Introduction to International

Finance
Aditya Banerjee
International Finance: Why We Study It

• We live in a highly globalized and integrated world economy.

• No nation today can think of itself as an economic entity unto itself.
• More and more companies today venture into the international
financial markets.
• Like consumption, production of goods and services have become
highly globalized (can you think of an example of this?)
• Finance managers are now forced to come to terms with the
theoretical and analytical issues underlying the workings of the
international financial market.
Globalization and the Multinational Firm
• Multinational enterprises/companies (MNEs or MNCs) are firms—both
for-profit companies and not for-profit organizations—that have
operations in more than one country, and conduct their business
through branches, foreign subsidiaries, or joint ventures with host
country firms.
• E.g. MNCs like Nestle (entered India in 1912), Microsoft, IBM, Suzuki,
etc. Have local headquarters, manufacturing, services, and operations in
India
• Why do you think MNCs come to India (or go to other international
markets)?
• MNC’s Goal: Innovate, remain competitive, and profitable. Maximize
shareholder’s wealth.
Globalization and the Multinational Firm

• MNEs strive to take advantage of imperfections in national markets

for products, factors of production, and financial assets
• MNEs are a gift of market imperfections
• Imperfections represent various frictions and impediments
preventing markets from functioning perfectly (like trade barriers,
high taxes, availability of raw material, labour, & capital)
• An experienced Indian software developer can get about
$38,000 annually (in India). A relatively inexperienced software
developer can get double that salary in US. What does this
imply?
Globalization and the Multinational Firm

• When firms venture into the arena of global markets, they can
benefit from an expanded opportunity set.
• MNCs can locate production in any country or region of the world
to maximize their performance
• They can raise funds in any capital market where the cost of
capital is the lowest.
• They can gain from greater economies of scale when their
tangible and intangible assets are deployed on a global basis.
Why Do Firms become Multinational?
• Market seekers produce in foreign markets either to satisfy local
demand or to export to markets other than their home market. U.S.
automobile firms manufacturing in Europe for local consumption are
an example of market-seeking motivation.
• Raw material seekers extract raw materials wherever they can be
found, either for export or for further processing and sale in the
country in which they are found—the host country. Firms in the oil,
mining, plantation, and forest industries fall into this category.
• Production efficiency seekers produce in countries where one or
more of the factors of production are underpriced relative to their
productivity. Labor-intensive production of electronic components in
Taiwan, Malaysia, and Mexico is an example of this motivation.
Why Do Firms become Multinational?
• Knowledge seekers operate in foreign countries to gain access to
technology or managerial expertise. For example, German, Dutch,
and Japanese firms have purchased U.S.-located electronics firms
for their technology.
• Political safety seekers acquire or establish new operations in
countries that are considered unlikely to expropriate or interfere with
private enterprise. For example, Hong Kong firms invested heavily
in the United States, United Kingdom, Canada, and Australia in
anticipation of the consequences of China’s 1997 takeover of the
British colony.
International Finance – Key Challenges for Finance
Managers
• Keep up to date with significant environment al changes and
analyze their implication on the firm.
• To understand and analyze the complex interrelationships between
relevant environmental variables and corporate responses.
• To be able to adapt the finance function to significant changes in
firm’s own strategic posture.
• To design and implement effective solutions to take advantage of
the opportunities offered by the market and advances in financial
theory.
International Finance – A decision-making tool

• A tool for managers of MNC/MNE.

• Provides knowledge of foreign exchange and political risk (like tax
laws and other legal matters).
• Market imperfections (barriers that hamper free movements of
goods and services).
• Expanded opportunities (lower cost of capital, better diversification
of funds)
Find Out…
• The latest trends in FDI inflows in developing countries.
• The top 10 Financial MNCs globally.
• The top 10 Non-Financial MNCs globally.
• Try to find out about FDI in India.
• The volume of foreign trade globally and by regions (Asia, Africa, Europe
etc.)
• The highest contributors to foreign trade globally/
• Any other interesting information on global trade that you come across.
• Useful Links for you:
• www.unctad.org
• www.unctad.org/wir
• www.oecd.org
• www.wto.org
THANK YOU

THANK YOU