discribed about international financial management and its types

1. INTERNATIONAL FINANCIAL
MANAGEMENT

2. PRESENTED BY:-MANIKRAO
2016A104MBA

3. Introduction
IFM- is a popular concept which means management of finance in an international business
environment, it implies, doing of trade and making money through the exchange of foreign
currency.
The international financial activities help the organizations to connect with international
dealings with overseas business partners- customers, suppliers, lenders. It is also used by
government organization and non-profit institutions.
The main objective of international financial management is to maximise shareholder wealth.
Adam Smith wrote in his famous title, “Wealth of Nations” that if a foreign country can supply
us with a commodity Cheaper than we ourselves can make it, better buy it of them with some
part of the produce of our own in which we have some advantage.

4. BASIC FUNCTIONS
 This function involves generating funds from internal as
well as external sources.
 The effort is to get funds at the lowest cost possible.

5. -
 It is concerned with deployment of the acquired funds
in a manner so as to maximize shareholder wealth.
 Other decisions relate to dividend payment, working
capital and capital structure etc.
 In addition, risk management involves both financing
and investment decision.

6. NATURE AND SCOPE
 Finance function of a multinational firm has two functions namely, treasury and
control.
 The treasurer is responsible for
 financial planning analysis
 fund acquisition
 investment financing
 cash management
 investment decision and
 risk management
 Controller deals with the functions related to
 external reporting
 tax planning and management
 management information system
 financial and management accounting
 budget planning and control, and
 accounts receivables etc.

7. ENVIRONMENT AT INTERNATIONAL LEVEL
 The knowledge of latest changes in forex rates
 Instability in capital market
 Interest rate fluctuationsacro level charges
 Micro level economic indicators
 Savings rate
 Consumption pattern
International financial management practitioners are
required the knowledge in the following fields:
 Investment behavior of investors
 Export and import trends
 Competition
 banking sector performance
 inflationary trends
 demand and supply conditions etc.

8. FOREIGN EXCHANGE RISK
 In a domestic economy this risk is generally ignored because a single national
currency serves as the main medium of exchange within a country.
 When different national currencies are exchanged for each other, there is a definite
risk of volatility in foreign exchange rates.
 The present International Monetary System set up is characterized by a mix of
floating and managed exchange rate policies adopted by each nation keeping in
view its interests.
 In fact, this variability of exchange rates is widely regarded as the most serious
international financial problem facing corporate managers and policy makers

9. POLITICAL RISK
 Political risk ranges from the risk of loss (or gain) from unforeseen
government actions or other events of a political character such as acts of
terrorism to outright expropriation of assets held by foreigners.
 For example, in 1992, Enron Development Corporation, a subsidiary of a
Houston based Energy Company, signed a contract to build India’s
longest power plant. Unfortunately, the project got cancelled in 1995 by
the politicians in Maharashtra who argued that India did not require the
power plant. The company had spent nearly $ 300 million on the project

10. EXPANDED OPPORTUNITY SETS
 When firms go global, they also tend to benefit from expanded
opportunities which are available now.
 They can raise funds in capital markets where cost of capital is the
lowest.
 The firms can also gain from greater economies of scale when they
operate on a global basis

11. INTERNATIONAL TRADE
THEORIES

12. THEORY OF MERCANTILISM
• This theory is during the sixteenth to the three-fourths of
the eighteenth centuries.
• It beliefs in nationalism and the welfare of the nation
alone, planning and regulation of economic activities for
achieving the national goals, restriction imports and
promoting exports.
• It believed that the power of a nation lied in its wealth,
which grew by acquiring gold from abroad.Mercantilism

13. CONTI…….
• Mercantilists failed to realize that simultaneous export promotion and
import regulation are not possible in all countries, and the mere
control of gold does not enhance the welfare of a people.
• Keeping the resources in the form of gold reduces the production of
goods and services and, thereby, lowers welfare.
 It was rejected by Adam Smith and Ricardo by stressing the importance
of individuals, and pointing out that their welfare was the welfare of the
nation.

14. THEORY OF ABSOLUTE COST
ADVANTAGE
• This theory was propounded by Adam Smith (1776), arguing that the
countries gain from trading, if they specialise according to their production
advantages.
 The pre-trade exchange ratio in Country I would be 2A=1B and in
Country II IA=2B.

15. CONTI……
• If it is nearer to Country I domestic exchange ratio then trade would be more beneficial to Country II
and vice versa.
• Assuming the international exchange ratio is established IA=IB.
• The terms of trade between the trading partners would depend upon their economic strength and the
bargaining power.

16. THEORY OF COMPARATIVE COST
ADVANTAGE
• Ricardo (1817), though adhering to the absolute cost advantage principle of
Adam Smith, pointed out that cost advantage to both the trade partners was
not a necessary condition for trade to occur.
 According to Ricardo, so long as the other country is not equally less
productive in all lines of production, measurable in terms of
opportunity cost of each commodity in the two countries, it will still be
mutually gainful for them if they enter into trade.
Ricardo

17. THEORY OF COMPARATIVE COST
ADVANTAGE
 In the example given, the opportunity cost of one unit of A in country I is 0.89
(80/90) unit of good B and in country II it is 1.2 (120/100) unit of good B.
 On the other hand, the opportunity cost of one unit of good B in country I is 1.125
(90/80)units of good A and 0.83 (100/120) unit of good A, in country II.

18. CONTI……
• The opportunity cost of the two goods are different in both the countries and as
long as this is the case, they will have comparative advantage in the production
of either, good A or good B, and will gain from trade regardless of the fact that
one of the trade partners may be possessing absolute cost advantage in both
lines of production.
 Thus, country I has comparative advantage in good A as the opportunity cost of
its production is lower in this country as compared to its opportunity cost in
country II which has comparative advantage in the production of good B on the
same reasoning.

19. INTERNATIONAL BUSINESS
METHODS
 Licensing
 Franchising
 Subsidiaries and Acquisitions
 Strategic Alliances
 Exporting

20. LICENSING
 License -means to give permission. A license may be granted by a party ("licensor") to
another party ("licensee") as an element of an agreement between those parties.
 A license may be issued by authorities, to allow an activity that would otherwise be
forbidden. It may require paying a fee and/or proving a capability. The requirement may
also serve to keep the authorities informed on a type of activity, and to give them the
opportunity to set conditions and limitations.

21. FRANCHISING
 Franchising is the practice of selling the right to use a firm's successful business model. For
the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods
that avoids the investments and liability of a chain. The franchisor's success depends on the
success of the franchisees. The franchisee is said to have a greater incentive than a direct
employee because he or she has a direct stake in the business.
 The franchisor is a supplier who allows an operator, or a franchisee, to use the supplier's
trademark and distribute the supplier's goods. In return, the operator pays the supplier a fee.

22. SUBSIDIARIES AND ACQUISITIONS
 A subsidiary is a company that is completely or partly owned by another corporation that
owns more than half of the subsidiary's stock, and which normally acts as a holding
corporation which at least partly or a parent corporation, wholly controls the activities and
policies of the daughter corporation.
 Mergers and acquisitions are both aspects of corporate strategy, corporate finance and
management dealing with the buying, selling, dividing and combining of different
companies and similar entities that can help an enterprise grow rapidly in its sector or
location of origin, or a new field or new location, without creating a subsidiary, other child
entity or using a joint venture.

23. STRATEGIC ALLIANCES
 A strategic alliance is an agreement between two or more parties to pursue a set of
agreed upon objectives needed while remaining independent organizations. This
form of cooperation lies between Mergers & Acquisition M&A and organic growth.
 Partners may provide the strategic alliance with resources such as products,
distribution channels, manufacturing capability, project funding, capital equipment,
knowledge, expertise, or intellectual property. The alliance is a cooperation or
collaboration which aims for a synergy where each partner hopes that the benefits
from the alliance will be greater than those from individual efforts.
 A strategic alliance is an agreement between two or more parties to pursue a set of
agreed upon objectives needed while remaining independent organizations. This
form of cooperation lies between Mergers & Acquisition M&A and organic growth.
 Partners may provide the strategic alliance with resources such as products,
distribution channels, manufacturing capability, project funding, capital equipment,
knowledge, expertise, or intellectual property. The alliance is a cooperation or
collaboration which aims for a synergy where each partner hopes that the benefits
from the alliance will be greater than those from individual efforts.