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The world has become a single entity – global entity
Globalization, WTO, GATT, mutual trade agreements etc
has removed almost all barriers in trade and commerce
Trade and commerce has become more international than
the past
We consume more goods produced in countries and are
familiar to commodities and brands of other nations than
that of our country
Free flow of goods, services, funds in the world
People are ready to invest in any part of the world
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A separate and new discipline, developed
recently
It is the management of international finance
Concerned with the management of
international business related financial
function, commonly, known as international
financial function
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MULTINATIONAL CORPORATIONS (MNC)
Firms engaged in international trade can be called
by different names , viz.,
International firms
Multinational firms and
Transnational firms
International Firms :Firms engaged in cross
border activities of import and export
Goods produced in country are exported to other
countries and vice versa
Financial operations of such firms are limited to
receiving and paying of the sales proceeds across
the national frontiers / boundaries
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Multinational Firms
Growth and expansion of international firms compel
them to move more closer to the customers
Set up factories and other production operations both
at home and aboard, Such firms are known as MNCs
MNCs carryout some of their productions operations
or activities abroad by establishing presence in foreign
countries through subsidiaries or joint ventures
Financial operations become complex – subsidiaries
deals with different currencies, which are liable to
high risk (political / valuation etc)
An MNC is considered to belong one country “home
country” and has its operations aboard – two identities
“HOME” ,“ABROAD”
MNC is “ a firm having a substantial portion of its
operation and assets deployed in different countries”
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Transnational companies
Further, expansion leads to reduce the gap
between the “home” and “abroad”
It becomes difficult to identify which country
is “home” and which is “abroad”. Such
companies are known as transnational
companies
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What is IFM?
IFM is the process of making financial decisions
pertaining to the foreign business in such a way as
to maximize the value of the firm and its stock
owners
These decisions include decisions regarding
Acquisition of funds (financing decisions)
Deployment (utilization) of funds (investment
decisions)
Dividend/retentions (dividend) decisions
Firm has to take apt/judicious decisions to achieve
the objectives of the firm.
All the above decisions are made by a domestic
manager also
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In addition to the functions performed by a
domestic finance manager, an international
finance manger has to deal with several factors
like
Exchange rates,
inflation risks,
international difference in tax rates,
multiple money markets with limited access,
currency controls,
exchange controls,
political risk etc.
Socio-cultural factors(religious, ethnic groups)
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“The management of whole gamut (aspects) of financial
operations relating to international activities of
organizations”
It includes, expansion of business to foreign countries,
setting up of plants and factories abroad, investing in
another company, acquisition of business in foreign
countries etc
-include, import, export, financing subsidiaries, dividend
distribution
-In other words all financial activities which involve
foreign exchange.
“is the process of making financial decisions pertaining to
foreign business in such a way as to maximize the value of
the firm and its stock owners”
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Scope is very wide
Includes the scope of domestic financial management
and a variety of other activities
A domestic financial manager has to take three major
decisions (perform three major functions)
Financing decisions (financing faction)
Investment decisions (investment functions)
Dividend decision (dividend function)
In addition to these functions, a international financial
manger has to deal with different aspects of foreign
trade and exchange, balance of payments,
international financial markets, international financial
institutions etc.
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Decision making the most important function
I. Investment decisions
Related with investment / deployment of funds in fixed
assets and current assets or capital expenditure and
working capital management
In investment decision, he has to decide, what type or types
assets are to be acquired, risks involved in the acquisition of
assets
In MNC, the International Finance manager’s responsibility
is to identify and exploit profitable opportunities for long
term investment
Survival and growth of MNC depends upon investment
decisions
Has to employ capital budgeting techniques like NPV, IRR
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Specific feature is investment in foreign countries and
parent or subsidiary companies etc. In addition to
profitability
Though the subsidiary company may have made
profits and due to the parent company. But the entire
profits due cannot be transferred to the parent
company due to the restrictions imposed by the host
country or foreign country
The parent company make several charges for different
kinds of services. This is an income to the parent
company but an expense to the subsidiary company
Exchange rate variations / oscillations affect the
amount paid and received. A subsidiary company in a
country with high inflation rate might have made
good profits, but it becomes less when paid to the
home country of the parent company
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In addition to these, various kinds of risks
involved need to be considered
Exchange rate risk, political risk, interest rate risk,
tax rate difference
Financing Decision
Financing decision is concerned with determining
the source and quantum of funds to be raised
from different sources
Different sources – different kinds of securities
Depend on several factors like, capital market
conditions, attitude of investors, legal, political
economic and social environments
In addition to the above general factors in
international financing and MNCs, different kinds
of risks, such as exchange rate risk, interest
difference, govt. subsidies etc
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Financing decision is concerned with
determination of capital structure and tapping
of different sources of funds
Multinationals can raise funds from different
countries, may plough back of profits earned
from different subsidiaries may list securities in
different stock exchanges of different countries
Though there are different sources, the
manager has to consider different factors
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Dividend Decision
Dividend payout ratio is very important
Affect several factors in different countries –
tax rate, exchange control and regulations,
double taxation, tax avoidance agreements etc.
Free flow of capital between parent and
subsidiary companies in different countries are
also affected by legal restrictions and
regulations and bi-lateral agreements
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Managing Working Capital
Optimal working capital is to be maintained for
smooth operations of the business. Adequate working
capital is essential for survival, growth and expansion
of the entity
To meet current obligations
Maintain proper equilibrium between cash inflows and
outflows, through proper time planning
To maintain optimum levels of cash to minimize idle
cash flows
The above functions are performed both domestic and
international finance manager
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In addition to the above functions:He has to consider availability of specific currency and
exchange rate risks and variations
Wide geographical dispersion of the operation of
MNCs having several subsidiaries in different
countries make co-ordination of financial aspects
difficult. Thus, to co-ordinate, different costs are
necessary (carrying costs and transfer costs of surplus
funds). Has to try these costs to the minimum
While transferring funds from one country to another
country special cares are to be taken – Govt.
restrictions, regulations, exchange variations, risk
variations etc
Inflation rates of different countries
Inter-firm transfer should be considered to minimum
costs, cost effective
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Controlling Financial Activities
An MNC constitutes different entities in the
form of parent – subsidiaries at different
regions
Both parent and subsidiary companies spend
money
The IF Manager has to control and co-ordinate
overall financial activities, which requires
special control system
May adopt any of the following controlling
system or approaches
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Approaches for controlling financial activities
The local level manager is given full
responsibility of spending and his
achievements are evaluated by the parent
company through profits earned
The responsibility of financing is left to the
parent company and the local manager is
evaluated only in terms of operating profit
However, many MNCs follow middle path –
depends upon the philosophy of top level
managers, laws and regulations of both the
countries, competency level of managers
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Estimating, Evaluating And Minimizing Risk
Domestic companies face two major kinds of risk Business risk an financial risk
MNCs, are exposed to additional risks, like
Political risk and
Exchange rate risk
Political Risk : arise from political factors –
different countries have different political setups –
political changes will lead to changes in policies
and international relations and international trade
- might be a great blow or impetus
Exchange Rate Risk : Constant flow of funds
between parent and subsidiaries in different
countries – different ways – profit, capital, royalty
etc. these fund transfers are influenced by
exchange rates
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Role of International Financial Manager
Forecasting of financial environment
– Prices – inflation rates – interest rates – and
exchange rates of different countries
Management of assets
From cash management to international capital
budgeting, at home and abroad, both in domestic
countries and foreign countries
Management of liabilities
Borrowing relationship and decisions in domestic
and foreign countries and markets – short term
and long term
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Exchange risk management
– Measuring the effect of exchange rate risk on balance
sheet, income, cash flows, and manage these risks
Performance evaluation and control
Accounting for outsiders and to the management, tax
authorities etc to meet the requirements of both
domestic and foreign countries
Identifying global investment opportunities
Assessing national and international capital and debt
market conditions
to increase financial resources
Establishing ethical and healthy corporate practices
and governance, adhere to the laws and regulations of
different countries
Forecast exchange rate behavior
Devising suitable hedging strategies to cover exchange
rate risk, political risk, inflations risk etc.
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Responsibilities of International Financial Manager
The important responsibility of an IFM is to enable the
corporation to cope up with the changes and
challenges in the financial markets – both at the
domestic and international
Assess the financial environmental changes:
Financial environments change and may create threat
or provide opportunities to the organization ( financial
and taxation policies, foreign policies, credit policies,
interest rates, foreign exchange rates, money market
and capital market conditions)
He has to monitor assess and evaluate the changes.
Analyze the changes: he has to analyze the changes by
studying the inter-relationship between different
variables in the environment and corporate responses.
Responses of his firm as well as that of competitors
(Eg. Effect stock market crash)
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Equip the firm to adapt to the environmental
challenges and changes (through product
diversification – mergers, acquisition etc)
Analyze and evaluate past failures and try to
prevent their recurrences
Design and implement effective solutions to
take advantage of opportunities offered by the
markets
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Challenges faced by international financial
manager
Firm is an entity and a social system with own
environment
Environmental changes affect
Recent changes in the socio-economic and
political environments create challenges
Globalization and liberalization is rampant
Almost all countries in the world are
liberalized and globalized – absence of control
and regulations in economic activities,
including flow of capital
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The world has become more or less a single
financial market
A small movement, change in financial factors in
any corner of the world will affect their entire
international financial system.
Political uncertainties, social unrest in the world
affect, international relations and trade relations
as well as flow of funds
Inflation, revaluation, corruption, etc
Difference in culture, believes and values followed
by different countries, culture and cultural
transformation
Difference in attitude about returns expected from
investment
An international financial manager has to be aware
of all these.
1.
Exposure to Foreign Currency
2.
Exchange Rate
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Different instruments are used in IFM
4.
Wealth Maximization
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Micro/Macro Business Environment
6. Legal & Tax Environment
7. Different group of stakeholders
8. FOREX derivatives (Options, Futures, Swaps,
Hedging)
9. Different standards of reporting
10. Capital Management
11. PESTEL