•International Financial Management

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 Why Study International
Finance
• In today's world finance cannot be
anything but international
• Enormous growth in the volume of
international trade
• Cross border capital flows and, in
particular, direct investment have also
grown enormously

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Why Study International Finance
(contd.)

• Real revolution has been taking place in

the money and capital markets around
the world
• Liberalization, integration and
innovation have created a giant
international financial market which is
extremely dynamic and complex
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Why Study International Finance
(contd.)
• Multilateral negotiations regarding phased
removal of trade barriers have made
considerable progress and WTO had
emerged as a meaningful platform
• Post war, World trade has grown faster
than World GDP
• Almost all countries getting integrated with
the global economy
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Why Study International Finance
(contd.)
• Indian economy needs substantial
amounts of foreign capital to augment
domestic savings
• Technology up-gradation in India will
require continuing import of foreign
technology, hardware and software
• India’s increasing recourse to
commercial borrowings and direct and
portfolio investments by nonresidents
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Why Study International Finance
(contd.)
• The efforts of Indian companies to
diversify into exports of engineering
equipment and turnkey projects will
have to be supported by the ability to
offer long term financing to buyers
• A number of companies particularly in
the Indian IT sector have begun
venturing abroad for strategic reasons
either as partners in joint ventures or by
establishing foreign subsidiaries
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Why Study International Finance
(contd.)
• India's growing dependence on
international financial markets
– Debt
– Equity
– FII investment
• Indian companies have also been
venturing abroad for setting up joint
ventures and wholly owned subsidiaries
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Why Study International Finance
(contd.)
• For those who are willing to master its
complexities the global financial market
provides endless opportunities for
creative financial management; for the
unwary, it is a minefield
• Finance managers must come to grips
with the conceptual foundations and
practical issues of instruments and
markets 8
 Why go for International Trade
• Mercantile Theory
• Theory of Absolute Advantage
• Theory of Comparative Advantage

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Theory of Comparative Advantage

It states that goods and services can move

internationally but factors of production,
such as capital, labour and land are
relatively immobile.
The theory deals only with commodities
It does not consider role of uncertainties,
economies of scale, transportation costs
and technology in the international trade.
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In today’s business the theory has lost its
relevance
Capital moves around the world in
massive amounts at the speed of light
Skilled labours are also moving from one
country to another country
Technology is also rapidly becoming a
global pool
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Against this background, the ability of
corporations of all sizes to use these
globally available factors of production is
more important factor in international
competitiveness than broad
macroeconomic differences among
countries

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 PART 1 THE RISE OF THE
MULTINATIONAL CORPORATION

I. The MNC: A Definition

– a company with production and
distribution facilities in more than one
country.
– with a parent company located in the home
country
– at least five or six foreign subsidiaries
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THE RISE OF THE MULTINATIONAL
CORPORATION
The existence of MNCs is based on the
international mobility of certain factors of
production
Capital raised in London on the Eurodollar
market may be used by a Swiss based
pharmaceutical firm to finance the
acquisition of German equipment by a
subsidiary in Brazil

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THE RISE OF THE MULTINATIONAL
CORPORATION
A single Barbie doll is made in 10
countries – designed in California, with
parts and clothing from Japan, China,
Hong Kong, Malaysia, Indonesia, Korea,
Italy and Taiwan and assembled in
Mexico – and sold in 144 countries

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 Total Recall
- A Hungarian born producer
- A Dutch director
- Starred an Austrian born leading man
- A Canadian Villain
- Shot in Mexico
- Distributed by a Hollywood studio owned
by a Japanese firm

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THE RISE OF THE MULTINATIONAL
CORPORATION
A. Forces Changing Global Markets
Massive deregulation
Collapse of communism
Privatizations of state-owned industries
Revolution in information technology
Wave of M&A
Emergence of free market policies in Third
World Nations
Countless nations accepting the standards of
free market capitalism
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THE RISE OF THE MULTINATIONAL
CORPORATION
The Rise of China as a Global
Competitor
the most dramatic change in the
international economy over the last decade
the number one destination for foreign
direct investment (FDI)
Note: FDI is the acquisition abroad of
companies, property, or physical assets

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 THE RISE OF THE MULTINATIONAL
CORPORATION
B. Who is the Prime Transmitter of
Competitive Forces in the Global
Economy: The MNC
emphasizes group performance such as
Global coordinated allocation of
resources
Market – entry strategy
Ownership of foreign operations
Production, marketing and financial
activities

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THE RISE OF THE MULTINATIONAL
CORPORATION
C. The MNC’s Evolution
Reasons to Go Global:
1. More raw materials
2. New markets
3. Minimize costs of
production

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THE RISE OF THE MULTINATIONAL
CORPORATION
RAW MATERIAL SEEKERS
exploit markets in other countries
historically first to appear
modern-day counterparts
British Petroleum
Exxon

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THE RISE OF THE MULTINATIONAL
CORPORATION
MARKET SEEKERS
Produce and sell in foreign markets
Have heavy foreign direct investors
Represented today by firms such as:
IBM
MacDonald’s
Nestle
Levi Strauss

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THE RISE OF THE MULTINATIONAL
CORPORATION

COST MINIMIZERS
seek lower-cost of production abroad
Their motive: to remain cost competitive
Represented today by firms such as:
Texas Instruments
Intel
Seagate Technology

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THE RISE OF THE MULTINATIONAL
CORPORATION
D. What is the MNC?
From a Behavioral View
it’s a state of mind committed to globally
producing,
undertaking investment,
marketing, and
financing.

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THE RISE OF THE MULTINATIONAL
CORPORATION
E. THE GLOBAL MANAGER:
1. Understands political and
economic differences;
2. Searches for most cost-
effective suppliers;
3. Evaluates changes on value
of the firm.

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Part II INTERNATIONALIZATION OF
BUSINESS AND FINANCE

I. Globalization
II. Political and Labour Union
Concerns
III. Consequences of Global
Competition:
The acceleration of the
global economy
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 PART III. MULTINATIONAL
FINANCIAL MANAGEMENT:
THEORY AND PRACTICE

I. The MNC’s Policies

A. Main Objective of MNC:
Maximize shareholder wealth

B. Other Objectives Reflect Its Ability to

Link:
via affiliate transfer mechanisms

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 MFM: THEORY AND PRACTICE
C. Mode of Transfer:
Reflects freedom to select a variety of
financial channels.
D. Timing Flexibility:
Most MNC have some flexibility in
timing of fund flows.
E. Value
The ability to avoid national
taxes has led to controversy.
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 MFM: THEORY AND PRACTICE

II. FUNCTIONS OF FINANCIAL

MANAGEMENT
A. Two Basic Functions:
1. Financing
2. Investing

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 MFM: THEORY AND PRACTICE

B. Additional Factors Facing the

MNC Executive
1. Political risk
2. Economic risk

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 MFM: THEORY AND PRACTICE

III. THEORETICAL FOUNDATIONS

A. Useful Concepts from
Financial Economics:
1. Arbitrage
2. Market Efficiency
3. Capital Asset Pricing

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 MFM: THEORY AND PRACTICE

B. Importance of Total Risk

1. Adverse Impact
lower sales and higher costs
2. Justifies hedging activities of MNC
3. Diversification reduces risk

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 MFM: THEORY AND PRACTICE

IV. THE GLOBAL FINANCIAL

MARKET PLACE
A. Inter-linkage by Computers
B. Market Acts as A Global
Referendum Process Where :
Currencies may rise or fall
 The Finance Function
• The finance function in a firm can be
conveniently divided into two sub-
functions viz. accounting and control
and treasury management
• Decisions taken by the treasurer have
implications for the controller and vice
versa

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The Finance Function
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The Finance Function (contd.)

• Treasury Function: Acquisition and

allocation of financial resources so as to
minimize the cost and maximize the
return, consistent with the level of
financial risk acceptable to the firm is
the core of treasury management
• Accounting and Control: Internal and
External Reporting, MIS, Control, etc.

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 The Emerging Challenges
• Five key categories of emerging challenges
can be identified
– To keep up-to-date with significant
environmental changes and analyze their
implications for the firm
– To understand and analyze the complex
interrelationships between relevant
environmental variables and corporate
responses - own and competitive - to the
changes in them
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The Emerging Challenges (contd.)

– To be able to adapt the finance function to

significant changes in the firm's own strategic
posture
– To take in stride past failures and mistakes to
minimize their adverse impact
– To design and implement effective solutions to
take advantage of the opportunities offered by
the markets and advances in financial theory

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 Recent Challenges in Global
Financial Markets
• The outstanding feature of the changes
during the eighties was integration
• Both the potential borrower and the
potential investor have a wide range of
choice of markets
• there has been a strong trend towards
functional unification across the various
types of financial institutions within
individual markets
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 Recent Challenges in Global
Financial Markets (contd.)
• The driving forces behind this spatial and
functional integration were first,
liberalization of cross border financial
transactions and, second, deregulation
within the financial systems of the major
industrial nations
• Assets denominated in various
currencies became more nearly
substitutable 40
 Recent Challenges in Global
Financial Markets (contd.)
• Deregulation involved action on two fronts
– Eliminating the segmentation of the markets
for financial services
– permitting foreign financial institutions to enter
the national markets and compete on an equal
footing with the domestic institutions
• This is a part of the overall trend towards
securitisation and disintermediation

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Recent Challenges in Global
Financial Markets (contd.)
• The attainment of the Economic and
Monetary Union (EMU) and the birth of
Euro in the closing years of the decade of
1990's
• There is a race on to come up with
increasingly complex and often esoteric
products which, it is sometimes said, the
bankers themselves do not fully
understand
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Recent Challenges in Global
Financial Markets (contd.)
• The explosive pace of deregulation and
innovation has given rise to serious
concerns about the viability and stability
of the system
• Disturbances following a local financial
crisis tend to spread throughout the
global system at the "speed of thought"
making the policy makers' task extremely
difficult
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 Summary
• The finance manager of the new century
cannot afford to remain ignorant about
international financial markets and
instruments and their relevance for the
treasury function
• The job of the finance manager will
increasingly become more challenging,
demanding and exciting

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