rapid
advances in telecommunications and transportation technologies, the world economy will
become even more integrated.
2. International financial management vs domestic financial management
The major dimensions are:
a) foreign exchange and political risks (sovereign government have the right to regulate the
movement of goods, capital and people across their borders. This laws sometimes can exchange
in unexpected ways).
b) market imperfections ( legal restrictions on the movement of goods, people and money;
transactions cost, shipping cost).
c) and expanded opportunity set
3. Major trends in international business
A major economic trend of the recent decades is the rapid pace with which former state-
owned businesses bare being privatized. With the fall of communism, many eastern bloc
countries began stripping themselves of inefficient business operations formerly run by the
state. Privatization has placed a new demand on international capital markets to finance the
purchase of the former state enterprises, and it has also brought about a demand for new
managers with international business skills.
4. Country economic well-being enhanced through free international trade in goods
and services
It is mutually beneficial for two countries to specialize in the production of the goods for which
they have comparative advantages and then trade those goods. By doing so, the two countries
can increase their combined production, which allows both countries to consume more of both
goods. This argument remains valid even if a country can produce both goods more efficiently
than the other country. International trade is not a zero-sum game, but is instead, could be an
increasing-sum game at which all players become winners.
5. Considerations which limit the extent of theory of comparative advantage as
realistic
The theory of comparative advantage claims that economic well-being is enhanced if each
country's citizens produce what they have a comparative advantage in producing relative to the
citizens of other countries, and then trade products. Underlying the theory are the assumptions of
free trade between nations and that the factors of production (land, buildings, labor, technology,
and capital) are relatively immobile. To the extent that these assumptions do not hold, the theory
of comparative advantage will not realistically describe international trade.
6. Multinational corporations (MNCs) and economic role
A multinational corporations (MNC) is a firm that has been incorporated in one country and has
productions and sales operations in another countries.
There are about 60.000 MNCs in the world
Many MNCs obtain raw materials from one nations, financial capital from another, produce
goods with labor and capital equipment in a third country, and sell their output in various other
national markets