International Finance *An Overview

MBA (Finance specialisation)
MBA – Banking and Finance
Term VI
Module : – International Financial Management
Unit I: Introduction to International Financial Management
Lesson 1.1
International Finance –An Overview
The Management of Financial resources in the
context of International Business transactions is
International Finance –An Overview
International business are expansion of sales, acquiring resources,
competitive risk and diversification of sources of sales and supplies.
Besides these, there are other few factors like economic factors, cultural
technological factors, and social factors which have
influence to a greater extent.
However , the rapid expansion and diversification of international
transactions during recent years have necessitated a separate and distinct
focus on the financial aspects of International transactions. Managers now
require special skills to understand the complexities of International
finance. Accordingly, International financial management evolved into a
separate discipline of study.
International Finance –An Overview
MNCs and TNC
A Multi National Corporation (MNC)
 A Multi National Corporation (MNC) is a corporation with extensive ties
international operations in more than one foreign country.
A MNC has its facilities and other assets in at least one country other
than its home country.
A Transnational Corporation (TNC)
A Transnational Corporation (TNC) is a MNC that operates worldwide
without being identified with a national home base.
It is said to operate on a borderless basis.
International Finance –An Overview
The Scope of International Finance
International Finance is crucial for MNCs in two important ways.
 It helps the companies and financial managers to decide how
international events will affect the firm and what steps can be
taken to
gain from positive developments and insulate
from harmful ones.
 It helps the companies to recognise how the firm will be
affected by
movements in exchange rates, interest rates,
inflation rates and asset
International Finance –An Overview
Objective of the MNCs
If the managers of MNCs are to achieve their objective of
maximising the value of their firms or the rate of return from
foreign operations, they have to understand the environment in
which they function. The environment consists of:
1. The international financial system
2. The foreign exchange market
3. The host country’s environment
International Finance –An Overview
International Business Activities
1. Foreign Direct Investments (FDI) are investments made
for the
purpose of actively controlling property
assets or companies located
in host countries.
2. Foreign Portfolio Investments are purchases of foreign
assets for a purpose other than control.
International Financial Management
Vs Domestic Financial Management
1.Foreign Exchange Risk: An understanding of
foreign exchange risk is essential for managers
transactions whereas in domestic financial
transactions , this risk is ignored because single
national currency serves as the main medium of
exchange within a country.
International Financial Management
Vs Domestic Financial Management
2.Political Risk: In case of International Financial
management, political risk ranges from the risk
of loss from unforeseen government actions to
outright expropriation of assets held by
foreigners. Political risk associated with
international operations is generally greater than
that associated with domestic operations and is
generally more complicated.
International Financial Management
Vs Domestic Financial Management
3.Expanded Opportunity sets: In case of
International Financial management, the
managers tend to benefit from expanded
opportunities which are available to them. They
can raise funds in capital markets from where
cost of capital is lowest. Firms can also gain from
greater economies of scale when they operate
on a global basis.
International Financial Management
Vs Domestic Financial Management
4.Market Imperfections: The world markets
today are highly imperfect. There are significant
differences among nation’s laws, tax systems,
business practices and general cultural
environment. Though there are risks and costs in
coping with these market imperfections , they
also offer managers of international firms
abundant opportunities.
Issues in the functioning of
Multinational Corporations
A Multinational corporation is a corporation
with extensive ties in international operations
in more than one foreign country. A MNC has
its facilities and other assets in at least one
country other than its home country. Example
– Nokia, Coca-Cola, Walmart,etc.
Issues in the functioning of
Multinational Corporations
MNC have subsidiaries or joint ventures in each national market.
Their lines of business are heavily influenced by socio-cultural,
political, global, economic and legal environments of each country.
International treaties such as Basel Accords, norms stated by WTO,
etc. provide a uniform framework . The responsibilities of finance
manager working in MNC can be understood by examining the
principal challenges they are required to cope with. Five key
categories of emerging challenges that can be identified are :
Issues in the functioning of
Multinational Corporations
1. To keep up-to-date with significant environment changes
and analyse their implications for the firm.
2. To understand and analyse the complex
interrelationships between relevant environmental
variables and corporate responses.
3. To be able to adapt the finance function to significant
changes in the firm’s own strategic posture.
4. To take in stride past failures and mistakes to minimize
their adverse impact.
5. To design and implement effective solutions to take
advantage of the opportunities offered by the markets
and advances in financial theory.
Self Assessment questions
1.Explain the objective of multinational financial management? What are
various aspects of world economy which have given rise to international
financial management?
2. “In globalised era the functions of finance executives of an MNC have become
complexed”. In your view what are the factors responsible for decision making in
international financial management?
3. Discuss the nature and scope of international financial management by a
multinational firm.
4. How is international financial management different from financial
management at domestic level?
5. Why is international financial management important for a globalised firm?