GLOBAL FINANCE

Global finance is defined as the international framework of economies, regulations, and

financial institutions and how these things interact with each other. It covers a range of topics
such as financial regulations, exchange rates, investments, trading, and other important topics
associated with international financial management.

Global finance is primarily concerned with markets for credit that cross political boundaries.
Households, businesses, and states all borrow extensively to meet their needs, with financial
institutions mediating between investors and borrowers. Crisis, default, and financial loss is not,
however, new, but have a long history. This reflects the high risks and uncertainties that
surround financial transactions based on promises of future repayment – risks that markets and
most economic observers repeatedly fail to take account of. Markets, like many other systems,
are prone to extreme events, highly damaging in their consequences, yet unrecognized in
economic thought.

Global finance has an enormous dynamic potential, yet its economic power and global scope
raise
fundamental challenges to national sovereignty, democratic politics, and international
cooperation.
These challenges are magnified by the problems of risk and severe economic instability to
which the sector is prone, posing further challenges for global as well as national public policy
as to how global finance is best regulated.

Definition of terms:

Financial regulation- is a form of regulation or supervision, which subjects financial institutions

to certain requirements, restrictions, and guidelines, aiming to maintain the stability and
integrity of the financial system.

Exchange rates- the price of a country's money in relation to another country's money.

Global investment or international investment- is a way through which an investor may

acquire financial assets and securities in different countries of the world.

Trading- the act or process of buying, selling, or exchanging commodities, at either wholesale
or retail, within a country or between countries: domestic trade; foreign trade.

The Rising Importance of Global Finance

Due to the advancement of technology and the increase in globalization, financial markets
around the world have become more connected. International trading and investments have
increased and businesses find it easier to grow beyond their home countries and participate in
global markets. And whether we recognize it or not, global finance affects all of us in some way.

What is Global Finance?

Global finance refers to the financial system consisting of regulators and various financial
institutions that conduct their business on an international level. As a result of this definition,
global finance does not constitute any financial businesses or regulators that act on a national
or regional level.
The primary components of global finance are the enormous international institutions, such as
the Bank for International Settlements or the International Monetary Fund, as well as various
national agencies and government departments, such as various central banks, finance
ministries, and those private companies who act on a global scale.

Prominent International Institutions aligned with Global Finance:

The International Monetary Fund is a financial institution that is responsible for maintaining
the international balance of payments accounts of its member states. The International
Monetary Fund may also act as a lender (typically in last-resort situations) for state members
who are in financial distress due to currency crises or struggles that revolve around meeting the
balance of payment when debt default is present.

Membership in the International Monetary Fund is based on quota or the amount of funding a
member state (country) provides to the fund. The evaluation of funding is based on a relative
investigation of the member state’s role in the international trading system and global finance
in general.

Another prominent member of global finance is the World Bank, which is an institution that
aims to offer funding for development projects that, for the most part, reside in developing
nations. The World Bank assumes the credit risk of these developing nations; the World Bank
will provide financing to projects that otherwise would not be able to access such funding.

The World Trade Organization is another principal player aligned with global finance. The World
Trade Organization is responsible for settling disputes and negotiating international trade
agreements with various international companies, institutions or government agencies.

Types of Private Participants in Global Finance:

To be considered a participant in global finance a company or organization must possess

international clients or conduct business transactions overseas.
The following types of institutions also play a prominent role in global finance:

 Commercial Banks
 Insurance Companies
 Sovereign Wealth Funds
 Mutual Funds
 Pension Funds
 Private Equity Firms and Hedge Funds

THE PRINCIPLES OF GLOBAL FINANCE

THE FINANCIAL MANAGER MAJOR FUNCTION

without provoking investors to retreat their capital to stronger markets. Nations' inability to
align interests and achieve international consensus on matters such as banking regulation has
perpetuated the risk of future global financial catastrophes.

BENEFITS FROM FINANCIAL GLOBALIZATION

The benefits of financial globalization are well-known: it facilitates the transfer of savings across
borders allowing savings to finance productive investment, promoting growth and job creation,
as well as portfolio diversification. At the same time, the process of integration also injects
healthy competition to the domestic banking system.

Just like integration of trade is promoted by liberalized trade regimes, financial integration is
also facilitated by limited restrictions and controls on capital movements. However, there is an
important question as to the appropriate speed by which countries that presently have capital
controls should abolish them.

One of the clear lessons from the past decade of increased financial integration is that such
integration tends to accentuate/emphasize the benefits of good policies and the costs of bad
policies.
Foreign capital tends to be attracted to countries that enjoy macroeconomic stability
characterized by prudent fiscal policies and monetary policies aimed at low inflation rates and a
stable political situation. While capital can provide a valuable source of foreign savings, it also
poses challenges to policymakers. Large inflows attracted by relatively high interest rates might
cause the money supply to expand thus endangering the inflation target. It might also be
difficult for an embryonic banking system to efficiently channel large inflows to productive
investments.

GLOBAL FINANCE COVERS AN IMPORTANT TOPIC ASSOCIATED WITH INTERNATIONAL

FINANCIAL MANAGEMENT

International financial management, also known as international finance, is the management of

finance in an international business [1] environment; that is, trading and making money
through the exchange of foreign currency. International financial activities help organizations to
connect with international dealings with overseas business partners- customers, suppliers,
lenders etc. It is also used by government organizations and non-profit institutions.

International finance is the study of monetary interactions that transpire between two or more
countries.

International finance focuses on areas such as foreign direct investment and currency exchange
rates.

Increased globalization has magnified the importance of international finance.

International finance is a section of financial economics that deals with the macroeconomic
relation between two countries and their monetary transactions. The concepts like interest
rate, exchange rate, FDI, FPI, and currency prevailing in the trade come under this type of
finance.

We live in a globalized world. Every country is dependent on another country by some other
means. Developed countries look for a cheap workforce from developing countries, and
developing countries look for services and products.

When a trade happens between two countries, as in this case, many factors come into the
picture and have to be considered during the execution of the business so that no violation of
regulation happens.
For any economy, international finance is a critical factor; the local government should
accordingly execute the policies so that the local players do not face severe competition from
the non-local players.
SCOPE OF INTERNATIONAL (GLOBAL) FINANCE

•It is important while determining the exchange rates of the country. One can do this against
the commodity or the common currency.

•It plays a crucial role in investing in foreign debt securities to have a clear idea about the
market.

•The transaction between countries can be significant in assessing the economic conditions of
the other country.

•One can use arbitrage in tax, risk, and price to market imperfections

to book good profits while transacting in international trade.

SIGNIFICANCE AND IMPORTANCE

•In a growing world moving towards globalization, its importance is growing in magnitude.
Every day, the transaction between two countries for trade is scaling up with the supporting
factors.

It considers the world a single market instead of individual markets and carries out the other
procedures. For the same reason, the firms and corporations doing such research include
institutions like the International Monetary fund (IMF), International Finance Corp (IFC), and the
World Bank. Trade between two foreign countries is one factor for developing the local
economy and improving economies of scale
.•Currency fluctuations, arbitrage, interest rate, trade deficit, and other international
macroeconomic factors are crucial in prevailing scenarios.

IMPORTANCE OF INTERNATIONAL FINANCE

International finance plays a critical role in international trade and inter-economy exchange of
goods and services. It is important for a number of reasons, the most notable ones are listed
here:

•International finance is an important tool to find the exchange rates, compare inflation rates,
get an idea about investing in international debt securities, ascertain the economic status of
other countries and judge the foreign markets.

The following are definitions of international financial management. The art of managing
money on a global scale. The common term that means financial management in an
international business setting implies trade and money-making through foreign currency
exchange. The financial activities allow the company to communicate with overseas business
partners-clients, suppliers, lenders.

International Financial Management defines Multinational Corporations or simply MNCs as

firms that engage in some form of international business. Their managers conduct international
financial management, which involves international investing and financing decisions that are
intended to maximize the value of the firm, which is similar to the goal of managers employed
by domestic companies.
These MNCs are most likely to bring the practices - methods, culture and values of their home
country to different countries where they have subsidiaries. In simple words, MNCs are
business enterprises that operates in several countries they are under the management of one
home country or the base company.

Management goal and organizational structure

The costs of ensuring that managers maximize shareholder wealth called agency costs are
normally larger than those for purely domestic firms for several reasons:

 MNCs with subsidiaries scattered around the world may experience larger agency
problems because monitoring managers of distant subsidiaries in foreign countries is
more difficult.

 Due to distance constraints, round-the-clock monitoring of the activities of the

managers around the world is most unlikely. Some activities of the managers may in one
way or another affect the operations and image as well. Because of the distance, some
expenses unnecessarily expensed may be incurred without the verification process as to
the validity, and authenticity of the expenditures. One thing more, the parent manager
in may require some time to visit subsidiaries thus, entails costs.

Foreign subsidiary managers raised in different cultures may not follow uniform goals.

 Different cultures and different values of the managers in each subsidiary may affect the
systems or methods in place. It is but normal that a manager has their own cultures,
norms, and values to protect, believe, and adhere and these may somehow be carried
along as he/she man the operations. In observance of these cultures, norms, and values
there might be some expenses that need to be incurred.

 The sheer size of the larger MNCs can also create large agency problems. When a
company maintains numerous large subsidiaries monitoring is likewise an issue. The
larger the company, the more costs it entails. Some managers tend to downplay the
short-term effects of decisions that are inconsistent with maximizing shareholder
wealth.

 A conflict of interest may arise because manager have also their own agenda in running
the operations other than maximizing the shareholders’ wealth. The magnitude of
agency costs can vary with the management style of the MNC.

 Centralized style can reduce agency costs because it allows managers of the parent to
control foreign subsidiaries and therefore reduces the power of subsidiary managers.
However, the parent’s manager may make poor decisions for the subsidiary if they are
not as informed as subsidiary managers about the financial characteristics of the
subsidiary.

 A centralized management style in MNCs means that parent managers concentrate and
reserve the decision-making power, especially for important and key decisions,
execution/implementation of directives is decided upon, the job of the subsidiary
manager is under the direct control of the parent manager.

 A decentralized style is more likely to result in higher agency costs because subsidiary
managers may make decisions that do not focus on maximizing the value of the entire
MNC. This style gives more control to those managers who are closer to the subsidiary’s
 operations and environment. To the extent that subsidiary managers recognize the goal
of maximizing the value of the overall MNC and are compensated in accordance with
that goal. This management style can be more effective.

In an article entitled Centralized and Decentralized Management Explained, Matt Barrett

explained decentralized management as the opposite of centralized management where most
of the decision-making are being transferred to lower levels and even to the extent that
employees are given the authority to do the decision-making processes. For MNCs,
decentralized management means that most of the decision-making processes is delegated to
the subsidiary manager.

Thus, allowing the manager to make instant decisions that impact the subsidiary work
environment. However, the overall authority is still maintained by the parent manager. Despite
the apparent trade-off between centralized and decentralized forms of management, some
MNCs are attempting to gain the advantages of both forms. In other words, they allow
subsidiary managers to make key decisions about their respective operations, but the parent
management monitors decisions to ensure that they are in the best interests of the entire MNC.

Goals for International Financial Management

One of the major benefits of Financial Globalization is that the risk of a "credit crunch" has been
reduced to extremely low levels. When banks are under strain, they can now raise funds from
international capital markets.

Another benefit is that, with more choices, borrowers and investors get a better pricing on their
financing. Corporations can finance the investments more cheaply.

The disadvantage is that the markets are now extremely volatile, and this can be a threat to
financial stability.

Financial globalization has altered the balance of risks in international capital markets.

With financial globalization, creditworthy banks and businesses in emerging markets can now
reduce their borrowing costs. However, emerging markets with weak or poorly managed banks
are attached risk.

Reference:

Online references:

thunderbird.asu/thought-leadership/insights/rising-importance-global-finance
finance-laws-com.cdn.ampproject/v/s/finance.laws.com/global-finance?