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M.B.S – Final
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Chapter -1
1) What is International Finance?
Ans: The term International Finance is defined as the economic
interaction among different nations involving the monetary payments
and the exchange of currency. The basis of international finance is
foreign exchange, including foreign exchange markets and exchange
rates.
The final reason is, we are growing international and form of financial
instruments and markets became international. The need of citizen
currently has no political border. So to fulfill their wants, the risks over
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foreign currencies become huge. With the efficient international
financial management, we can find the most suitable technique to be
applied at a particular moment and in a particular case in order to
hedge risk.
3) What is Multinational Company? What economic roles do
they play?
Ans: Multinational Company or transnational company is defined as a
company which maintains its assets and operations in more than
country. A multinational corporation often has a long supply chain that
may, for example require the acquisition of raw materials in one
country, a product’s manufacture in another country, and it’s retail
sale in a third country. A multinational often globally manages its
operations from a main office in its home country. They recruit human
resources from their operational countries or may from any part of the
world. Multinationals create wealth in every country where they
operate, which ultimately benefits workers as well as shareholders. For
example – Toyota, Nokia, Honda, Volkswagen etc.
Economic roles played by Multinationals:
1) Economic growth and employment: MNC bring inward
investment in such country which is not their home base. This
huge investment is likely to provide a boost, not only to the local
economy but also to the national economy.
2) Skills, production techniques and improvements in the human
capital: MNC’S new ideas and new techniques can help to
improve the quality of production and help boost the quality of
human capital in the host country. Many will not only look to
local labor but also provide them with training and new skills to
help them improve productivity and efficiency.
3) Availability of quality goods and services in the host country:
Production in a host country may be primarily aimed as to
export. However the inward investment might have been made
to gain access to the host country to circumvent trade barriers.
In the case of many Japanese car manufacturers the investment
made into UK production has enabled them to get a foothold in
the EU and to avoid tariff barriers.
4) Tax Revenue: For operating in host country, MNC has become a
tax regime of the country.
5) Improvement of infrastructure: In addition to the investment in a
country in production or distribution facilities, a company might
also invest in additional infrastructure facilities like road, port
etc. That can provide benefits for the whole country.
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MNC plays a vital role for the economy. It not only provides us
employment, revenues, good products but also provide positive
images for the country. That is really very important for showing
stability to gain foreign investment more. But it is to be needed to
check that MNC is not supposed to take the whole profit they made by
using the host country.
1) Agency problems larger for MNC ARE than purely domestic firms
because:
a) monitoring more difficult because of geographic distance
b) Different cultures
c) MNC size
d) Subsidiary managers may maximize the value of their
subsidiary but not of the MNC as a whole
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Ans: Theories which justify the international business are provided
below –
● Theory of comparative advantages:
- Countries specialize in the production of goods; they can produce
with relative efficiency and trade for other products.
● Theory of imperfect markets:
- Factors of production (labor and other resources) are immobile.
● Theory of product cycle:
- Firm introduces product in home market, then exports it, then
establish a subsidiary, and then differentiate the product.
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Disadvantage: must establish customer base, unfamiliarity
with local customs
●Methods requiring a direct investment are referred to as direct
foreign investment (DFI):
Includes franchising, joint ventures, acquisitions, and
foreign subsidiaries
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called “translation risk”. This risk relates to cases where large
manufacturing companies have subsidiaries in other countries.
2) Exposure to Political Risk: For MNC, political risk refers to the risk
that a host country will make political decisions that will prove to
have an adverse effect on MNC’S profit and goals. Two types of
political risk –
a) Macro risk (Refers to an adverse action that will affect all
foreign firms) and - b) Micro Risk (Refers to an adverse action
which will affect particular industrial sector or business).
Terrorism is a major political risk recently facing by the MNC so
much.
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countries have recently imposed tougher antipollution laws as a
result of severe pollution problems.
2) Regulatory Constrains: Each country also enforces its own
regulatory constrains pertaining to taxes. Currency convertibility
rules, earnings remittance restrictions, and other regulations that
can affect cash flows of a subsidiary established there.
3) Ethical Constrains: There is no census standard of business
conduct that applies to all countries. A business practice that is
perceived to be unethical in one country may be totally ethical in
another. For example – Bribes, Sexual product in Arab countries.
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