APEX COLLEGE MBA International Financial Management (IFM) Chapter 1 Introduction

Narayan Prasad Paudel April 2012

Coverage
Ch-1 Introduction (LH- 2) Ch-2 Foreign Exchange Markets (LH- 3) Ch-3 Determination of Exchange Rates (LH- 3) Ch-4 international Parity Conditions (LH- 4) Ch-5 Foreign Currency Derivatives (LH- 4) Ch-6 International Flow of Funds (LH- 3) Ch-7 international Trade (LH- 2) Ch-8 FX Risk and Exposures (LH- 3) Text Book Jeff Madura: International Financial Management,

International Financial Management

Involves decision making in an international context Goal: Maximize shareholders wealth as measured by share price Functions Financing decision (Capital mix decision) Investment decision (Asset mix decision) Dividend decision (Profit allocation decision) Conflict: The agency problem (Managers vs. shareholders goals)

Multinational Corporations (MNCs)

Firms engaged in some forms of international business or involved in producing and selling goods and services in more than one country. Large firms seeking physical presence through operating subsidiaries, branches or affiliates located in foreign countries. Parent company located in the home country and other foreign subsidiaries scattered around the world. A firm operating in two or more than two countries. Example: General Motors, IBM, Xerox, Sony, Hewlett-Packard, Gillette, Compaq, Kentucky Fried 4 Chicken (KFC), Pizza Hut, McDonald's etc.

Operational Goals of the MNCs

Maximize after-tax income Minimize global tax burden Correct the firms financial position

Constraints Interfering with the MNC Objectives

Environmental constraints: pollution controls and anti-pollution laws. Regulatory constraints: tax, convertibility and earnings remittance etc. Ethical constraints: standard of business conduct.

Reasons for Companies Going Global

To broaden their markets To seek raw materials To seek new technologies To seek production efficiency To avoid political and regulatory hurdle To diversify businesses

Theories of International Business

Theory of comparative advantage: - Goods and services can move internationally - Factors of productions such as capital, labor and land are relatively immobile - Production efficiency through specialization Imperfect markets theory: - Countries differ with respect to resources availability - Factors of productions are immobile/ nontransferable Product life cycle hypothesis
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Increased Globalization
Rapid reduction in transportation costs Revolution in information technology Freeing investment flows through massive deregulation Reduction in tariffs Increased standardization of products and services Privatization The rise in the market for corporate control
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International Business Methods

International trade: Export / import Licensing: Providing copyrights, patents, trademarks etc. in exchange of fees or other benefits Use of technology in foreign markets No major investment required No transportation costs Examples: Coca-cola Disadvantage: quality control Franchising: Specialized sales/service strategy or support assistant Initial investment, but not major in 10 exchange of periodic fees

International Business Methods

Joint ventures: Jointly operated/owned by two or more firms Major initial investment required Examples: General Motors, Xerox Acquisitions of existing operations: Full control through large investments Establishing new foreign subsidiaries: Establishing new operations to tailor firm's needs Large investment required
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Multinational versus Domestic Financial Management

Different currency denomination Economic and legal ramifications Language differences Cultural differences Role of governments Political risk

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