International financial management is important for several reasons: (1) International trade corresponds to currency transactions as goods move between countries; (2) Specialization and trade allow countries to focus on goods they have a comparative advantage in and import other goods, benefiting all countries; (3) Globalization has led firms to expand internationally to exploit competitive advantages and imperfect foreign markets. International trade and financial management are crucial for world economic growth and development.

1. INTERNATIONAL FINANCIAL
MANAGEMENT
IMPORTANCE OF IFM
by
V S SARMA ,PROF, MBA
VIDYA JYOTHI INSTITUTE OF TECHNOLOGY
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2. - IFM is having a direct bearing on international trade
- Movement of goods correspond to currency
transaction
- International Trade is the backbone of IFM
- Reasons for International Trade:
- Resource abundance
- Increased Population
- High technology – High Production
- New form of business
INTERNATIONAL FINANCIAL MANAGEMENT
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3. - Six aspects provide importance to IFM
1) Specialization of some goods and services
2) Opening of new economies
3) Globalization of firms
4) Emergence of new form of business
5) Growth of world trade
6) Development process of Nations
INTERNATIONAL FINANCIAL MANAGEMENT
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4. 1) Specialization of some goods and services
- There are several theories of international
business which favor international trade. Relevant
are discussed hereunder :
a) Theory of absolute advantage
b) Theory of comparative advantage
c) Factor proportion theory
d) New trade theory – High fixed costs – increase out put
to achieve economies of scale and export
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5. 1) Specialization of some goods and services (contd..)
a) Theory of absolute advantage (Adem Smith)
- If a country is capable of producing goods with
lower amount of inputs compared to other countries –
produce such goods and export surplus
- Import such goods if the country is not efficient to
produce
(labour cost of production in hours)
- USA :Export cotton, import wine
- France : export wine – import cotton
- both get benefitted
INTERNATIONAL FINANCIAL MANAGEMENT
Country I unit of
cotton
1 unit of wine
USA 10 20
France 20 10
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6. 1) Specialization of some goods and services (contd..)
b) Theory of comparative advantage (David Recardo)
- Comparative Advantage refers to the ability of a
country to produce a particular good at a lower
marginal cost/ opportunity cost over others
- Even if one country is absolute advantage in the
production of all goods still gain by trading with
others as long as they have relative advantage
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7. 1) Specialization of some goods and services (contd..)
b) Theory of comparative advantage (contd.)
Example (units of labour cost for one unit)
- Britain: Exports one unit of cloth against one unit of wine.
Thus Britain got wine for 100 against 110 to be incurred
- Portugal: Exports wine against for one unit of cloth. Thus
Portugal got one unit of cloth for 80 against 90 to be
incurred
Thus both the countries got benefitted in spite of Portugal
having absolute advantage
INTERNATIONAL FINANCIAL MANAGEMENT
country cloth wine
Britain 100 110
Portugal 90 80
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8. 1) Specialization of some goods and services (contd..)
c) Factor proportion theory (Heckscher)
- Export goods that require large amount of production
factors that are abundantly available
- Import goods that require large amount of their scarce
production factors
- considers two factors production only
INTERNATIONAL FINANCIAL MANAGEMENT
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9. 1) Specialization of some goods and services (contd..)
d) New trade theory - High fixed costs – Economies
of scale
- Industries with high fixed costs should
produce more by specialization (learning
curve)
- Reap the benefit of economies scale(cost
reduction)
- Export surplus, exploit world market
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10. 2) OPENING OF NEW ECONOMIES
- Developing countries globalize due to
economic pressure being generated by
deficient resources
- in these countries always there is gap
between savings and investments (exports
and imports)
- Acute BOP problems prompt the countries to
promote exports.
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11. 3) Globalization of firms
` Trade occurs between nations through firms
- Exports and FDIs are the means of
international trade
- Why the firms globalize?
a) Theory of competitive advantage
b) Theory of imperfect markets
c) Product life cycle theory
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12. INTERNATIONAL FINANCIAL MANAGEMENT
3) Globalization of firms (contd..)
a) THEORY OF COMPETITIVE ADVANTAGE
 Competitive advantage means owning certain
attributes by a firm that allow it to outperform its
competitors
 Attributes
- R & D
- Innovation in production
- Specialization in management styles
- Location of the firm
 Firms having competitive advantage try to
expand business
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13. INTERNATIONAL FINANCIAL MANAGEMENT
3) Globalization of firms (contd..)
b) MARKET IMPERFECTIONS
 If markets are perfect resources move freely
 Perfect markets:
 free flow information
 free mobility of goods & services
 World markets are highly imperfect because
factors of production are not freely mobile
 Hence firms are encouraged to exploit
these resources
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14. INTERNATIONAL FINANCIAL MANAGEMENT
3) Globalization of firms (contd..)
c) PRODUCT LIFE CYCLE THEORY
 Firms evolve into MNCs because of product life
cycle theory
 As the product attain the maturity stage firms
resort to ;
- exports at first instance and then
- open subsidiaries (FDIs) in other
countries for manufacture of these
products there
 these goods are repatriated to their own
country latter on 14

15. INTERNATIONAL FINANCIAL MANAGEMENT
4) EMERGENCE OF NEW FORMS OF
BUSINESS
 Over period of time the forms of business
organizations have changed and felicitated
the access of firms to foreign markets
example:
 Licensing
 Franchising
 Joint ventures
 Acquisitions
 Subsidiaries
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16. INTERNATIONAL FINANCIAL MANAGEMENT
5) Growth of world trade
 Foreign Trade has grown as a result of :
 Increased production capacities of Nations
 necessity of Nations
 Developed countries achieved more production
and hence they export
 They in turn import such goods which enhance
the standards of population
 For developing countries there is a need to
import goods, equipment, technology to increase
growth
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17. INTERNATIONAL FINANCIAL MANAGEMENT
6) DEVELOPMENT PROCESS OF NATIONS
 Development process can be through:
 Internalization : totally depend on internal
sources say internal R&D
 Externalization : pay for external
R & D /technology
 All the above methods help growth
 But internal R & D takes time
 External R & D ( technology) is readily
available
 Hence countries resort to purchase new
technologies form other countries
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