INTERNATIONAL FINANCIAL MANAGEMENT

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  INTERNATIONAL FINANCIAL MANAGEMENT
• DR SHASHI AGAGRWAL
  
  
  
• INTERNATIONAL FINANCIAL MANAGMENT

·         MEANING OF INTERNATIONAL FINANCE/IFM

·         INTERNATIONAL ENVIRONMENT

·         OBJECTIVES ,NEED AND IMPROTANCE

·         SCOPE OF IFM

·         ROLE OF INTERNATIONAL FINANCIAL MANAGER

• INTERNATIONAL FINANCIAL MANAGEMENT

1.       ALSO KNOWN AS INTERNATIONAL FINANCE

2.       MANAGEMENT OF FINANCE IN AN INTERNATIONAL BUSINESS ENVIRONMENT THAT IS TRADING AND MAKING MONEY THROUGH THE EXCHANGE OF FOREIGN CURRENCY

3.       THE INTERNATIONAL FINANCIAL ACTIVITIES HELP THE ORGANIZATION TO CONNECT WITH INTERNATIONAL DEALINGS WITH OVERSEAS BUSINESS PARTNERS – CUSTOMERS,SUPPLIERS,LENDERS ETC

4.       ALSO USED BY GOVERNMENT ORGANIZATION AND NON PROFIT INSTITUTIONS

• MEANING OF INTERNATIONAL FINANCE
  
  
• ALSO REFERRED AS INTERNATIONAL MONETARY ECONOMICS OR INTERANTIONAL MACROECONMOCIS
• A BRANCH OF FINANCIAL ECONOMICS BROADLY CONCERNED WITH MONETARY AND MACROECONOMIC INTERRELATIONSHIP BETWEEN TWO OR MORE COUNTRIES.
• IT EXAMINES:-

1. GLOBAL FINANICAL SYSTEMS
2. INTERNATIONAL MONETARY SYSTEM
3. BALANCE OF PAYMENTS
4. EXCHANGE RATES
5. FOREGIN DIRECT INVESTMENTS

 

• ALSO CALLED MULTINATIONAL FINANCE.
• CONCERNED WITH MATTERS OF INTERNATIONAL FINANCIAL MGMT,FOREIGN EXCHANGE RISK AND POLITICAL RISK,MARKET IMPERFECTIONS AND EXPANDED OPPORTUNITY COST
• IT IS CONCERNED WITH UNDERSTANDING OF THE PROCEDURES, TECHNIQUES AND TOOL RELATED TO HELPING FIRM IN ASSESSING GLOBAL MARKET FOR SHORT TERM AND LONG TERM FUNDS.
• REASONS FOR GROWTH IN INTERNATIONAL FINANCE
• ECONOMIC INTERDEPENDENCE:- REMOVAL OF TRADE RESTRICTION, INTERNATIONAL INITIATIVES LIKE GENERAL AGREEMENT ON TRADE AND TARIFFS ( GATT),NORTH AMERICAN FREE TRADE AGREEMENTS,WORLD TRADE ORGANIZATION HAS PROMOTED INTERNATIONAL TRADE
• GLOBALIZATION: SYSTEM MOVED FROM BANK ORIENTED TO MARKET ORIENTED PHASE.
• LIBERALIZATION OF FINANCIAL MARKET:-DEREGULATION OF FINANCIAL MARKETS,NEW AND INNOVATIVE FINANCIAL PRODUCTS
• GROWTH OF INFORMATION TECHNOLOGY:-
• MULTINATIONAL CORPORATIONS ( MNC)
• FIRMS ENGAGED IN INTERNATIONAL TRADE CAN BE CALLED BY DIFFERENT NAMES

1. INTERNATIONAL FIRMS
2. MULTINATIONAL FIRMS

• TRANSNATIONAL FIRMS
• INTERNATIONAL FIRMS : ENGAGED IN CROSS BORDER ACTIVITIES OF IMPORT AND EXPORT
• MULTINATIONAL CORPORATIONS ARE GIANT FIRMS WITH THEIR HEAD QUARTERS LOCATED IN ONE COUNTRY AND WITH VARIETY OF BUSINESS OPERATIONS IN SEVERAL OTHER COUNTRIES.
• MULTINATIONAL CORPORATIONS ( MNC)
• TRANSATIONAL COMPANIES : FURTHER EXPANSION LEADS TO REDUCE THE GAP BETWEEN THE HOME AND THE ABROAD
• DIFFICULT TO IDENTIFY WHICH COUNTRY IS HOME AN ABROAD
• KNOWLEDGE OF INTERNATIONAL FINANCE IS VERY CRUCIAL FOR MNC.
• THE FIVE METHODS BY WHICH FIRMS CONDUCTS :

1. LICENSING
2. FRANCHISING
3. JOINT VENTURES
4. MANAGEMENT CONTRACTS
5. ESTABLSIHING NEW FOREIGN SUBSIDIARIES

 

• MULTINATIONAL CORPORATIONS ( MNC)
• LICENSING : A FIRM IN ONE COUNTRY LICENSE THE USE OF SOME OR ALL OF ITS INTELLECTUAL PROPERTY TO FIRM OF SOME OTHER COUNTRY FOR SOME FEES OR ROYALTY
• FRANCHISING : A FIRM AUTHROISING A FIRM IN ANOTHER COUNTRY TO UTILIZE ITS BRANDS NAMES AND LOGOS
• JOINT VENTURES : JOINT VENTURE ALLOWS TWO FIRMS TO APPLY THEIR RESPECTIVE COMPARATIVE ADVANTAGE
• ESTABLSIHING NEW FOREIGN SUBSIDARY
• MANAGEMENT CONTRACT : A FIRM IN ONE COUNTRY AGREES TO OPERATE FACILITIES OR PROVIDE MANAGEMENT SERVICES TO A FIRM IN ANOTHER COUNTRY
• INTERNATIONAL FINANCIAL MANAGMENT

1. PROCESS OF MAKING  FINANCIAL DECISIONS PERTAINING TO THE FOREIGN BUSINESS IN SUCH A WAY AS TO MAXIMSE THE VALUE OF THE FIRM AND ITS STOCK OWNERS
2. ACQUISITION OF FUNDS ( FINANCING DECISIONS)
3. DEPLOYMENT ( UTILIZATION ) INVESTMENT DECISIONS
4. DIVIDEND /RETENTION DECISIONS

• IN ADDITION TO FINANCE FUNCTION PERFORMED BY A DOMESTIC FINANCE MANAGER HAS TO DEAL WITH :
• EXCHNAGE RISK,INFLATION RISK,MUTIPLE MONEY MARKET WITH LIMITED ACCES,EXCHNAGE CONTROLS,POLITICAL RISK AND SOCIAL CULTUTAL FACTORS ALSO

 

 

• DEFINITION
• THE MANAGEMENT OF THE WHOLE GAMUT (ASPECTS) OF FINANCIAL OPERATIONS RELATING TO INTERNATIONAL ACTIVITIES OF ORGANIZATION. INCLUDE EXPANSION OF BUSINESS TO FOREGIN COUNTRIES, SETTING UP OF PLANTS AND FACTORES ABRAOD, INVESTING IN ANOTHER COMPANY, ACQUISITION IN FOREIGN COUNTRIES ETC. INCLUDES IMPORT,EXPORT,FINANCING,SUBSIDARIES DIVIDEND DISTRIBUTION
• ALL FINANCIAL ACTIVITIES WHICH INVOLVE FOREIGN EXCHNAGE
• INTERNATIONAL FINANCIAL MANAGEMNT IS THE PROCESS OF MAKING FINANCE DECISIONS PERTAINING TO FOREIGN BUSINESS IN SUCH A  WAY AS TO MAXIMIZE THE VALUE OF THE FIRM AND ITS STOCK OWNERS
• INTERNATIONAL ENVIRONMENT
• INTERNATIONAL FINANCIAL SYSTEM : OFFICIAL PART : INTERNATIONAL MONETARY SYSTEM AND PRIVATE PART : INTERNATIONAL BANKS AND MULTINATIONAL FINANCIAL INSTITUTIONS
• FOREIGN EXCHNAGE MARKET : MULTINATIONAL BANKS,FE DEALERS ORGANIZED EXCHNAGES
• HOST COUNTRY’S ENVIRONMENT :
• FINANCING FUNCTION :MULTIPLICITY OF SOURCES OF FUNDS AND LARGE NUMBER OF INVESTMENT OPPORTUNITIES AND POLITICAL RISK

1. GREATER EXPOSURE
2. VOALITILITY IN INTEREST RATES
3. INTENSE COMPEITION
4. FDI BARRIERS
5. POLITICAL UNCERTAINTIES

• OBJECTIVE OF INTERNATIONAL FINANCIAL MANAGEMENT :
• ACQUISTION OF FUNDS: THE OBJECTIVE INVOLVE GENERATING FUNDS FROM INTERNAL AS WELL AS EXTERNAL SOURCES. THE OBJECTIVE IS TO ARRANGE FUNDS AS LOWEST POSSIBLE COST
• INVESTMENT DECISIONS: CONCERNED WITH THE INVESTMENT OF ACQUIRED FUNS IN AN OPTIMUM MANNER IN ORDER TO MAXIMIZE SHAREHOLDER AS WELL AS STAKEHOLER’S WEALTH.

·         INTERNATIONAL MARKETS HAVE DIFFERENT ANALYTICS AND DYNAMICS

·         PROPER MANAGEMENT OF INTERNATIONAL FINANCE CAN HELP THE ORGANIZATION TO ACHIEVE THE SAME LEVEL OF EFFICIENCY AND EFFECTIVENESS IN ALL THE MARKETS.

• JUST LIKE DOEMSTIC FINANCIAL MANAGEMENT THE GOAL OF  INTERNATIONAL FINANCE IS ALSO TO MAXIMIZE THE SHAREHODLER’S WEALTH
• GOAL IS NOT ONLY LIMITED TO SHAREHOLDER BUT EXTENDS TO ALL STAKEHOLDERS VIX EMPLOYEES,SUPPLIERS,CUTOMERS ETC
• NO GOAL CAN BE ACHIEVED WITHOUT ACHIEVING THE WELFARE OF SHREHOLDERS
• MAXIMIZING SHAREHOLDER’S WEALTH WOULD MEAN MAXIMIZING SHAREHOLDER’S WEALTH WOULD MEAN THE MAXIMIZING THE VALUE OF SHARES
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• NEED OF INTERNATIONAL FINANCE
• IMPORTANT TOOL TO FIND OUT THE EXCHNAGE 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
• EXCHNAGE RATE ARE VERY IMPORTANT  AS THEY LET US  DETERMINE THE RELATIVE VALUES OF CURRENCIES
• VARIOUS ECONOMIC FACTORS HELP IN MAKING INTERNATIONAL INVESTMENT DECISIONS AND ECONOMIC FACTORS OF ECONOMICS HELP IN DETERMINING WHETHER OR NOT INVESTOR’S MONEY IS SAFE
• IFRS WHICH IS A PART OF INTERNATIONAL FIANCNE ALSO HELPS IN SAVING MONEY BY FOLLOWING THE RULES OF REPORTING ON A SINGLE ACCOUNTING STANDARD.
• IT HELPS US TO UNDERSTAND THE BASICS OF ALL INTERNATIONAL ORGANIZATION
• INTERNATIONAL FINANCE ORGANIZATIONS SUCH AS IMF,WORLD BANK ETC PROVIDE A MEDIATOR ROLE IN MANAGING INTERNATIONAL FINACIAL DISPUTE
• FINANCIAL GLOBALIZATION
  MAJOR FORCES
• ADVANCEMENT IN INFORMATION AND COMMUNICATION TECHNOLOGY :MARKET PLAYERS MORE EFFICIENT
• GLOBALIZATION OF NATIONAL ECONOMIES: ECONOMIC GLOBALIZATION HAS MADE PRODUCTION, CONSUMPTION AND INVESTMENT DISPERSED OVER VARIOUS GEOGRAPHIC LOCATION. BARRIERS  TO INTERNATIONAL TRADE HAVE BEEN LOWERED,INTERNATIONAL FLOWS OF GOODS AND SERVICES HAVE DRAMATICALLY INCREASED
• LIBERLIZATION AND FAST IMPROVEMENT IN IT AND GLOBALIZATION OF NATIONAL ECONOMIES RESULTED IN HIGHLY SPREAD FINANCIAL INNOVATION
• INTENSE COMPETITION
• DIFFERENCE BETWEEN DOMESTIC AND INTERNATIONAL FINANCIAL MANAGEMENT
•  FOREIGN EXCHANGE: ADDITIONAL RISK WHICH A FINANCE MANAGER IS REQUIRED TO CONSIDER. FOREIGN EXCHNAGE RISK REFERS TO THE RISK OF FLUCTUATING PRICES OF CURRENCY WHICH HAS THE POTENTIAL TO CONVERT A PROFITABLE DEAL INTO A LOSS MAKING ONE
• POITICAL RISK: ANY CHANGE IN THE ECONOMIC ENVIRONMENT OF THE COUNTRY: CONTRACT ACT.TAXATION ACT. PERTAINING TO THE GOVERNMENT OF THE COUNTRY WHICH CAN ANYTIME CHANGE THE RULES IN UNEXPECTED MANNER. IN 1992 ENRON DEVELOPMENT CORPORATION A SUBSIDARY OF HOUSTON BASED ENERGY COMPANY SIGNED A CONTRACT TO BUILD INDIA’S LONGEST POWER PLANT BUT PROJECT CANCELLED BY THE POLITICAN OF MAHARASHTRA IN 1995
• DIFFERENCE BETWEEN DOMESTIC AND INTERNATIONAL FINANCIAL MANAGEMENT

 

• MARKET IMPERFECTION : DIFFERENCE ACROSS THE COUNTRIES IN TERMS OF TRANSPORTATION COST,DIFFERENT TAX RATES,DIFFERENT LAWS AND BUSINESS PRACTICES AND GENERAL CULTURAL ENVIRONMENT
•  ENHANCED OPPORTUNITY SET: DIVERSIFIES THE OVER ALL RISK OF A BUSINESS.  RAISE FUNDS WHERE THE COST IS MINIMUM.GREATER ECONOMIES OF SCALE
• SCOPE OF INTERNATIONAL FINANCIAL MANAGMENT
• ESTIMATING FINANCIAL REQUIRMENTS : PREPARE FINANCIAL PLAN FOR THE PRESENT AS WELL AS THE FUTURE, THIS INCLUDE THE AMOUNT REQUIRED FOR PURCHASING THE  FIXED ASSETS AS WELL AS THE WORKING CAPITAL
• DECIDING CAPITAL STRUCTURE : KIND AND PROPORTION OF DIFFERENT SECURITIES FOR RAISING THE REQUIRED FUNDS
• SELECTING A SOURCE OF FINANCE :
• TRENDS IN INTERNATIONAL TRADE AND CROSS BORDER FINANCIAL FLOWS :
• ROLE OF INTERNATIONAL FINANCIAL MGR
• MAKING INVESTMENT DECISIONS
• DEPLOYMENT OF RESOURCES TO ACHIEVE THE FIRM’S GOAL
• MAKING WISE DECISIONS
• TOTAL AMOUNT OF ASSETS,MAKE UP OF ASSETS
• UNDERSTANDING THE PERCEPTION OF BUSINESS RISK FROM THE POINT OF VIEW OF INVESTOR
• MANAGING WORKING CAPITAL
• MAINTAINING ADEQUATE LIQUID RESOURCES
• MANAGING THE TIMING OF THE FLOW OF FINANCIAL RESOURCES
• OPTIMUM LEVEL OF CASH
• AVAILABILITY OF APPROPRIATE CURRENCY,OVERALL POLICY AND EXCHANGE RISK
• TRANSFERRING FUNDS AT THE DESIRED PLACE AND IN TIME
• ROLE OF INTERNATIONAL FINANCIAL MGR
• MAKING FINANCING DECISIONS
• TO CONSIDER LOTS OF FACTOR ASSOCIATED WITH INTERNATIONAL ECONOMIC ENVIRONMENT LIKE GOVT INFLUENCE,JOINT GOVT ACTION OF EXCHANGE RATES ON THE TRANSFER OF FUNDS TO OFFSHORE
• CAPIATAL STRUCTURE DECISIONS. INTERNATIONAL GLOBAL CAPITAL STRUCTURE

 

 

• CONTROLLING FINANCIAL ACTIVITIES:
• THE LOCAL MGR IS GIVEN THE RESPONSIBILITY FOR ALL FINANCIAL DECISIONS AND MESAURED FROM THE INCOME STATEMENT
• RESPONSIBILITY IS PLACED AT PARENTING LEVEL AND LOCAL MGR IS EVALUATED ON THE BASIS OF OPERATING PROFITS.
• IMPORTANT CONSIDERATIONS:-

1. FLUCTUATING EXCHANGE RATE
2. COMPLEX INTERNATIONAL TAXATION SYSTEM
3. FLOW OF FUNDS WITHIN THE AFILIATE OF AN MNC
4. MANGING INTERNATIONAL ACCOUNT RECEIVABLE,INVENTORIES AND LONG TERM ASSETS
5. MANAGING CASH IN DIFFERNENT AFFILIATES
6. INFLATION
7. DIFFERENT INTERST RATES
8. POLITICAL UNCERTAINITES AT HOME AND ABROAD
9. COMPETITIVE ENVIORNMENT
10. THREATS OF HOSTILE TAKOVER
11. LEGAL RULES

• FINANCE FUNCTION OF MULTINATIONAL FIRM
• TREASURY IS RESPONSIBLE FOR
•  FINANCIAL PLANNING ANLAYIS
• FUND ACQUSITION
• INVESTMENT FINANCING
• CASH MANAGEMENT
• INVESTMENT DECISIONS AND RISK MANAGEMENT
• CONTROLLER :
• EXTERNAL REPORTING
• TAX PLANNING AND MANAGEMENT
• FINANCIAL AND MANAGEMENT ACCOUNTING
• BUDGET PLANNING AND CONTROL
• ACCOUNT RECIEVABLE
• IMPORTANCE
• EFFICENTLY PRODUCE  PRODUCTS IN  FOREIGN MARKETS THAN DOMESTICALLY
• OBTAIN THE ESSENTIAL RAW MATERIALS NEEDED FOR THE PRODUCTION
• BROADEN MARKET AND DIEVERISFY
• EARN HIGHER RETURN
• FORIGN INVESTMENT

 

           

 

 

 

 

 

 

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