Module : Understanding International Financial

Environment

Introduction:
Welcome to Module 1 of Global Finance and Electronic Banking! In this module, you will
be comprehending the international financial environment as applied for globalization and
multinational corporation, international flow of funds will also be discussed and elaborated.

Module Outcome:
Develop an understanding on the international financial environment.

Specific Learning Outcomes:

At the end of the module, you are expected to:

1.1 Explain globalization and the Multinational Corporation.

1.2 Discuss the international flow of funds.
1.3 Create a concept map on international financial management.

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 Let’s get
ready to
ENGAGE!

Pre-Activity!

Instruction: Search and encircle the Global Finance terms. There are Ten (10) terms in the box,
hence, you have to strategize on how to achieve the goals by encircling all these terms within
FIVE (5) minutes. Please use a stopwatch or timer and crash-out the terms you have searched
or encircled.

Enjoy searching!

-GLOBALIZATION -TRADE -FINANCIAL -FUNDS -CURRENCY

-INTEGRATION -RISKS -ECONOMY -EXCHANGE RATE -MANAGEMENT

G M A N A G E M E N T X I

L L A H I J G Q K W L B N

O B O H I N F U N D S C T

B G B B J I F J K V Z W E

E X C H A N G E R A T E G

D C U C T L O S V U M R R

A F E F D R I S K S A Y A

R D V G K E P Z L X N M T

T E D L A I C N A N I F I

B O X V Q M P S O T A N O

Y M O N O C E T U Y I Q N

A Z C H R L S R T Z O O P

E D W Y C N E R R U C D N

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 Let’s Why do we need to study “International” financial management?
The answer to this question is straightforward: We are now living in a
EXPLORE!
highly globalized and integrated world economy. American consum-
ers, for example, routinely purchase oil imported from Saudi Arabia
and Nigeria, TV sets from Korea, automobiles from Germany and Ja-
pan, garments from China, shoes from Indonesia, handbags from Italy,
and wine from France. Foreigners, in turn, purchase American-made
aircrafts, software. Movies, jeans, smartphones, and other products.
Continued liberalization of international trade is certain to further in-
ternationalize consumption patterns around the world.

What’s Special about International Finance?

Putting another way, how is international finance different from purely domestic finance? Three major
dimensions set international finance apart from domestic finance. They are:

1. Foreign exchange and Political Risk.

2. Market Imperfections.

3. Expanded opportunity set.

As we will see, these major dimensions of international finance largely stem from the fact that sovereign
nations have the right and power to issue currencies, formulate their own economic policies, impose taxes, and
regulate movements of people, goods, and capital across their borders.

Foreign exchange risk: In a domestic economy this risk is generally ignored because a single national curren-
cy serves as the main medium of exchange within a country. However, when different national currencies are
exchanged, there is definite risk of volatility in foreign exchange rates. Variability of exchange rates is widely
regarded as the most serious international financial problem facing policymakers and corporate managers.
Political risk: It is risk of loss (or gain) from unforeseen government action or other events of political charac-
ter, such as acts of terrorism.
Expanded opportunity set: When firms go global, they get benefited from the expanded opportunities availa-
ble globally. They can locate production in any country or region to maximize their performance and raise
funds in any capital market where the cost of capital is the lowest. They can also gain from greater economies
of scale when tangible and intangible assets are deployed on a global basis.

Market imperfections: The world markets are highly imperfect, in the sense that a variety of barriers still
hamper free movements of people, goods, services, and capital across national boundaries.

Compared to national financial markets international markets have a different shape and analytics.
Proper management of international finances can help the organization in achieving same efficiency and effec-
tiveness in all markets, hence without IFM sustaining in the market can be difficult. Companies are motivated
to invest capital in abroad for the following reasons:

 Efficiently produce products in foreign markets than that domestically.

 Obtain the essential raw materials needed for production.

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 Let’s Lesson 1:
EXPLAIN! Globalization and the Multinational
Corporation

Globalization

Globalization is the word used to describe the growing interdependence of the world’s economies, cul-
tures, and populations, brought about by cross-border trade in goods and services, technology, and flows of in-
vestment, people, and information. Countries have built economic partnerships to facilitate these movements
over many centuries. But the term gained popularity after the Cold War in the early 1990s, as these cooperative
arrangements shaped modern everyday life. The wide-ranging effects of globalization are complex and political-
ly charged. As with major technological advances, globalization benefits society as a whole, while harming cer-
tain groups. Understanding the relative costs and benefits can pave the way for alleviating problems while sus-
taining the wider payoffs.

Understanding Globalization

Corporations gain a competitive advantage on multiple fronts through globalization. They can re-
duce operating costs by manufacturing abroad, buy raw materials more cheaply because of the reduction or
removal of tariffs, and most of all, they gain access to millions of new consumers.

Globalization is a social, cultural, political, and legal phenomenon.

 Socially, it leads to greater interaction among various populations.

 Culturally, globalization represents the exchange of ideas, values, and artistic expression among cul-
tures.
 Globalization also represents a trend toward the development of a single world culture.
Politically, globalization has shifted attention to intergovernmental organizations like the United Na-
tions (UN) and the World Trade Organization (WTO).

 Legally, globalization has altered how international law is created and enforced.

On one hand, globalization has created new jobs and economic growth through the cross-border flow
of goods, capital, and labor. On the other hand, this growth and job creation are not distributed evenly
across industries or countries.

Specific industries in certain countries, such as textile manufacturing in the U.S. or corn farming in
Mexico, have suffered severe disruption or outright collapse as a result of increased international competi-
tion.

Globalization's motives are idealistic, as well as opportunistic, but the development of a global free
market has benefited large corporations based in the Western world. Its impact remains mixed for workers,
cultures, and small businesses around the globe, in both developed and emerging nations.

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 Let’s
EXPLAIN!
Multinational Corporations (MNCs)

A multinational corporation (MNC) has facilities and other assets in at least one country other than its
home country. A multinational company generally has offices and/or factories in different countries and a central-
ized head office where they coordinate global management. These companies, also known as international, state-
less, or transnational corporate organizations tend to have budgets that exceed those of many small countries.

How a Multinational Corporation (MNC) Works?

A multinational corporation, or multinational enterprise, is an international corporation that derives

at least a quarter of its revenues outside its home country. Many multinational enterprises are based in
developed nations. Multinational advocates say they create high-paying jobs and technologically ad-
vanced goods in countries that otherwise would not have access to such opportunities or goods. However,
critics of these enterprises believe these corporations have undue political influence over governments,
exploit developing nations, and create job losses in their own home countries. The history of the multina-
tional is linked with the history of colonialism. Many of the first multinationals were commissioned at the
behest of European monarchs in order to conduct expeditions. Many of the colonies not held by Spain or
Portugal were under the administration of some of the world's earliest multinationals. One of the first
arose in 1600: The East India Company, founded by the British. It was headquartered in London, and took
part in international trade and exploration, with trading posts in India. Other examples include the Swe-
dish Africa Company, founded in 1649, and the Hudson's Bay Company, which was incorporated in the
17th century.

Types of Multinationals

There are four categories of multinationals that exist. They include:

 A decentralized corporation with a strong presence in its home country.

 A global, centralized corporation that acquires cost advantage where cheap resources are available.
 A global company that builds on the parent corporation’s R&D.
 A transnational enterprise that uses all three categories.

There are subtle differences between the different kinds of multinational corporations. For instance,
a transnational—which is one type of multinational—may have its home in at least two nations and
spread out its operations in many countries for a high level of local response. Nestlé S.A. is an example of
a transnational corporation that executes business and operational decisions in and outside of its head-
quarters. Meanwhile, a multinational enterprise controls and manages plants in at least two countries.
This type of multinational will take part in foreign investment, as the company invests directly in host
country plants in order to stake an ownership claim, thereby avoiding transaction costs. Apple Inc. is a
great example of a multinational enterprise, as it tries to maximize cost advantages through foreign in-
vestments in international plants.

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 Let’s
ELABORATE!

 Globalization is the spread of products, technology, information, and jobs across nations.
 Corporations in developed nations can gain a competitive edge through globalization.
 Developing countries also benefit through globalization as they tend to be more cost-effective and there-
fore attract jobs.
 The benefits of globalization have been questioned as the positive effects are not necessarily distributed
equally.
 One clear result of globalization is that an economic downturn in one country can create a domino effect
through its trade partners.
 Multinational corporations participate in business in two or more countries.
 MNC can have a positive economic effect on the country where the business is taking place.
 Many believe manufacturing outside of the U.S. has a negative effect on the economy with fewer job op-
portunities.
 Transnational business is considered diversifying the investment.
 Multinational corporations participate in business in two or more countries.
 MNC can have a positive economic effect on the country where the business is taking place.
 Many believe manufacturing outside of the U.S. has a negative effect on the economy with fewer job op-
portunities.
 Transnational business is considered diversifying the investment.

Instruction: This is a short answer essay. Kindly provide your answer based on
Activity 1!
the given questions in the box. 15 Points each.

1. How is a country’s economic well-being en- 2.What economic roles do multinational corpora-
hanced through free international trade in goods tions (MNCs) play?
and services?

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 Let’s
EXPLAIN! Lesson 2:
The International Flow of Funds

The international flow of funds takes place when the transactions of buying and selling take place be-
tween the international market by means of international business that is export and import from one country to
another country. The transactions of international business cause the flow of funds from one country to another
which facilitates imports and exports from one country to another and helps into money to flow from one to an-
other market. The financial managers of many multinational corporations keep an eye on the changing trends of
the flow of international business transactions which is measured by the balance of payment in a country. The
balance of payment statement shows the changes in the transactions that took place between two countries at an
international level and also the fluctuations in their specific exchange rates of foreign currency. The key compo-
nents included in the balance of payment and the reasons why the economic factors and other non-economic fac-
tors influence the international flow of funds.

Balance of Payments

The balance of payment shows the value of all the transactions that took place between the domestic
and the foreign residents in a specific period of time. All of these transactions are recorded in double entry
system of accounting and each transaction has two sides one is debt and the other is credit. So, in the bal-
ance of payment is the aggregate of both the transactions. The balance of payment can be in surplus or in
deficit within a specific period of time. When the export transactions are more than the import transactions
in a given specific period of time it is said as the surplus balance of payment. On the other hand, when the
export transactions are less than the import transactions of the country in a given specific period of time it
is said as deficit balance of payment.

Two Components of the Balance of Payment

Current Account - The short term transactions of a country and the difference between the savings and the
deposits aggregately constitutes the current account of the balance of payment. The transactions in the cur-
rent account consist of export and import transactions of goods, export and import transactions of the ser-
vices, money transfers and income from the factors like land and foreign shares. The total of the current
account balance is also stated as the balance of trade as a subpart of the balance of payment.

Capital Account - The sum of total inflow and outflow of capital that directly affect a nation’s foreign assets
and liabilities is aggregate constitutes a capital account. It includes all the trade transactions of international
business between one country or a nation or the other country or nation. The investments and loans of for-
eign countries, banking and other forms of foreign capital and any changes in the foreign reserves all these
items are included in the capital account of the balance of payment.
All the transactions that are related to the export services by the United States result in the inflow of
funds to the United States and all the transactions related to the import services are the reason behind the
outflow of the funds from the United States.

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 Factors Influencing International Flow of Funds

1. Impact of Inflation - If the inflation rate of a country increases or rises as compared to the other
countries with whom they trade, then the value of the current account will decrease after taking an
assumption that all the other factors are constant. In this case, the country’s exports will decrease as
no one would like to purchase at inflated prices and the imports of the country will increase as the
local companies will also purchase products from the overseas market as they can buy from them at
a low price which will definitely assist their working by saving their costs.
2. National Income - If the gross domestic product of a country increase, it gives a rise to the per capi-
ta income of the people of the country which increases the consumption as well as the spending of
the country and this will definitely increase the demand for the foreign goods and will give adverse
impact on the balance of payment as the imports of the country will increase with the increase in the
level of income of the public.
3. Government policies of a country - The government policies of a country impact the most on the
trade between two countries at an international level. The policies of a country help them or restrict
them to do import and export transactions with the other countries that can totally change the con-
ditions of the balance of payment and balance of trade of a country and can determine the growth
pattern of a country. This is one of the most important factors that affects and controls the flow of
funds from one country to the other which constitutes the international trade and flow of funds
from one country to another country.
4. Subsidies provided for traders - The rate subsidies decide the volume of exports in a country. If a
country promotes exports in its country then it tends to provide a lot of subsidies on international
trade and mainly on the export activities. In India, huge subsidies are provided on the exports of
goods and services from India to any other country and another example is China where they re-
ceive free loans and the free lands from the government for the production of goods and services
that can be exported in future and these firms incurred a very low cost of operation as most of their
fixed cost and fluctuating costs are subsidizes by the government of their own country to promote
the international flow of funds which is necessary for the overall development of the economy and
for the development of the country and its growth in respect of other countries. These subsidies are
helpful for a countries exporters and importers to capture the larger share of the global market.
5. Restriction on imports - If the government of a country imposes heavy duties on the imports and
related activities in their countries then it will help the country to improve their balance of payment
position as the public will not be able to purchase the goods and products from the other countries
and if they will purchase it will decrease their profitability as the heavy duties are levied on the im-
ports of the goods and it will increase their cost of production or business as well. On the other
hand, if the country levied less duty on the imports then people of the country will import more and
more from the other countries and will adversely affect the balance of payment position of a coun-
try.
6. Restrictions on the piracy - In some cases, a government can affect international trade flows by its
lack of restrictions on piracy.
7. Impact of exchange rates of foreign currency - Each country’s currency is valued in terms of other
currencies through the use of exchange rates so that currencies can be exchanged to facilitate inter-
national transactions. If the foreign currency in which the export or import transactions takes place
more fluctuates at a higher level, in that case, the balance of payment for that specific period will
also fluctuate at a greater extent and somehow equal to the extent of changes in the foreign currency
in the international market.

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 Advantages and Disadvantages of International Flow of Funds

Advantages of International Flow of Funds

1. Increase Aggregate Demand - The demand for the products overall increases if the international flow
of funds is allowed in a country. Before the implementation of globalization all over the world the de-
mand for the local products were not so good and many of the industries has faced failure before the
globalization but after it as the international trade was allowed, the demand for the local, as well as in-
ternational product, got a rise and most of the manufacturing companies emerged as big giant indus-
tries at that time.
2. Increased Production Capacity - After the globalization era, many countries emerged as a manufac-
turing hub for one or the other good and the existing production capacity also rise of the countries and
the manufacturing units as they now had buyers for their products in a huge quantity which has in-
creased their profits and thus their production capacity as well.
3. Technological Advancement - If the import and export from one country to the another is easy and
promoted then the country also becomes technologically advanced as the new and innovated technolo-
gy can easily float from one country to the another. On the other hand, if the import and export policy
from one country to the other is restricted then the country becomes obsolete in terms of the technology
and innovations used by them for various purposes of manufacturing and research and development
activities.
4. The surplus on the financial account of the balance of payment - Capital inflows from any other
country out of the world can help to finance a current account deficit. With the help of attracting capital
flows from the international market, it enables UK households to effectively import more goods and
services. Without these capital inflows, a current account deficit would lead to a devaluation in the ex-
change rate to restore equilibrium in the balance of payments.
5. Easy Finances - In the international market the flow of funds is very easy and it assists the domestic
companies and even government to raise funds from outside the country which is easier with the help
of the flow of funds from outside the country by mean of foreign direct investment.
6. The inflow of Foreign Currencies - The international flow of funds helps the country to get foreign
currency easily as all the transactions of imports and exports take place in the foreign currency only.

Disadvantages of International Flow of Funds

1. The loss to Domestic Players - Internationalization of flow of funds that means the promotion of im-
ports and exports transaction can destroy the market of domestic players. The domestic market gets af-
fected when the international player enters the domestic market with its more advanced products and
services and destroys the domestic players.
2. Tax Evasion - International companies like Facebook and Amazon move to the countries that have
lower tax foundations. The companies save their expenditure on corporate taxation by operating in the
underdeveloped and developing countries where the tax on doing business and related activities is very
less. For example; Amazon – Luxumberg, Google in Ireland.
3. Destroying the real estate market - The international flow of funds can also be in the way of purchase
of assets or real estate property in the other country. Many multinational companies invest in the real
estate property in the other countries which helps them to curtail their profits in the form of investments
in the other countries and helps them to reduce their tax liability on the profits. This sometimes increas-
es the price of the real estate property in the domestic country as multinational corporations set up their
plants in a particular area.
4. Money Laundering - The problem of money laundering can be there when the funds are easily al-
lowed to flow from one country to another country which can also become the cause of many illegal and
criminal activities like terrorist attacks and emergence of black money in the banks of other countries.

15
 Let’s
ELABORATE!

 The international flow of funds takes place when the transactions of buying and selling take place between


the international market by means of international business that is export and import from one country to
another country.
 The balance of payment shows the value of all the transactions that took place between the domestic and
 the foreign residents in a specific period of time.
 The international flow of funds assists the countries to make themselves technologically advanced and
 helps them to promote trade between them and the developed countries which is helpful for the customers
as they will be able to have a more variety of products and services from all the service providers in all
 over the world.
 So overall the international flow of funds is good in most of the aspects for the development of a country
and the world’s economy.

Instruction: This is a short answer essay. Kindly provide your answer based on
Activity 2!
the given questions in the box. 15 Points each.

1.) Why would it be useful to examine a country’s
balance-of-payments data?
2.) Comment on the following statement: “ Since
the United States imports more than it exports, it is
necessary for the United States to import capital
from foreign countries to finance its current ac-
count deficits.”

16
 Great job! You are
Let’s now done with Module 1 of
EVALUATE! Gobal Finance and Elec-
tronic Banking.

Now, let’s assess

your learning by creating a
concept map about Interna-
tional Financial Management. Please follow the instruc-
Main Task 1!
tions below.

Instruction: Create a concept map on international financial management. For more information about
creating a concept map, visit: https://www.youtube.com/watch?v=sZJj6DwCqSU. 30 points.

17
 Bonus!

Instruction: Share us your insights

on what you have learned from this
module. Limit your answer to two (2)
paragraphs only. 15 points.

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 RUBRICS

Short Answer
Criteria Outstanding Needs Improvement Unsatisfactory
5 Points 3 Points 1 Point
Content and develop- - Major points are stated - Major points are addressed - Major points are not
ment clearly - Responses are inadequate or clear.
- Responses are excel- do not address topic.
lent, timely and address
topic.
- Content is clear

Organization & Struc- -Structure of the paper - Structure of the paper is not - Organization and struc-
ture is clear and easy to fol- easy to follow. ture detract from the
low. - Transitions need improve- message.
- Transitions are logical ment. - Writing is disjointed
and maintain the flow and lacks transition of
of thought throughout thoughts.
the paper.

Grammar, Punctuation - Rules of grammar, - Paper contains few gram- - Paper contains numer-
& Spelling usage, and punctuation matical, punctuation and ous grammatical, punc-
are followed; spelling is spelling errors. tuation, and spelling er-
correct. rors.

Concept Mapping

Criteria Outstanding Needs Improvement Unsatisfactory

10 Points 5 Points 3 Point
Concepts -All significant concepts -Acceptable number of con- -insufficient concepts
(Knowledge) selected are and they cepts selected, with some re- selected relating to topic.
are clearly relate to the lationship to topic. -arrangement of con-
topic. -Arrangement of concepts cepts demonstrate a little
-Arrangement of the demonstrates some under- understanding of rela-
concepts demonstrates standing of relationship be- tionship between the.
complete and insightful tween them.
understanding of rela-
tionship between them.
Hierarchical Structure -All concepts connected -Some concepts connected in -Only a few concepts
(Communication) in a hierarchical struc- a hierarchical structure mov- connected in a hierar-
ture leading from more ing from one major ideas to chical structure.
complex to less com- minor ideas.
plex, and on to specific
concepts.

Linkages -All relationships indi- -Some relationships indicated -A few relationships in-
(Thinking) cated by connecting by connecting lines. dicated by connecting
lines -Some errors in the linking lines.
-All linking words are words. -Many errors in the link-
accurate and varied. ing words.

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 RUBRICS

Module Insights

Criteria Outstanding Needs Improvement Unsatisfactory

5 Points 3 Points 1 Point
Content and develop- - Content is comprehen- Content is not comprehensive - Content is incomplete.
ment sive and accurate - Major points are addressed - Major points are not
- Major points are stated - Responses are inadequate or clear.
clearly do not address topic.
- Responses are excel-
lent, timely and address
topic.
- Content is clear
Organization & Struc- -Structure of the paper - Structure of the paper is not - Organization and struc-
ture is clear and easy to fol- easy to follow. ture detract from the
low. - Transitions need improve- message.
- Transitions are logical ment. - Writing is disjointed
and maintain the flow and lacks transition of
of thought throughout thoughts.
the paper.

Grammar, Punctuation - Rules of grammar, - Paper contains few gram- - Paper contains numer-
& Spelling usage, and punctuation matical, punctuation and ous grammatical, punc-
are followed; spelling is spelling errors. tuation, and spelling er-
correct. rors.

20
 Great job!

You have finished Module 1: Understanding Inter-

national Financial Environment. I bet you are very excit-
ed for the next Module. Please take time to review and
read the references, additional readings, and videos for
Module 1. This will greatly help you in understanding
more the context of International Financial Environment.

The next lesson would be on the applications of

electronic banking as a trading tool.

Keep the track!

Module 1 References and Additional Readings:

 Gaspar et al (2017). Introduction to Global Business 2nd Edition. Boston, MA:

Centage Learning, 20 Channel Center Street, Boston, Ma 02210
 Krugman, P. (2018). International Finance Theory and Policy 11th Edition. Re-
trieved from https://bookfortoday.com

 Madura, J. (2012). International Financial Management. 11th Edition. Florida At-

lantic University. South-Western, Cengage Learning

 Schwendimann, B. (2014). Concept Mapping. 10.1007/978-94-007-6165-0_409-

5. Retrieved from https://www.researchgate.net/publication/
276420008_Concept_Mapping

 https://www.investopedia.com/terms/i/imperfectmarket.asp

 https://www.investopedia.com/terms/g/globalization.asp

 https://www.myassignmenthelp.net/international-flow-of-
funds#:~:text=The%20international%20flow%20of%20funds,one%20country%
20to%20another%20country.

• https://www.youtube.com/watch?v=sZJj6DwCqSU

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