Part I: The International Financial Environment

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International Financial Management: An Overview

Chapte r

International Financial Management: An Overview

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International Financial Management (2nd Edition)

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Excel Books

Part I: The International Financial Environment

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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. 2. it helps the companies 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.

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International Financial Management (2nd Edition)

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Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview

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.

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International Financial Management (2nd Edition)

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Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview

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 Industrial countries

35
30 25 20 1981 1983 1985 1987 1989 1991 1993 1995 1997
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Developing countries

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International Financial Management (2nd Edition)

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Excel Books

Part I: The International Financial Environment

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1.
2. 3. 4.
International Financial Management: An Overview

Distinguishing features of International finance

Foreign exchange risk
Political risk Expanded opportunity sets Market imperfections

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International Financial Management (2nd Edition)

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Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview

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. 2. Foreign Direct Investments (FDI) Foreign Portfolio Investments

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International Financial Management (2nd Edition)

Madhu Vij

Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview

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.

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International Financial Management (2nd Edition)

Madhu Vij

Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview

International Business Methods

Licensing
Franchising Joint Ventures

Establishing New Foreign Subsidiaries

Management Contracts

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International Financial Management (2nd Edition)

Madhu Vij

Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview

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.
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International Financial Management (2nd Edition)

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Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview
Operations and Influences of International Business
OPERATIONS Objectives Sale expansion Resource acquisition Diversification INFLUENCES Influences External environment Geographic Historical Political Legal Economic Cultural

MEANS Operational Functional Production Marketing Accounting Finance Personnel

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

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

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International Financial Management (2nd Edition)

Madhu Vij

Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview

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.
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International Financial Management (2nd Edition)

Madhu Vij

Excel Books

Part I: The International Financial Environment

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International Financial Management: An Overview

Asset Level of Firm

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

MNC

Appropriate size for MNC

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International Financial Management (2nd Edition)

Madhu Vij

Excel Books