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Basics of International Financial Management

International Finance Session 1 Date: 27.7.2012

Session Objectives
1. Nature and Scope of International Finance 2. Factors responsible fro the fast growth of International Finance Function 3. Why to study International Finance 4. Comparison between the domestic financial Management and International Financial Management. 5. Broad Contours to discuss IFM in present context
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SO-1 The nature and Scope of IFM?


IF is concerned with the management of finance function related to international business So IFM is the function performed in to the various modes of IB. International Business and the wave of Globalization are the first aspects to be understood before we go into management of international financial operations.
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SO-2

Factors responsible for the increased


role of IF function

SO-2 The globalization is the result.


Globalization is the result of increasing activities in international business. Be it Multinational Company or any other way of doing business. The objectives of IB are:
To expand the sales of products beyond national boundaries To acquire resources with minimum cost Minimizing competitive risk To diversify the sources of sales and supplies Economic factors Cultural factors Technological factors Social factors

Modes/Methods of International Business

Operations and Influences of International Business

SO-2 Tremendous impact of Globalization

SO-2 Tremendous impact of Globalization


Amazing increase in the global trade & transactions in recent years Increase in international business through different modes like licensing, franchising, FDI, FPI and MNCs etc. Strong position o f MNCs and TNCs in shaping the globalization

SO-2 Drivers of Globalization


1. Declining Trade and Investment Barriers
Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods in order to protect domestic industries from foreign competition

Reducing barriers to foreign trade and promoting global business was done by GATT. More reduction in the Uruguay Round-1993.
It provided enhanced protection for the patents, trademarks and copyrights and established WTO to police the international trading system.
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SO-2 Drivers of Globalization


1. The role of technological change
1. 2. 3. 4. 5. Microprocessors and Telecommunications The internet and World Wide Web Development in Transportation technology as A gateway for the globalization of production A gateway for the globalization of markets

2. In short, the main reason is interest of several countries in trading with each other in order to maximize their profit and sales and protecting them from being eroded by the competition.
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SO-2 The emergence of Global Institutions

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SO-2 The globalization and the Multinational Enterprise


Why Multinational companies?
Due to market imperfections Due to market seekers Due to raw material seekers Production efficiency seekers Political safety seekers The latest trend is that the world economy is flourishing because of the existence of these MNEs and MNCs. Globalization is the result of increasing activities in international business.

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Multi National Corporations:


The Key participant in IF Function
A Multinational corporation is an enterprise that owns and controls production or service facilities outside the country in which it operates. It has its facilities and other assets in at different countries other than its home country. Like:
General Electric, Nike, coca-Cola. Wal-Mart, Toshiba and Honda. The strong hold of MNCs in host countries is evident form the fact that in 2002, 57.5 % of total sales, 48.1% of total assets and 49-1% of total employment in top 100 MNCs were accounted by the host countries (United Nations, 2004)

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Multi National Corporations: Meaning


According to Vernon and Wells Jr, MNCs represent a cluster of affiliated firms located in different countries That:
Are linked through common ownership Draw upon common pool of resources Respond to a common strategy

All this is because of high integration among different units of the firm.
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Multi National Corporations: Types


Based on the strategic features , MNCs are grouped as:
a. Ethnocentric b. Polycentric c. Geocentric

Ethnocentric are those that adopt home market oriented policy and seldom distinguish between domestic operation and global operation policy. Polycentric firms operate in the foreign country just to cater to the demand in those countries. These follow a host market oriented policy Geocentric firms maintain a balance between the home market and host market oriented policies. A MNC is different form a TNC. IN the former decision making is decentralized and activities of the firm are not strictly coordinated. In the latter the global business activities of the firm are perfexctly configured, coordinated and controlled so as to achieve global competitiveness.
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Essentials to qualify as MNC


It is the MNCs which are responsible for lions share of world trade and investment. For qualifying as MNC,
the number of countries where the firm operates must be at least six ( Vernon, 1971; United Nations, 1978) Secondly the firm must generate a sizeable proportion of its revenue from the foreign operations ( exact % is yet to be decided)
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Multi National Corporations and India


What are the specific risk exposures or vulnerabilities the Indian domestic scene projects for a MNC to predict and protect its business continuity? Some of these are:
Lack of adequate and assured supply of power Break down in telecommunication Heightened risk awareness of acts of terrorism, The frequency of natural catastrophe occurrences, The lack of contract certainty Endless judicial delays to resolve disputes Strident labour attitude
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Objectives of the Multi National Corporations

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So-3 Why to study International Finance ?


A knowledge of IF is crucial to Mncs:
I. It helps the companies and financial managers to decide how international events will affect the firm and what steps can be taken for the positive developments and insulate from negative ones II. Second it helps companies to reconise how the firms are affected by movements in exchange rates, interest rates and inflation rates and asset values.
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SO-4 Scope or Dimensions of International Finance


1. The operations of financial companies at the stock exchanges abroad. 2. Study of the functions of IMF 3. Investment decision of the international firms including both FDI and FPI 4. MNCs Working Capital 5. Analysis of Balance of Payments showing flow of funds following international financial transactions. 6. International indebtedness and its management
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SO-4 Scope or Dimensions of International Finance


1. Knowledge of Convertible currency 2. Knowledge of Foreign exchange exposure and risk 3. Knowledge of varying exchange rates-its determination and forecasting along with the factors influencing exchange rates 4. Knowledge of Foreign exchange Markets and market for derivatives 5. Knowledge of financial institution as decision maker for international dealings
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SO-5 Domestic FM and International FM


1. Difference in environment

2.
3. 4. 5.

Foreign Exchange risk


Political Risk Expanded Opportunity sets Market Imperfections

6.
7. 8.

Various markets
Various currencies Easy access to domestic capital markets as well as unregulated international capital a markets by the MNCs.
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Topic for Seminar and Group Discussion


Collect recent annual reports of 5 MNCS of your choice and comment on the impact of the MNCs foreign Business and how the MNCs has benefitted from its International Operations. You can also perform the above analysis industry wise. You can also develop a research paper on this.

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Topics to study this chapter from the book- Please start reading.
1. Factors leading to the emergence of International Finance.
1. Detailed study of Globalization its importance, impact on the development of world

economy
2. 3. Role of FDI Detailed study Role of Multinational Companies

4.

Role of other modes of IB in the globalization

2. 3.

Objectives of Multinational Companies Difference between domestic and international Finance

4. 5.
6.

Distinguishing features or major dimensions of international finance Modes or Methods of doing international Business
Importance of International Finance.
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The Session ends here Next Session Chapter-2 - International Monetary System- Read it from the book and come prepared

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