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Importance / Need / Scope of International Financial Management

International business activity is not new. The transfer of goods and services across national
borders has been taking place for thousand of years. However, international business has
undergone a revolution out of which has emerged one of the most important economic
phenomena which is termed as MULTINATIONAL CORPORATION.

Generally, the MNCs are interested in International Financial Management. A Multinational

Company is a company involved in producing and selling goods and services, in more than one
country. It usually consists of a parent company located in its home country with numerous
foreign subsidiaries.

Initially a company may start as a domestic company but as the awareness of opportunities in
foreign markets also increases the domestic company may become a MNC.

It is important to study IFM because we are now living in a highly globalizes and integrated
world economy. Due to the rapid advance in telecommunications and also the continuous
liberalization trade, the world economy will become more integrated. Hence, the need to study
the IFM.

The knowledge of INTERNATIONAL FINANCE is crucial fir MNCs in two important ways:

First, it helps the multinational companies and financial managers to decide how international
events will effect the firm and what steps can be taken to gain from positive developments and
insulate from harmful ones.

Second, it helps the companies to recognize how movements in EXCHANGE RATES,

INTEREST RATES and ASSET VALUES will affect the firm.

The consequences of events affecting the stock markets and interest rates of one country
immediately show up around the world. This is due to the integrated ad interdependent financial
environment. Which exists around the world.

Global Links: Globalisation increases the ability of firms to do business across the national
boundaries. The barriers to crossing these boundaries are coming down gradually. What once
took days now takes hours and what once took weeks now take minutes or even seconds. All this
is opening opportunities for everyone everywhere BUT GLOBALISATION NOT REALLY

Foreign trade has grown more quickly than the world economy in recent years. A trend that is
likely to continue for developing countries like India. Foreign trade is the way for realizing the
benefits of globalization.

MNC have become central actors of the world economy and linking foreign direct investment,
trade technology and finance; they are drivingforce of economic growth.

World is reduced to an electronic village and global finance has become a reality.

Trade in services has grown even faster, aided by the revolution of telecommunication and

INTERNATIONAL ECONOMICS: International Financial Management deals with the Financial

Decisions taken in the area of international business.

International business is not new, nor is the study of the IFM. However, it was, for long, a part of
international economics in general. It is only the fast growing dimensions o international
business in the second half of the twentieth century and the growing complexities associated with
it that the study of IFM has turned significant enough to become an independent branch of study.

International Financial Management covers the following:

Foreign Exchange Markets.

Exchange Rate Determination.

Exchange Rate Risk and Risk Management.

MNCs Investment Decisions.

International Working Capital Decisions.

Financing Decisions of the MNCs.

International Accounting.

International Indebtedness.
It can be observed that above areas are related to the FINANCIAL DECISIONS of the
International Business. However, it can also be said that a financial manager of the DOMESTIC
CORPORATION carries pit the above functions in one form or the other also. Now it is
necessary that we have to understand the difference between DOMESTIC FINANCIAL



INTRODUCTION: It is to be observed that both IFM and DFM are having the same objectives
and scope. IFM is, to a great extent, similar to domestic corporate financial management.

A domestic company takes up a project for investment only, when the Net Present Value of cash
flows is positive and it shapes the working capital policy in a way that maximizes the
profitability and ensures desired liquidity. It is not different in case of MNCs.

Further the financing decisions, in respect of whether a domestic or an international company,

aim at minimizing the overall cost of capital and providing optimum control.

OBJECTIVES OF IFM: The main objective of both DFM and IFM is same. The main
objective of IFM is to MAXIMISE SHAREHOLDERS WEALTH. The shareholders wealth is
measured in the market share price. This means that IFM deals with making investment decisions
and financing decisions that add value to the firm . The focus on shareholders value arises from
the fact that the shareholders are the legal owners of the firm and management has a fiduciary
obligation to act in their best interest.

The basic principle of financial management is always same even if the project involves foreign
currency or a foreign project is accepted. The basic rule is that a project with higher present
value be accepted and a capital mix with lowest cost is desirable.

However, the IFM has a wider scope than a domestic corporate finance and it is designed to cope
with greater range of complexities then the domestic financial management. The reasons for the
broader scope of the IFM are as follows:

The MNCs operate in different economic, political, legal, cultural and tax environments.

They operate across and within varied rages of product and factor markets which vary to a large
They trade in large number of different currencies as a result of which their dependence on the
foreign exchange market is quite substantial.

They mobilize funds not only from domestic capital market but also from the international
capital markets.

Working capital management in an MNC is more complex because it involves cash movement of
inventory from parent company to subsidiary company and vice- versa.

Expanded opportunity set.