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International Finance
Management
– Unit 1
Dr. J. Mexon P. Rayan
Introduction
•International finance is the set of relations for the
creation and using of funds (assets), needed for
foreign economic activity of international companies
and countries.
•Assets in the financial aspect are considered not just
as money, but money as the capital, i.e. the value that
brings added value (profit). Capital is the movement,
the constant change of forms in the cycle that passes
through three stages: the monetary, the productive,
and the commodity.
•So, finance is the monetary capital, money flow,
serving the circulation of capital. If money is the
universal equivalent, whereby primarily labour costs
are measured, finance is the economic tool.
• The definition of international finance is the combination of
monetary relations that develop in process of economic
agreements - trade, foreign exchange, investment - between
residents of the country and residents of foreign countries.
• Financial management is mainly concerned with how to
optimally make various corporate financial decisions, such as
those pertaining to investment, capital structure, dividend
policy, and working capital management, with a view to
achieving a set of given corporate objectives. When a firm
operates in the domestic market, both for procuring inputs as
well as selling its output, it needs to deal only in the domestic
currency.
•When companies try to increase their
international trade and establish operations
in foreign countries, they start dealing with
people and firms in various nations. On this
regards, as different nations have different
currencies, dealing with the currencies
becomes a problem-variability in exchange
rates have a profound effect on the cost,
sales and profits of the firm.
Relevance of International Finance
•International finance is an important tool to find the
exchange rates, compare inflation rates, get an idea
about investing in international debt securities,
ascertain the economic status of other countries
and judge the foreign markets.
•Exchange rates are very important in international
finance, as they let us determine the relative values
of currencies. International finance helps in
calculating these rates.
•Various economic factors help in making
international investment decisions. Economic
factors of economies help in determining whether
or not investors’ money is safe with foreign debt
securities.
•Utilizing IFRS is an important factor for many stages
of international finance. Financial statements made
by the countries that have adopted IFRS are similar.
It helps many countries to follow similar reporting
systems.
•IFRS system, which is a part of international finance,
also helps in saving money by following the rules of
reporting on a single accounting standard.
•International finance has grown in stature due to
globalization. It helps understand the basics of all
international organizations and keeps the balance
intact among them.
•An international finance system maintains
peace among the nations. Without a solid
finance measure, all nations would work for
their self-interest. International finance helps in
keeping that issue at bay.
•International finance organizations, such as
IMF, the World Bank, etc., provide a mediators’
role in managing international finance disputes.
Finance Function - Objectives
1. Assessing the Financial Requirements
2. Proper Utilisation of Funds
3. Increasing Profitability
4. Maximising Value of Firm
Scope of International Finance
•It is important while determining the exchange rates
of the country. This can be done against the
commodity or against the common currency.
•It plays a crucial role in investing in foreign debt
securities to have a clear idea about the market.
•The transaction between countries can be significant
in assessing the economic conditions of the other
country.
•The arbitrage in tax, risk, and price due to market
imperfections can be used to book good profits while
transacting in international trade.
Features of International Finance
1)Expanded Opportunity To Business:
2)Foreign Exchange Risk:
3)Imperfect Market:
4)Political Risk:
Multinational Company
•A multinational company is one which is
incorporated in one country (called the home
country); but whose operations extend beyond the
home country and which carries on business in
other countries (called the host countries) in
addition to the home country.
•It must be emphasized that the headquarters of a
multinational company are located in the home
country.
Neil H. Jacoby defines a multinational company as
follows:
•“A multinational corporation owns and manages
business in two or more countries.”
Features of MNC
(i) Huge Assets and Turnover:
(ii) International Operations Through a
Network of Branches:
(iii) Unity of Control:
(iv) Mighty Economic Power:
(v) Advanced and Sophisticated Technology:
(vi) Professional Management:
(vii)Aggressive Advertising and Marketing:
(viii) Better Quality of Products:
Growth of MNC
• As the world economy is opening up with a fall in regulatory
barriers to foreign investment, better transport and
communications, free capital movements, etc., international
companies are finding it easier to invest where they choose to
cheaply, and with less risk.
• Moreover, the developing countries no longer consider the
presence of MNCs to be synonymous with a loss of their
sovereignty. It is now realized that MNCs are merely a part of a
much wider force that is integrating the world economy.
• Over the years, foreign direct investment by MNCs in the
developing countries has been steadily on the rise, from as low
as 19% of total flows in 1990, to 30% in 1994.
The main factors which have contributed
towards the growth of multinational
corporations are given below:
•Market Expansion : The growth of GDP
and per capita income in various
countries led to increasing demand for
goods and services. Companies in
developed economies, explained their
operations overseas to exploit the
expanding markets abroad.
•Marketing Superiorities : Multinationals enjoy the
following marketing superiorities over the following
over the domestic companies :
a) Availability of more reliable and up-to-date
information about market conditions.
b) Reputation in the market due to popular brands
and image.
c) More effective advertising and sales promotion
techniques.
d) Wide distribution network.
e) Quick transportation and warehousing facilities.
•Financial Superiorities : Multinationals are
financially superior to domestic companies in the
following respects :
a) Huge financial resources.
b) More effective and economical utilisation of funds
through transfer of excess funds from one country to
another.
c) Easy access to foreign capital markets.
d) Easy mobilisation of high quality resources of
different types.
e) Access to international banks and financial
institutions.
• Technological Superiorities : Multinationals have strong R &
D departments. They can invent and innovate new products
and processes more easily and frequently. This provides
them an edge over national companies. Developing
countries invite multinationals for advanced technology due
to the following reasons :
a) Developing countries do not have the resources to develop
advanced technology and the level of industrialisation is low.
b) They are unable to exploit their rich mineral and other
natural resources due to shortage of funds and low level
technology.
c) They do not have adequate foreign exchange reserves to
import raw materials, capital equipment and technology on
their own.
Different Problems faced by the
Multinational Companies (mnc’s)
•Market Imperfections:
•Tax Competition:
•Political Instability:
•Market Withdrawal:
•Lobbying:
Problems between Domestic and MNC
•DIFFERENT ECONOMIC AND LEGAL STRUCTURE
•DIFFERENT CURRENCY DENOMINATIONS
•DIFFERENT LANGUAGES
•CULTURAL DIFFERENCES
•ROLE OF GOVERNMENTS
•POLITICAL RISK
International Business Activities/Methods
International business occurs in many different formats:
• The movement of goods from country to another (exporting,
importing, trade)
• Contractual agreements that allow foreign firms to use products,
services, and processes from other nations (licensing, franchising)
• The formation and operations of sales, manufacturing, research and
development, and distribution facilities in foreign markets
The study of international business involves understanding the effects
that the above activities have on domestic and foreign markets,
countries, governments, companies, and individuals. Successful
international businesses recognize the diversity of the world
marketplace and are able to cope with the uncertainties and risks of
doing business in a continually changing global market.
The challenging aspect of international business, however, is
that many firms combine aspects of both multi-domestic and
global operations:
• Multi-domestic – A strategic business model that involves
promoting products and services in various markets around
the world and adapting the product/service to the cultural
norms, taste preferences and religious customs of the
various markets.
• Multinational – A business strategy that involves selling
products and services in different foreign markets without
changing the characteristics of the product/service to
accommodate the cultural norms or customs of the various
markets.
The five types of international businesses are: 1. Exporting 2.
Licensing 3. Franchising 4. Foreign Direct Investment (FDI) 5.
Joint Venture
1. Exporting: Exporting is often the first choice when
manufacturers decide to expand abroad.
Exporting means selling abroad, either directly to
target customers or indirectly by retaining foreign
sales agents or/and distributors. Either case,
going abroad through exporting has minimal
impact on the firm‘s human resource
management because only a few, if at all, of its
employees are expected to be posted abroad.
Exporting is the practice of shipping goods from
the domestic country to a foreign country. The
seller of such goods and services is referred to as
an ―exporter whereas the overseas based buyer
is referred to as an ―importer
2. Licensing: Licensing is another way to expand
one‘s operations internationally. In case of
international licensing, there is an agreement
whereby a firm, called licensor, grants a foreign firm
the right to use intangible (intellectual) property for a
specific period of time, usually in return for a royalty.
Licensing of intellectual property such as patents,
copyrights, manufacturing processes, or trade names
abound across the nations
•Compared to the other potential entry models for
foreign market entry, licensing is relatively low risk
in terms of time, resources, and capital
requirements.
•A licensor‘ in a licensing relationship is the owner
of the product, service, brand or technology being
licensed. And a licensee‘ is the buyer of the
produce, service, brand or technology being
licensed. A licensor (i.e. the firm with the
technology or brand) can provide their products,
services, brand and/or technology to a licensee via
an agreement. This agreement will describe the
terms of the strategic alliance, allowing the licensor
affordable and low risk entry to a foreign market
while the licensee can gain access to the
competitive advantages and unique assets of
another firm. This is potentially a strong win-win
arrangement for both parties, and is a relatively
common practice in international business.
Advantages:
• Licensing is a rapid entry strategy, allowing almost instant
access to the market with the right partners lined up.
• Licensing is low risk in terms of assets and capital
investment. The licensee will provide the majority of the
infrastructure in most situations.
• Localization is a complex issue legally, and licensing is a clean
solution to most legal barriers to entry.
• Cultural and linguistic barriers are also significant challenges
for international entries. Licensing provides critical resources
in this regard, as the licensee has local contacts, mastery of
local language, and a deep understanding of the local
market.
Disadvantages:
• Loss of control is a serious disadvantage in a licensing
situation in regards to quality control. Particularly relevant is
the licensing of a brand name, as any quality control issue on
behalf of the licensee will impact the licensor‘s parent
brand.
• Depending on an international partner also creates inherent
risks regarding the success of that firm. Just like investing in
an organization in the stock market, licensing requires due
diligence regarding which organization to partner with.
• Lower revenues due to relying on an external party are also
a key disadvantage to this model. (Lower risk, lower returns.)
3. Franchising: Franchising is closely related to
licensing and is a special form of it. Franchising is an
option in which a parent company grants another
company/firm the right to do business in a
prescribed manner. A franchisee‘ is a holder of a
franchise; a person who is granted a franchise. And a
franchiser‘ is a person who grants franchises.
Franchising differs from licensing in the sense that it
usually requires the franchisee to follow much
stricter guidelines in running the business than does
licensing.
•Advantages of franchising (for the franchiser)
include low costs of entry, a localized
workforce (culturally and linguistically), and a
high speed method of market entry.
Disadvantages of franchising (for the
franchiser) include loss of some
organizational and brand control, as well as
relatively lower returns than other strategic
entry models (with lower risk).
4. Foreign Direct Investment: FDI is practiced by
companies in order to benefit from cheaper labour
costs, tax exemptions, and other privileges in that
foreign country. FDI is the flow of investments from
one company to production in a foreign nation, with
the purpose of lowering labor costs and gaining tax
incentives. FDI can help the economic situations of
developing countries, as well as facilitate progressive
internal policy reforms.
Foreign direct investment (FDI) is investment into
production in a country by a company located in
another country, either by buying a company in the
target country or by expanding operations of an
existing business in that country.
•FDI is done for many reasons including to take
advantage of cheaper wages in the country, special
investment privileges, such as tax exemptions,
offered by the country as an incentive to gain tariff-
free access to the markets of the country or the
region. Foreign direct investment refers to
operations in one country that are controlled by
entities in a foreign country. In a sense, this FDI
means building new facilities in other country.
5. Joint Venture: When two or more persons come
together to form a partnership for the purpose of
carrying out a project, this is called a joint venture. In
this scenario, both parties are equally invested in the
project in terms of money, time and effort to build
on the original concept. While joint ventures are
generally small projects, major corporations use this
method to diversify.
Since the cost of starting new projects is generally
high, a joint venture allows both parties to share the
burden of the project as well as the resulting profits.
•Since money is involved in a joint venture, it
is necessary to have a strategic plan in place.
In short, both parties must be committed to
focusing on the future of the partnership
rather than just the immediate returns.
Ultimately, short term and long term
successes are both important. To achieve this
success, honesty, integrity and
communication within the joint venture are
necessary.
INTERNATIONAL FINANCIAL
ENVIRONMENT
1. Foreign Exchange Market
2. Currency Convertibility
3. International Monetary System
4. International Financial Markets
5. Balance of Payments

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International Finance Management - Unit 1

  • 2. Introduction •International finance is the set of relations for the creation and using of funds (assets), needed for foreign economic activity of international companies and countries. •Assets in the financial aspect are considered not just as money, but money as the capital, i.e. the value that brings added value (profit). Capital is the movement, the constant change of forms in the cycle that passes through three stages: the monetary, the productive, and the commodity. •So, finance is the monetary capital, money flow, serving the circulation of capital. If money is the universal equivalent, whereby primarily labour costs are measured, finance is the economic tool.
  • 3. • The definition of international finance is the combination of monetary relations that develop in process of economic agreements - trade, foreign exchange, investment - between residents of the country and residents of foreign countries. • Financial management is mainly concerned with how to optimally make various corporate financial decisions, such as those pertaining to investment, capital structure, dividend policy, and working capital management, with a view to achieving a set of given corporate objectives. When a firm operates in the domestic market, both for procuring inputs as well as selling its output, it needs to deal only in the domestic currency.
  • 4. •When companies try to increase their international trade and establish operations in foreign countries, they start dealing with people and firms in various nations. On this regards, as different nations have different currencies, dealing with the currencies becomes a problem-variability in exchange rates have a profound effect on the cost, sales and profits of the firm.
  • 5. Relevance of International Finance •International finance is an important tool to find the exchange rates, compare inflation rates, get an idea about investing in international debt securities, ascertain the economic status of other countries and judge the foreign markets. •Exchange rates are very important in international finance, as they let us determine the relative values of currencies. International finance helps in calculating these rates. •Various economic factors help in making international investment decisions. Economic factors of economies help in determining whether or not investors’ money is safe with foreign debt securities.
  • 6. •Utilizing IFRS is an important factor for many stages of international finance. Financial statements made by the countries that have adopted IFRS are similar. It helps many countries to follow similar reporting systems. •IFRS system, which is a part of international finance, also helps in saving money by following the rules of reporting on a single accounting standard. •International finance has grown in stature due to globalization. It helps understand the basics of all international organizations and keeps the balance intact among them.
  • 7. •An international finance system maintains peace among the nations. Without a solid finance measure, all nations would work for their self-interest. International finance helps in keeping that issue at bay. •International finance organizations, such as IMF, the World Bank, etc., provide a mediators’ role in managing international finance disputes.
  • 8. Finance Function - Objectives 1. Assessing the Financial Requirements 2. Proper Utilisation of Funds 3. Increasing Profitability 4. Maximising Value of Firm
  • 9. Scope of International Finance •It is important while determining the exchange rates of the country. This can be done against the commodity or against the common currency. •It plays a crucial role in investing in foreign debt securities to have a clear idea about the market. •The transaction between countries can be significant in assessing the economic conditions of the other country. •The arbitrage in tax, risk, and price due to market imperfections can be used to book good profits while transacting in international trade.
  • 10. Features of International Finance 1)Expanded Opportunity To Business: 2)Foreign Exchange Risk: 3)Imperfect Market: 4)Political Risk:
  • 11. Multinational Company •A multinational company is one which is incorporated in one country (called the home country); but whose operations extend beyond the home country and which carries on business in other countries (called the host countries) in addition to the home country. •It must be emphasized that the headquarters of a multinational company are located in the home country. Neil H. Jacoby defines a multinational company as follows: •“A multinational corporation owns and manages business in two or more countries.”
  • 12. Features of MNC (i) Huge Assets and Turnover: (ii) International Operations Through a Network of Branches: (iii) Unity of Control: (iv) Mighty Economic Power: (v) Advanced and Sophisticated Technology: (vi) Professional Management: (vii)Aggressive Advertising and Marketing: (viii) Better Quality of Products:
  • 13. Growth of MNC • As the world economy is opening up with a fall in regulatory barriers to foreign investment, better transport and communications, free capital movements, etc., international companies are finding it easier to invest where they choose to cheaply, and with less risk. • Moreover, the developing countries no longer consider the presence of MNCs to be synonymous with a loss of their sovereignty. It is now realized that MNCs are merely a part of a much wider force that is integrating the world economy. • Over the years, foreign direct investment by MNCs in the developing countries has been steadily on the rise, from as low as 19% of total flows in 1990, to 30% in 1994.
  • 14. The main factors which have contributed towards the growth of multinational corporations are given below: •Market Expansion : The growth of GDP and per capita income in various countries led to increasing demand for goods and services. Companies in developed economies, explained their operations overseas to exploit the expanding markets abroad.
  • 15. •Marketing Superiorities : Multinationals enjoy the following marketing superiorities over the following over the domestic companies : a) Availability of more reliable and up-to-date information about market conditions. b) Reputation in the market due to popular brands and image. c) More effective advertising and sales promotion techniques. d) Wide distribution network. e) Quick transportation and warehousing facilities.
  • 16. •Financial Superiorities : Multinationals are financially superior to domestic companies in the following respects : a) Huge financial resources. b) More effective and economical utilisation of funds through transfer of excess funds from one country to another. c) Easy access to foreign capital markets. d) Easy mobilisation of high quality resources of different types. e) Access to international banks and financial institutions.
  • 17. • Technological Superiorities : Multinationals have strong R & D departments. They can invent and innovate new products and processes more easily and frequently. This provides them an edge over national companies. Developing countries invite multinationals for advanced technology due to the following reasons : a) Developing countries do not have the resources to develop advanced technology and the level of industrialisation is low. b) They are unable to exploit their rich mineral and other natural resources due to shortage of funds and low level technology. c) They do not have adequate foreign exchange reserves to import raw materials, capital equipment and technology on their own.
  • 18. Different Problems faced by the Multinational Companies (mnc’s) •Market Imperfections: •Tax Competition: •Political Instability: •Market Withdrawal: •Lobbying:
  • 19. Problems between Domestic and MNC •DIFFERENT ECONOMIC AND LEGAL STRUCTURE •DIFFERENT CURRENCY DENOMINATIONS •DIFFERENT LANGUAGES •CULTURAL DIFFERENCES •ROLE OF GOVERNMENTS •POLITICAL RISK
  • 20. International Business Activities/Methods International business occurs in many different formats: • The movement of goods from country to another (exporting, importing, trade) • Contractual agreements that allow foreign firms to use products, services, and processes from other nations (licensing, franchising) • The formation and operations of sales, manufacturing, research and development, and distribution facilities in foreign markets The study of international business involves understanding the effects that the above activities have on domestic and foreign markets, countries, governments, companies, and individuals. Successful international businesses recognize the diversity of the world marketplace and are able to cope with the uncertainties and risks of doing business in a continually changing global market.
  • 21. The challenging aspect of international business, however, is that many firms combine aspects of both multi-domestic and global operations: • Multi-domestic – A strategic business model that involves promoting products and services in various markets around the world and adapting the product/service to the cultural norms, taste preferences and religious customs of the various markets. • Multinational – A business strategy that involves selling products and services in different foreign markets without changing the characteristics of the product/service to accommodate the cultural norms or customs of the various markets. The five types of international businesses are: 1. Exporting 2. Licensing 3. Franchising 4. Foreign Direct Investment (FDI) 5. Joint Venture
  • 22. 1. Exporting: Exporting is often the first choice when manufacturers decide to expand abroad. Exporting means selling abroad, either directly to target customers or indirectly by retaining foreign sales agents or/and distributors. Either case, going abroad through exporting has minimal impact on the firm‘s human resource management because only a few, if at all, of its employees are expected to be posted abroad. Exporting is the practice of shipping goods from the domestic country to a foreign country. The seller of such goods and services is referred to as an ―exporter whereas the overseas based buyer is referred to as an ―importer
  • 23. 2. Licensing: Licensing is another way to expand one‘s operations internationally. In case of international licensing, there is an agreement whereby a firm, called licensor, grants a foreign firm the right to use intangible (intellectual) property for a specific period of time, usually in return for a royalty. Licensing of intellectual property such as patents, copyrights, manufacturing processes, or trade names abound across the nations •Compared to the other potential entry models for foreign market entry, licensing is relatively low risk in terms of time, resources, and capital requirements.
  • 24. •A licensor‘ in a licensing relationship is the owner of the product, service, brand or technology being licensed. And a licensee‘ is the buyer of the produce, service, brand or technology being licensed. A licensor (i.e. the firm with the technology or brand) can provide their products, services, brand and/or technology to a licensee via an agreement. This agreement will describe the terms of the strategic alliance, allowing the licensor affordable and low risk entry to a foreign market while the licensee can gain access to the competitive advantages and unique assets of another firm. This is potentially a strong win-win arrangement for both parties, and is a relatively common practice in international business.
  • 25. Advantages: • Licensing is a rapid entry strategy, allowing almost instant access to the market with the right partners lined up. • Licensing is low risk in terms of assets and capital investment. The licensee will provide the majority of the infrastructure in most situations. • Localization is a complex issue legally, and licensing is a clean solution to most legal barriers to entry. • Cultural and linguistic barriers are also significant challenges for international entries. Licensing provides critical resources in this regard, as the licensee has local contacts, mastery of local language, and a deep understanding of the local market.
  • 26. Disadvantages: • Loss of control is a serious disadvantage in a licensing situation in regards to quality control. Particularly relevant is the licensing of a brand name, as any quality control issue on behalf of the licensee will impact the licensor‘s parent brand. • Depending on an international partner also creates inherent risks regarding the success of that firm. Just like investing in an organization in the stock market, licensing requires due diligence regarding which organization to partner with. • Lower revenues due to relying on an external party are also a key disadvantage to this model. (Lower risk, lower returns.)
  • 27. 3. Franchising: Franchising is closely related to licensing and is a special form of it. Franchising is an option in which a parent company grants another company/firm the right to do business in a prescribed manner. A franchisee‘ is a holder of a franchise; a person who is granted a franchise. And a franchiser‘ is a person who grants franchises. Franchising differs from licensing in the sense that it usually requires the franchisee to follow much stricter guidelines in running the business than does licensing.
  • 28. •Advantages of franchising (for the franchiser) include low costs of entry, a localized workforce (culturally and linguistically), and a high speed method of market entry. Disadvantages of franchising (for the franchiser) include loss of some organizational and brand control, as well as relatively lower returns than other strategic entry models (with lower risk).
  • 29. 4. Foreign Direct Investment: FDI is practiced by companies in order to benefit from cheaper labour costs, tax exemptions, and other privileges in that foreign country. FDI is the flow of investments from one company to production in a foreign nation, with the purpose of lowering labor costs and gaining tax incentives. FDI can help the economic situations of developing countries, as well as facilitate progressive internal policy reforms. Foreign direct investment (FDI) is investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.
  • 30. •FDI is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges, such as tax exemptions, offered by the country as an incentive to gain tariff- free access to the markets of the country or the region. Foreign direct investment refers to operations in one country that are controlled by entities in a foreign country. In a sense, this FDI means building new facilities in other country.
  • 31. 5. Joint Venture: When two or more persons come together to form a partnership for the purpose of carrying out a project, this is called a joint venture. In this scenario, both parties are equally invested in the project in terms of money, time and effort to build on the original concept. While joint ventures are generally small projects, major corporations use this method to diversify. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project as well as the resulting profits.
  • 32. •Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership rather than just the immediate returns. Ultimately, short term and long term successes are both important. To achieve this success, honesty, integrity and communication within the joint venture are necessary.
  • 33. INTERNATIONAL FINANCIAL ENVIRONMENT 1. Foreign Exchange Market 2. Currency Convertibility 3. International Monetary System 4. International Financial Markets 5. Balance of Payments